Activision options back dating
One of the larger backdating scandals occurred at Brocade Communications, a data storage company.It was forced to restate earnings by recognizing a stock-based expense increase of $723 million between 19, after allegedly manipulating its stock options grants for the benefit of its senior executives.
To avoid having to pay higher taxes, many companies adopted a policy of issuing “at the money” stock options in lieu of additional income, with the idea that the executive or employee would benefit through the option by working to increase the value of the company without exceeding the one million dollar deductibility cap for executive income.When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.The problem with this practice, according to the SEC, was that stock option backdating, while difficult to prove, could be considered a criminal act 6.In the modern business world, the Sarbanes-Oxley Act has all but eliminated fraudulent options backdating by requiring companies to report all options issuances within 2 days of the date of issue.Options backdating may still occur under the new reporting regulations, but Sarbanes-Oxley compliant backdating is far less likely to be used for dishonest reasons due to the short time frame that is allowed for reporting.In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders 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.
Cases of backdating employee stock options have drawn public and media attention.
According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.
Activision stated that four individuals — the former heads of the finance and legal departments, the outgoing head of human resources, and a former outside legal adviser — "bore significant responsibility," in varying degrees, for the inaccuracies.
The company stressed, however, that the subcommittee found no evidence of intentional wrongdoing on their part, or by chairman and chief executive officer Robert A. Kelly, director and senior adviser Ronald Doornink, or senior vice president, general counsel, and secretary George Rose.
It allegedly failed to inform investors, or account for the options expense(s) properly.