Former UnitedHealth Group CEO/Chairman Settles Stock Options Backdating Case for $468 Million
In finance , options backdating is the practice of altering the date a stock option was granted, to a usually earlier but sometimes later date at which the underlying stock price was lower. This is a way of repricing options to make them more valuable when the option ” strike price ” the fixed price at which the owner of the option can purchase stock is fixed to the stock price at the date the option was granted. Cases of backdating employee stock options have drawn public and media attention. Stock options are often granted to the upper management of a corporation. While options backdating is not always illegal,  it has been called “cheating the corporation in order to give the CEO more money than was authorized. To be legal, backdating must be clearly communicated to the company shareholders, properly reflected in earnings, and properly reflected in tax calculations. The U. Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required. In essence, the revision enabled companies to increase executive compensation without informing their if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
On the Timing of CEO Stock Option Awards
With the U. The practice involves stock options. A company promises a worker the right to buy a share of of stock at a specific price, called the strike price.
decision to backdate options, whether the intention to engage in option backdating is materialized ex-post matters more. In addition to the legal ramifications, this.
Washington, D. McGuire, M. The settlement is the first with an individual under the “clawback” provision Section of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors. The Commission’s complaint alleges that during a year period, McGuire repeatedly caused the company to grant undisclosed, in-the-money stock options to himself and other UnitedHealth officers and employees without recording in the company’s books and disclosing to shareholders material amounts of compensation expenses as required by applicable accounting rules.
McGuire’s misconduct. The Commission’s complaint alleges that from at least through , McGuire looked back over a window of time and picked grant dates for UnitedHealth options that coincided with dates of historically low quarterly closing prices for the company’s common stock, resulting in grants of in-the-money options. According to the complaint, McGuire signed and approved backdated documents falsely indicating that the options had actually been granted on these earlier dates when UnitedHealth’s stock price was at or near these low points.
These inaccurate documents caused the company to understate compensation expenses for stock options, and were routinely provided to the company’s external auditors in connection with their audits and reviews of UnitedHealth’s financial statements. According to the SEC’s complaint, UnitedHealth filed with the Commission quarterly and annual reports, proxy statements, and registration statements that McGuire knew, or was reckless in not knowing, contained materially false and misleading statements concerning the true grant dates and proper exercise prices of stock options.
Because of McGuire’s misconduct, investors were misled to believe that stock options were granted with strike prices not less than the fair market value of UnitedHealth’s stock on the date of grant and in accordance with the terms of the company’s stock option plans. The Commission’s complaint further alleges that from through , McGuire personally received more than 44 million split-adjusted UnitedHealth options, most or all of which were backdated.
Without admitting or denying the allegations of the Commission’s complaint, McGuire consented to the entry of an order permanently enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, proxy statement, certification, and securities ownership reporting provisions of the federal securities laws, and barring him from serving as an officer or director of a public company for a period of 10 years. District Court for the District of Minnesota.
The Commission acknowledges the assistance of the U.
Stock options backdating: What you need to know
This article also appeared in the Bloomberg Corporate Law Journal and can be accessed by clicking the pdf link above. Employee option grants have long been a staple of the recruitment and compensation of employees at venture-backed companies. However, changes in the regulatory and enforcement environment in recent years have made the option grant process more complicated and often more perilous than it has been in the past.
selecting ex post facto option grant dates that coincided with relatively low stock prices for the company’s stock, even though no meetings took.
What is backdating? Backdating is the practice of marking a document with a date that precedes the actual date. What is the benefit of backdating ESO grants? ESOs are usually granted at-the-money, i. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.
An example illustrates the potential benefit of backdating to the recipient. In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero. Is backdating of ESO grants illegal?
Forward dating stock options
The option backdating scandals of the s were initially unearthed through an academic research study. As we helped companies work through backdating issues, we found that a majority of the cases were linked to weak controls and not malpractice with notable exceptions, of course. We believe this research is worth knowing about because if even a few companies are found to be doing this, it could result in all companies facing heavier scrutiny of their disclosures.
In the s, it became common for companies to backdate the options they granted to their executives. That way, executives could receive a grant below the current market price while investors may have believed that the grant was at the money.
