While this conclusion is logical in cases of options backdating in which executives knowingly participated in the criminal actions, options backdating can be a result of normal accounting or corporate policies that are not criminal in nature, and is a legal practice as long as the backdated contract is appropriately reported for tax purposes.
Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.
As of 17 November 2006, backdating has been identified at more than 130 companies, and led to the firing or resignation of more than 50 top executives and directors of those companies.Notable companies embroiled in the scandal include Broadcom Corp., United Health Group, and Comverse Technology.Stock options granted with an exercise price below the then current fair market value have intrinsic value equal to the difference between the market price and the strike price, such backdating may be construed as illegally avoiding income recognition because falsely under-reporting the market price of such stocks makes them appear to have no value in excess of the strike price at the time the option is granted.The 1993 Clinton tax increase amended the Code to include Section 162(m) which presumptively makes compensation in excess of one million dollars unreasonable for public companies, as the Tax Code allows a corporate deduction only for reasonable compensation to employees, Section 162(m) needed an exception for performance based compensation.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; The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options versus the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.
Heinen was charged with, among other things, violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, lying to Apple's auditors, and violating prohibitions on circumventing internal controls, based on the options awarded to Steve Jobs (dated October 19, 2001 but allegedly granted in December 2001) and also option grants awarded to top company executives, including Heinen (dated January 17, 2001, but allegedly granted in February 2001.) According to the February 9, 2007 WSJ (Page A3) article IRS Urges Companies to Pay Taxes Owed By Workers Unaware of Backdated Options the government will go after taxpayers on such options but will pursue the company for rank and file employees.
According to Section 83 of the Code, employees who receive property from the employer must recognize taxable income in the year in which that property vests (i.e., in the year in which the property becomes free of restrictions and other risks of forfeiture).
However, in late 2005 and early 2006, the issue of stock options backdating gained a wider audience.
Numerous financial analysts replicated and expanded upon the prior academic research, developing lists of companies whose stock price performance immediately after options grants to senior management (the purported dates of which can be ascertained by inspecting a company's Form 4 filings, generally available online at the SEC's website) was suspicious.
this is not always the case, according to a ruling by federal judge William Alsup of the U. District Court for the Northern District of California.