Most companies that improperly backdated stock options never were caught by regulators and never admitted to the practice, according to a new academic study from researchers at the University of Houston’s C.T. Bauer College of Business.
Like most of these backdating investigations, the U of Hou (do they call it that? they should) study used a sophisticated statistical test to look for improbable patterns of options grands with abnormally favourable terms. It sounds like what the folks in Houston used to call ‘rocket science’ but it’s really not: you’re just spotting the companies that tend to grant options at low points in their share price.
The U of Housters went through the filings of 4,000 publicly traded companies and found 141 likely backdaters. 90-two of them were never caught and never confessed to backdating. And although the study doesn’t name the companies, the researchers provided a list of names to the Wall Street Journal. They include:
- Omnicom Group Inc.,
- retailer Dress Barn Inc.,
- trucking firm J.B. Hunt Transport Services Inc.
- and equipment-rental concern United Rentals Inc.
The Wall Street Journal has always been at the heart of the backdating scandal, first drawing attention to the matter with a front page story in March of 2006. Following the work of some academics, the Journal calculated that the odds were very much against this kind of luck. What really seemed to be happening was that the companies involved were granting stock options on one date, and pegging them to an earlier date when the stock price was low.
Backdating sounds like something absolutely terrible but it really just involved a covert way for a company to grant ‘in the money’ options without taking an accounting and tax expense. The shareholders know all the terms because of disclosures, which means that the entire scandalizing investigation offered nothing of value to shareholders. In fact, many shareholders were probably tricked into selling shares of perfectly good companies because of the breathless reporting. Others were deprived of competent executive leadership when executives resigned after backdating revelations.
Many would question whether backdating should even be regarded as a scandal. The Journal‘s Holman Jenkins has pointed out that the accounting rule which allowed companies to treat “at the money” options—including backdated options—as valueless but required them to expense “in the money” options was nonsensical, and practically invited creative avoidance. SEC commissioner Paul Atkins would later go on to explain that well-timed options were a good way for a company short on cash to compensate employees without giving rise to real or accounting costs.
When Steve Jobs was discovered to have received backdated stock options, the air started to go out of the balloon. No one believed he was stealing money from shareholders, even though his backdating was no different from any of the others. He was just a typical backdating miscreant. But the horror of losing Jobs to a minor accounting matter was too much to bear. And the press loves Jobs.
Perhaps more importantly, backdating was a huge distraction to the public and the press. We’d subsequently learn that despite the Journal’s claims, very few backdaters would ever be prosecuted and even fewer would go to trial. The press devoted so much attention to backdating that it overlooked many of the early signs of the housing bubble popping, the coming destruction of Wall Street and the whinging of the economy before it nosedived.
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