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Back to the Future - New Options Backdating Study

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

August 25, 2009

A story in the Wall Street Journal last week (subscription required to read complete story) described an interesting recent academic study on stock options backdating. The study found that several hundred companies that improperly backdated options never were caught or confessed. In the study, out of the University of Houston's C.T. Bauer College of Business, the authors used computer models to determine companies that are highly likely to have committed backdating. These companies featured "lucky" officers, who received option grants at or near the low points for their stock prices.

Based on this sampling of companies the researchers found that only around one-third of these companies had ever disclosed evidence of backdating. The authors extrapolated that at least 500 companies engaged in backdating that was never disclosed.

We are reading very little about backdating these days, compared to how much the story dominated the business headlines in 2006 and 2007. It's hard to imagine that there will be a new wave of SEC enforcement actions against previously undisclosed companies that backdated options.

However, the legacy of the backdating scandal lives on in the SEC's compensation disclosure rules that became effective in 2006. The scandal caused the SEC to suspect that companies were unfairly manipulating the pricing of stock options through the timing of option grants - practices such as "springloading". The SEC's 2006 adopting release clarifies that a public company must disclose any plan or program to coordinate the timing of stock option grants with the release of material non-public information.

We recommend that public companies adopt a written stock option grant policy, if they have not already done so. Careful adherence to such a policy can make it easier to establish that options are not being granted in coordination with the release of material non-public information.


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