Stock Option Back Dating - wild and reasonable predictions wanted.
October 20, 2006 6:46 AM Subscribe
Magic Ball Filter: Stock Option Back Dating Scandal: How bad is it? How much is it going to affect the average person?
For some reason this topic has caught my attention,and although I have very limited understanding and knowledge about the subject, I've been spouting off about how it could be reminiscent of the Stock Market Crash of '29 and the breaking up of monopolies etc.
It's a bad family trait to talk authoritatively about something I know nothing about --
But here's the thing, so many financial scandals over the past few years, but this one's caught my attention.
How bad is it going to be and is it going trickle down enough to cause overall economic damage?
For some reason this topic has caught my attention,and although I have very limited understanding and knowledge about the subject, I've been spouting off about how it could be reminiscent of the Stock Market Crash of '29 and the breaking up of monopolies etc.
It's a bad family trait to talk authoritatively about something I know nothing about --
But here's the thing, so many financial scandals over the past few years, but this one's caught my attention.
How bad is it going to be and is it going trickle down enough to cause overall economic damage?
Short of causing some job loss for the CEOs, it is a non-event that affects the shareholders only. It is an ethical breach that should NOT be tolerated under any circumstances, but it will not cause a market meltdown. The company shareholders should be pissed.
I do not understand your reference to the Crash of '29 as if there was some big scandal that caused it. As for monopoly breakup, putting MSFT aside for now, GOOG is a monopoly. It has corned the online advertising market, weilds incredible market pricing power and they are willing to price their products below cost in order to gain market share. I guess because their motto is "do no evil" or something like that they are ok. (Full disclosure: I am a GMail user and use them to host my domain email and would use most any of their products. I am a shareholder too. "Can't beat 'em, join 'em" my pappy used to say.)
posted by JohnnyGunn at 7:13 AM on October 20, 2006
I do not understand your reference to the Crash of '29 as if there was some big scandal that caused it. As for monopoly breakup, putting MSFT aside for now, GOOG is a monopoly. It has corned the online advertising market, weilds incredible market pricing power and they are willing to price their products below cost in order to gain market share. I guess because their motto is "do no evil" or something like that they are ok. (Full disclosure: I am a GMail user and use them to host my domain email and would use most any of their products. I am a shareholder too. "Can't beat 'em, join 'em" my pappy used to say.)
posted by JohnnyGunn at 7:13 AM on October 20, 2006
Yeah, this has had very little effect on most companies, although there have been some prosecutions at the few companies where it was really prevalent. A lot of these investigations are just checks and many have not found any major problems.
posted by Big Fat Tycoon at 7:24 AM on October 20, 2006
posted by Big Fat Tycoon at 7:24 AM on October 20, 2006
Best answer: I would say not very bad at all; probably not quite as bad as Enron, with something along the lines of "Sarbanes Oxley part 2" resulting. Nothing at all like the '29 crash.
You understand the issues with backdating, right? Here's a quick primer for anyone who doesn't yet. In the final analysis, the essential effect is that the executives who are granted back-dated options steal money from the other shareholders, to the tune of the difference between their fake strike price and the proper one as of the date they actually received the options. For any given executive, this can come to several hundred thousand or even over a million dollars, but when the cost is amortized over the entire shareholder base, it's pennies per share.
Furthermore, if you think about it, the executives could have gotten the full amount legally if only they were granted options earlier. To backdate is merely to put them in the position they would have been in if the company had compensated them earlier (with the value of hindsight, of course, guaranteeing in-the-money options). It's still lying and stealing, but the end result is still that the company is out the same amount of money that it would have been had it done something entirely legal several months earlier.