After all, stock option backdating is all the rage these days. You’d think they’d be up to their eyeballs in rope. I count no fewer than 38 top.
Several companies have expressed their intent to restate financial statements due to option timing issues, and opportunistic attorneys have already filed derivative and class action lawsuits. Use the arrows to arrange content. Download pages as a. No attorney-client relationship attaches as a result of any exchange of information, including emails that are sent to the Firm. Please do not send us confidential information or sensitive materials.
Unsolicited information that you send to us will not be regarded as confidential unless we have agreed to represent you. If you send this email, you confirm that you have read and understand this notice. Legal Alert Jul 10, What Are Backdated Options? Companies have considerable discretion in determining the timing of stock option awards. The stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.
Companies Say Backdating Used In Days After 9/11
Options backdating? Who would be so arrogant to be still backdating their options? We decided to find out. We find that despite all the reforms enacted in response to the backdating scandal of , manipulation of stock options as a form of incentive compensation is once again alive and well.
In , I posted on the major scandal involving companies’ backdating stock option awards. The first hint that a problem existed in this area.
Tobak’s take on Steve Jobs’ role in the stock options backdating scandal at Apple. The allegations of illicit sex, drugs, and rock and roll reminded me of the 60s Funny, I can’t remember. While the story was enthralling, I didn’t understand what any of it had to do with a federal investigation into stock option backdating. But how does that relate to hiring prostitutes and drugging customers without their knowledge?
Said another way, do the feds really need to dig that deep to find enough rope to hang executives with? After all, stock option backdating is all the rage these days.
patterns around declared option grant dates. It fur- ther captures any tendency for firms to simply grant options after stock price declines. However, the empir-.
New research finds that despite regulations, CEOs control information release and may do so for their own financial gain. Stock options are often used to align the interests of stakeholders and CEOs, as both benefit when share price rises. New research shows, however, that companies release more negative news during the period immediately before stock options are granted to their CEOs, which financially benefits the CEOs. CEOs, who control the release and tenor of the information, see higher future gains when options are granted while the share price is lower.
The researchers examined 1, grant dates representing CEOs across large U. For the year before each grant, they examined press releases issued by the firm to examine the positive or negative tone of each release, over a total of 49, releases. Despite increased regulation after the options back-dating scandal of the mids, where CEOs were caught manipulating the strike price purchase price of options by post-dating option grant dates to when stock prices were most advantageous — most notably benefiting Steve Jobs and Michael Dell — the researchers found some CEOs still benefit from strike-price manipulation via information releases.
The researchers expected that regulations within the Sarbanes-Oxley Act of , limiting that information control and requiring organizations to disclose material events by the end of the fourth day after the event, would stop manipulation of the price at which options were granted, Ward said. This is certainly much more subtle than the back-dating scandal, and now, just as then, only a minority of companies are engaging in it, but we find strong evidence that manipulation is still occurring.
They also found that relatively underpaid CEOs are more likely to employ this tactic, and that CEOs in high-discretion settings are more able to pursue those actions. Thus, the lower the stock price is at the time of the grant, the higher the potential future payout is for the CEO, as not only is the strike price lower, but the number of share options granted increases.
Backdating Scandal Ends With a Whimper
This brings the number the number of companies sued in securities fraud class action lawsuits based on options timing allegations to eight. Background on the other seven companies previously named can be found on prior D …. With the addition of the Brooks Automation lawsuit, the number of companies named in securities fraud class …. The recent media coverage surrounding stock option practices primarily has been focused on options backdating , and to a lesser extent on options springloading.
A new wave of media attention has drawn scrutiny of another options compensation practice — the allegedly improper use of stock options grants in connection with hiring and recruiting of ….
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Related Content. This chapter concerns the issue of backdating of US share options, including: the potential difficulties that this practice may cause and the penalties that may be incurred; steps that companies can take to avoid falling foul of this practice; the implications for non-US companies; and the likely further developments in this area. In the past few years, the practice of granting share options has come under heightened scrutiny in the US and the US Securities and Exchange Commission SEC has been investigating hundreds of publicly traded companies to determine whether they “backdated” share option grants.
