Comverse backdating scandal
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.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.(In fact, it can be argued that if these conditions hold, there is little reason to backdating options, because the firm can simply grant in-the-money options instead.)David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants.In particular, he found that stock prices tend to increase shortly after the grants.
For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.Unfortunately, these conditions are rarely met, making backdating of grants illegal in most cases.Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date (when backdating still might work), and for longer periods for the minority of grants that violate the two-day reporting requirements.
Law360, New York (March 18, 2011, PM EDT) -- A former top executive at Comverse Technology Inc.