It's definitely unsavory and shareholders are right to be pissed, but it just doesn't seem to rise to the level of a massive, Enron-style ponzi scheme: booking nonexistent profits and such, and then smirking when everyone finally realizes the emporer has no clothes. The backdating scandal represents a few hundred (or is it a few thousand?) executives stealing gobs of cash from their companies and shareholders, but not systematically undermining the profitability of those companies. Nor even, necessarily, their reputations. I think it's easy to place blame for this one on specific individuals, management teams, and boards who can be ridden out of town on a rail with no longterm damage to the company. Maybe some of the worst offenders will have to be fined, prosecuted, and ultimately liquidated, but it doesn't seem like this needs to ripple through the entire economy.
posted by rkent at 7:25 AM on October 20, 2006
You understand the issues with backdating, right? Here's a quick primer for anyone who doesn't yet. In the final analysis, the essential effect is that the executives who are granted back-dated options steal money from the other shareholders, to the tune of the difference between their fake strike price and the proper one as of the date they actually received the options. For any given executive, this can come to several hundred thousand or even over a million dollars, but when the cost is amortized over the entire shareholder base, it's pennies per share.
Furthermore, if you think about it, the executives could have gotten the full amount legally if only they were granted options earlier. To backdate is merely to put them in the position they would have been in if the company had compensated them earlier (with the value of hindsight, of course, guaranteeing in-the-money options). It's still lying and stealing, but the end result is still that the company is out the same amount of money that it would have been had it done something entirely legal several months earlier.
It's definitely unsavory and shareholders are right to be pissed, but it just doesn't seem to rise to the level of a massive, Enron-style ponzi scheme: booking nonexistent profits and such, and then smirking when everyone finally realizes the emporer has no clothes. The backdating scandal represents a few hundred (or is it a few thousand?) executives stealing gobs of cash from their companies and shareholders, but not systematically undermining the profitability of those companies. Nor even, necessarily, their reputations. I think it's easy to place blame for this one on specific individuals, management teams, and boards who can be ridden out of town on a rail with no longterm damage to the company. Maybe some of the worst offenders will have to be fined, prosecuted, and ultimately liquidated, but it doesn't seem like this needs to ripple through the entire economy.
posted by rkent at 7:25 AM on October 20, 2006
Response by poster: . . . showing how little I know/how loose I am being with financial malfeasance. I referenced the Crash of '29 because it was caused by widespread corrupt practices (I think) on the part of those playing the stock market. I slipped in the monopoly reference because it was financial and it did have an effect on the average person (again, I think) -- and I think that's the part that interests me most: The widespread effect on the general population. That's the connection that has to be made to get people moving. But maybe that's not enough in today's fractured world -- because although I felt for the Enron employees and stockholders and was happy to see the convictions, I am not convinced changes are happening and, nothing can change all the small scale tragedies that happened because of what happened to Californians when Enron was working its mumbo jumbo on the power grid.
But maybe reform is happening? Although it's so slow that the average person like me isn't aware of it? But is it really happening when pension funds are still tanking and Corporate Ex's are being paid way more than ANYONE deserves (but then that would be getting into moral judgements and I am not going to go into that any further)
We're a big old capitalist society and I am just interested in how the grand scheme of the workings of that machine ties into everyday -- and I guess I was trying to make a case out of the back dating scandal -- to bring it down to a scale that I could understand. Where does that money come from that they were stealing? Who really are they stealing it from? Because it has to come from somewhere, doesn't it? Which means it has to affect somebody, doesn't it? Kind of like how people who commit insurance fraud justify it by saying that they're not stealing from anyone in particular, they're just taking from some nameless, faceless corporation - it doesn't really hurt anybody (but of course it does because everybody's rates go up etc).
I better stop now.
posted by nnk at 7:41 AM on October 20, 2006
But maybe reform is happening? Although it's so slow that the average person like me isn't aware of it? But is it really happening when pension funds are still tanking and Corporate Ex's are being paid way more than ANYONE deserves (but then that would be getting into moral judgements and I am not going to go into that any further)
We're a big old capitalist society and I am just interested in how the grand scheme of the workings of that machine ties into everyday -- and I guess I was trying to make a case out of the back dating scandal -- to bring it down to a scale that I could understand. Where does that money come from that they were stealing? Who really are they stealing it from? Because it has to come from somewhere, doesn't it? Which means it has to affect somebody, doesn't it? Kind of like how people who commit insurance fraud justify it by saying that they're not stealing from anyone in particular, they're just taking from some nameless, faceless corporation - it doesn't really hurt anybody (but of course it does because everybody's rates go up etc).
