Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price.
It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable.
There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.
However, this concept is not perfect and there are ways that executives can take advantage of the way that options are granted in order to earn money.
That promise is considered to be an in-the-money options grant.
In-the-money options are different from performance-based compensation in the eyes of the Internal Revenue Service and the Financial Accounting Standards Board.
The cascading litany of alleged charges is not likely to stop with the Brocade case.
Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.