Backdating option scandal
News of the irregularities, which is expected to be revealed in a regulatory filing by Apple before the end of this week, will add to pressure that has been growing on one of Silicon Valley’s most highly-regarded companies since the middle of 2005.
Apple is among more than 160 companies that have owned up to stock option backdating — handing options to executives and other employees at exercise prices that were set in hindsight at favorable levels — a scandal which has led to the departure of a number of chief executives.
In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date.
This process makes the granted option in-the-money and of value to the holder.
Another appeal may be in the works after the latest guilty finding by a jury.
Gregory Reyes, ex-CEO of Brocade Communications and former owner of the San Jose Sharks, was found guilty by a federal jury on March 26 of intentionally backdating stock options for the benefit of employees and himself, according to the .
Stock options are frequently tied into executives’ compensation: giving them the option of purchasing a certain amount of stock at a set price.
The lower this “strike price” is, the cheaper the executive can buy the stock.
Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period.Is Gregory Reyes being made Silicon Valley's poster boy for backdating of stock options?Executives at Broadcom, Mc Afee and Comverse Technology have been able to evade federal criminal charges, but the defense may have been overconfident in avoiding using witnesses on Reyes' behalf.However, because he continued to argue over the point at which they would vest, Apple missed the deadlines it needed to file the right information with the SEC and its auditors.It took until December that year until terms were finally agreed, at which point Apple’s stock price was now .01.
When these options then “vest” after a period of time, the executive can sell them at the new share price: giving them a nice bonus if the company has increased in value.