I better stop now.
posted by nnk at 7:41 AM on October 20, 2006
Response by poster: Wow, you all were busy while I was composing my rant. Thanks. That clears things up a bit.
posted by nnk at 7:42 AM on October 20, 2006
posted by nnk at 7:42 AM on October 20, 2006
Furthermore, if you think about it, the executives could have gotten the full amount legally if only they were granted options earlier.
I don't agree with this logic. It's more on par with forging a powerball ticket with last week's winning numbers. It's a fraudulent document.
After all, if the execs had been granted options and the stock did poorly, those options would be as useless as an old lotto ticket.
posted by toothless joe at 7:50 AM on October 20, 2006
I don't agree with this logic. It's more on par with forging a powerball ticket with last week's winning numbers. It's a fraudulent document.
After all, if the execs had been granted options and the stock did poorly, those options would be as useless as an old lotto ticket.
posted by toothless joe at 7:50 AM on October 20, 2006
Response by poster: Those are great links too. Over 100 companies listed on that WSJ list and the primer is just right for someone like me. Thanks.
. . . and speaking of loss of confidence in management, and thinking of how fractured our society is, I imagine that part of the reason management does these things and gets away with them is because there will be no large-scale consequences (so I imagine). No one's going to boycott Bed Bath and Beyond or change their health care provider because these executives are greedy beyond belief.
Why don't we, as a society, have more contempt for these people? (That's a bit of a rhetorical question)
posted by nnk at 7:54 AM on October 20, 2006
. . . and speaking of loss of confidence in management, and thinking of how fractured our society is, I imagine that part of the reason management does these things and gets away with them is because there will be no large-scale consequences (so I imagine). No one's going to boycott Bed Bath and Beyond or change their health care provider because these executives are greedy beyond belief.
Why don't we, as a society, have more contempt for these people? (That's a bit of a rhetorical question)
posted by nnk at 7:54 AM on October 20, 2006
It's not just back-dating, it's specific dating. The company stock might have gone from 100 to 102 during the course of a year, but if on one day during the year it went down to 76, that's the day that Bob the CEO wants his options to be granted. Buy stock at 76, sell at 102 = profit! So in December, you look at the stock price for the last year, and you say, "Boy, it sure would have been nice if I was granted stock options on March 29! [scribble scribble] Oh wait, I guess I was given stock options on March 29!"
The old loophole in options was granting them well below the current price of the stock, so that they're instantly "in the money". Congress closed that one. The new loophole is granting them at the current price of the stock on a given day, but picking a day in the past when the stock was at its nadir. 20-20 hindsight, as it were. Amazingly, no executives retroactively granted themselves options on the day that the stock was at its yearly high.
It's clearly fraud, it should be punished, it might actually be punished, whatever damage was done has already been done.
posted by jellicle at 8:17 AM on October 20, 2006
The old loophole in options was granting them well below the current price of the stock, so that they're instantly "in the money". Congress closed that one. The new loophole is granting them at the current price of the stock on a given day, but picking a day in the past when the stock was at its nadir. 20-20 hindsight, as it were. Amazingly, no executives retroactively granted themselves options on the day that the stock was at its yearly high.
It's clearly fraud, it should be punished, it might actually be punished, whatever damage was done has already been done.
posted by jellicle at 8:17 AM on October 20, 2006
I referenced the Crash of '29 because it was caused by widespread corrupt practices (I think) on the part of those playing the stock market.
I think this is a HIGHLY simplistic view of an extremely complex event. There was nothing illegal about the lending practices of banks at the time that allowed common people to overextend themselves in the frenzy to get on the bubble bandwagon. It may have been short-sighted or even amoral, but it wasn't illegal.
posted by spicynuts at 8:32 AM on October 20, 2006
I think this is a HIGHLY simplistic view of an extremely complex event. There was nothing illegal about the lending practices of banks at the time that allowed common people to overextend themselves in the frenzy to get on the bubble bandwagon. It may have been short-sighted or even amoral, but it wasn't illegal.
posted by spicynuts at 8:32 AM on October 20, 2006
I don't agree with this logic. It's more on par with forging a powerball ticket with last week's winning numbers. It's a fraudulent document.
