The SEC is looking into this insider practice

Backdating Stock Options

You may not be aware of this, but the executives in your favorite company may be dabbling in a questionable practice to sweeten their own nest egg.  It’s called Backdating Stock Options, and it’s actually more common than you might think.  In fact, it’s so common that the SEC is looking into the practice right now:

How backdating works
Lots of companies, of course, hand out stock options to CEOs and other employees. The idea is that executives will work harder, make better decisions, etc., if they are rewarded by a rising stock price. Options give execs the right to buy company stock at an "exercise price," also known as the "strike price." Typically the strike price is the value of the stock at the end of trading on the date the options were granted. At many companies, options are granted only at predetermined dates throughout the year.

At some companies, however, the options-grant dates were more flexible. Some top managers — including UnitedHealth Group Chairman and CEO William McGuire — were given the ability to choose their own option-grant dates. It appears that some executives, in cooperation with members of the companies’ boards, cherry-picked dates when their stock prices were lowest.

Why it’s unfair
What’s wrong with that? Suppose a CEO gets 100,000 options near the end of the year on a day when the stock trades at $20. Exercising the options a year later when the stock goes to $30 gives the CEO a profit of $10 times 100,000, or $1 million. But if the options are backdated to a point when the stock traded for only $10, the exec earns an extra $1 million in the deal.

Stock-market researchers began suspecting a few years ago that this was going on. Studies showed too many executives were getting the best exercise prices for the year for their option grants.

It certainly seems unfair to the rest of us, as stock holders, to see them cheat the system (and the company) in this manner.  Stock market investing should be fair and equal, across the board.  It’s a shame to see greed get in the way of ethical business practices.

Several companies are already seeing their company’s shares fall because of their implication in this scandal.  It’s reportedly affecting dozens of companies.

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