By faking the issue date, they could guarantee themselves in-the-money options and instant profits.They could also cheat the IRS twice, once for themselves since capital gains are taxed at a lower rate than ordinary income and once for their employers since the cost of the options would qualify as a corporate tax write off.
Looking backward, I'll ruminate a little about how we got here, and finally, at the risk of appearing to be or worse, actually being the secular equivalent of a sanctimonious twit, offer some thoughts looking forward on lessons we might take away from all of this. I have reached the point in life where I view the world through ridiculously expensive progressive lenses, but I guarantee you these lenses are not rose-colored. To recap much of what you may already have read or heard, the Division of Enforcement is investigating over 100 matters relating to potential abuses of employee stock options.
I should begin of course where I always do with a disclaimer. The investigations are being conducted by SEC offices throughout the country and are being centrally coordinated and tracked here in Washington.
The roots of the scandal date back to 1972, when an accounting rule was put in place permitting companies to avoid recording executive compensation as an expense on their income statements so long as the income was in the form of stock options that were granted at a rate equal to the market price on the day of the grant, often referred to as an at-the-money grant.
This enabled companies to issue enormous compensation packages to senior executives without notifying shareholders.
At the same time, in a related criminal action brought by the US Attorney, Kreinberg pled guilty to securities fraud and conspiracy to commit securities fraud, mail fraud and wire fraud, and he now faces up to 15 years in jail, mandatory restitution and a possible criminal fine.
Despite all the recent media attention, Brocade and Comverse are not the SEC's first stock options cases.A series of two follow-up studies by professors at other universities suggested that the uncanny ability to time options grants could only have happened if the granters knew the prices in advance.A Pulitzer Prize winning story published in the .) As a result, firms restated earnings, fines were paid and executives lost their jobs - and their credibility.In the mid-2000s, an investigation by the Securities and Exchange Commission resulted in the resignations of more than 50 senior executives and CEOs at firms across the industry spectrum from restaurants and recruiters to home builders and healthcare.High-profile companies including Apple Computers, United Health Group, Broadcom, Staples, Cheesecake Factory, KB Homes, Monster.com, Brocade Communications Systems, Inc., Vitesse Semiconductor Corp.Although this practice gave the senior executives significant stock holdings, since the grant was issued at-the-money, the share price had to appreciate before the executives would actually earn a profit.