While the document is certainly fraudulent I wouldn't use the forged lottery ticket analogy.
Stock options can be awarded at any price the company pleases. If HugeCompanyCorp wants to give Joe Exec options in June at January prices they can do that, as long as they disclose it.
But giving options at a lower than current market price causes the tax to shoot way up, which is why all this illegal shit is going on.
posted by sideshow at 8:49 AM on October 20, 2006
While the document is certainly fraudulent I wouldn't use the forged lottery ticket analogy.
Stock options can be awarded at any price the company pleases. If HugeCompanyCorp wants to give Joe Exec options in June at January prices they can do that, as long as they disclose it.
But giving options at a lower than current market price causes the tax to shoot way up, which is why all this illegal shit is going on.
posted by sideshow at 8:49 AM on October 20, 2006
In many cases, the backdating was about helping valuable employees receive additional compensation (so that they didn't leave the company for greener and better paying pastures) with Uncle Sam paying the bill (in the form of a reduced tax burden) rather than the company. In other words: this "scandal" (read:witch hunt) will have almost no effect on the average stockholder. For an informed summary of the situation, see Dealbreaker's coverage.
posted by gd779 at 11:44 AM on October 20, 2006
posted by gd779 at 11:44 AM on October 20, 2006
i dont think this options thing is a big deal.
in fact, i'm starting to wonder if this sudden SEC zeal is somewhat politically motivated. most companies involved in this are high-tech companies based in california, and these companies are more often than not democratic-leaning. at the very least they are more progressive than most old-school companies.
anyway its also not as simple as "PUT THE CRIMINAL EXECS IN JAIL!!!111" here in the valley almost every single employee of a high-tech company has stock options, and probably many of those options were back-dated as well.
i dont think anyone's going to jail over this. i think companies are going to have to restate earnings slightly and perhaps pay a fine to the SEC.
posted by joeblough at 11:45 AM on October 20, 2006
in fact, i'm starting to wonder if this sudden SEC zeal is somewhat politically motivated. most companies involved in this are high-tech companies based in california, and these companies are more often than not democratic-leaning. at the very least they are more progressive than most old-school companies.
anyway its also not as simple as "PUT THE CRIMINAL EXECS IN JAIL!!!111" here in the valley almost every single employee of a high-tech company has stock options, and probably many of those options were back-dated as well.
i dont think anyone's going to jail over this. i think companies are going to have to restate earnings slightly and perhaps pay a fine to the SEC.
posted by joeblough at 11:45 AM on October 20, 2006
It does affect average people, namely my family. My husband is a mid-level minion for Broadcom, one of the companies being investigated for options fraud. Because of the investigation, all employee stock option activity has been frozen, for everyone. That means the Employee Stock Purchase Program (ESPP), which nets us about $5k every six months, is not available until Broadcom's accounting dept. gets its ducks in a row with the whole mess. That's bad, but worse is the CEOs attitude about it. During the last hands-on meeting, he was wishy-washy about when the options freeze would be lifted, saying that "accounting is working on it." If the CEO can't bust accountings' asses to get the work done, who can?
On a larger "this is wrong" scale, yes, it's bad, but not Enron bad. It's more stupid than anything.
posted by killy willy at 12:59 PM on October 20, 2006
On a larger "this is wrong" scale, yes, it's bad, but not Enron bad. It's more stupid than anything.
posted by killy willy at 12:59 PM on October 20, 2006
Response by poster: Thanks. That's maybe the most interesting answer of all. I am sorry if it's causing your family hardship.
posted by nnk at 2:21 PM on October 23, 2006
posted by nnk at 2:21 PM on October 23, 2006
This thread is closed to new comments.
posted by blue mustard at 7:03 AM on October 20, 2006