Backdating occurs when an option’s grant date is recorded as occurring in the past, typically on a date when the company’s share price and therefore the option’s exercise price, which is usually fixed as that day’s fair market value was lower. The opportunities for backdating have waned in recent years due to the enactment of several pieces of legislation, which led to an increased stringency in required disclosure reports, and tax penalties imposed on certain deferred compensation.
However, different agencies in the US continue to audit, investigate and impose civil and criminal penalties on listed companies for breach of the backdating rules. This chapter gives an overview of the most important issues relating to backdating, including:. An overview of the current position, including:. Implications of backdating, including implications relating to:. The likely further developments occurring in the issue of backdating. The issue of backdating has to be seen in the context of the increased popularity of the growth of equity-based compensation in the s see box, The growth of equity-based compensation.
Best Practices for Option Grants by Venture-Backed Companies
This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward. The return pattern has intensified over time, suggesting that executives have gradually become more effective at timing awards to their advantage, and possibly explaining why the results in this study differ from those in past studies. Moreover, I document that the predicted returns are abnormally low before the awards and abnormally high afterward. Unless executives possess an extraordinary ability to forecast the future marketwide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.
You must vest the stock (we have a 1 year cliff and 3 years of vesting after that). At GitLab, we give equity grants in the form of Incentive Stock Options (ISOs) Send a copy of the signed and dated election form to [email protected]
Many corporate managers, with the aid of the board of directors, discovered that they could provide themselves with guaranteed or excessive compensation by manipulating the terms of stock option grants that were included in their compensation packages. This paper seeks to examine the legal, tax, and accounting issues that have evolved because of these suspect illegal activities.
The author then examines regulations, judicial theory, and court cases to determine the current legal status of backdating, spring loading, or bullet dodging of executive stock option grants. The current legal environment has made it difficult for executives to continue the practice of manipulating stock option grants without falling under the ire of regulators and shareholders.
However, a question remains whether executives that manipulated stock option grants in the past will be found criminally liable for their acts. The paper’s review of the discourse on the legality of corporate executives enhancing their compensation packages shows the complexity of detecting and regulating this type of suspect activity. This paper presents a contemporaneous discussion and data on legal and regulatory changes that resulted from management malfeasance of executive compensation.
Oppenheimer, P. Emerald Group Publishing Limited. Report bugs here.
At GitLab we strongly believe in employee ownership in our Company. We are in business to create value for our shareholders and we want our employees to benefit from that shared success. In this document only accessible to GitLab team-members and candidates , you can find some more details on the number of shares outstanding and the most recent valuations.
Backdating options involves looking for past low points for a stock, then pretending the options were granted on those favorable dates.
Scholars, regulators, and practitioners have long struggled with challenges emanating from the separation of ownership and control of modern corporations. Agency theory typically prescribes the use of stock options, or other outcome-based contractual arrangements, to overcome the critical issue of information asymmetry. We theorize that this arrangement, which leaves information asymmetry in place, provides CEOs an informational advantage that can be used, via impression management techniques, to circumvent some of the intended benefits of option grants.
Specifically, we argue that the period leading up to an option grant creates a scenario where CEOs are incentivized to reduce the stock price of their firm for personal gain. Our results suggest that CEOs respond to this incentive by adjusting the tenor of releases from the firm during the pregrant period, providing CEOs a substantial economic gain. Our findings highlight a critical challenge of agency theory: if information asymmetry remains, a motivated CEO can often circumvent the contractual arrangements intended to mitigate that very problem.
We offer future research paths and practical recommendations to address this issue. Learn About the New eReader. Downloaded times in the past 12 months. Published online 13 February Published in print 1 February We would like to thank Associate Editor Brian Connelly and three anonymous reviewers for their guidance and feedback throughout the review process. We would also like to thank Craig Crossland for comments on an earlier version of this paper, and acknowledge Eric Lease Morgan of the Navari Family Center for Digital Scholarship in the Hesburgh Libraries at the University of Notre Dame for assisting us with the automatic classification of press releases.