Recording the exercise as having occurred on an earlier date when the stock price was lower would minimize the executive's income tax liability, but constitutes tax fraud.New research (July 2006) by Eric Lie and Randall Heron found that 29.2% of companies issuing options to executives and/or directors between 19 have grant date patterns that suggest backdating or other manipulative practices (such as "spring-loading," the announcement of a grant before good news is released), and 23% of options issued to executives appear to have been backdated or spring-loaded.
An analysis of the likelihood that Mc Guire's options could have been as felicitously times as they were showed that the odds were millions to one against it. The state, however, has not taken a position on the merits of the claims.
On April 19, 2006, Minnesota Attorney General Mike Hatch asked to intervene in a shareholder lawsuit against United Health Group (Brandin v. Hatch said that the importance of the company to the state's health care system meant that if there were substantial and unjustified costs, Minnesotans could be harmed.
Backdating is not per se illegal, but, under the Sarbanes-Oxley Act, top executives must report grants made to them within two days of the grant (before Sarbanes-Oxley, it was 45 days).
For its part, the company must report failure to comply on its annual proxy statement.
In the US, however, there seems to be have been much more consideration of the issue (at least according to my Google search results).
Despite recent controversies surrounding the backdating of executive stock options, the general attitude in the US is that backdating is not wrong (or right), per se.
In this article, the author writes: “Backdating by itself is not generally, at least with respect to private agreements, illegal.
Rather, it is the use of the backdated documents by the parties or their counsel that may violate the law.” The US approach seems to be founded on the principle that parties to an agreement (or deed) are free to agree that the document is to take effect prior to the date of execution – this is often denoted by dating the document “as of” the earlier date. Bradley Real Estate Trust, the US Court of Appeals (7th Cir.
The pattern was somewhat more common in technology companies, smaller companies, companies granting options to more executives and directors, and companies with higher stock price volatility.
Volatility is especially significant: 29% of companies with high volatility appear to have manipulated grant dates, compared to 13% of those with low volatility.
But aside from Sarbanes-Oxley, whose effective date was after most of these practices were alleged to occur, there is a raft of potential other problems: As this was written in July, the many lawsuits that inevitably will be filed against companies accused of backdating had just started.