Class actions ostensibly are brought on behalf of the shareholders of the company who have been impacted by the option grants.Shareholder claims typically are grounded in some allegation of misrepresentation.And in addition to officer and director bars imposed by government authorities, internal investigations have led to numerous officer resignations from at least 25 companies including Quest Software, KB Homes, United Health Group, Inc., Mc Afee, Inc., CNET Networks, Inc., and Monster Worldwide.Even Apple Computer CEO Steve Jobs was implicated by an internal investigation into backdating, although he apparently did not receive, or otherwise benefit from, the backdated grants.With its attendant investigation, legal actions and executive fallout, the practice of options backdating is expected to have a short shelf life.But while options backdating may have a truncated life expectancy, its current impact is robust.Not surprisingly, the defendants themselves earned millions of dollars from backdated options.Another troublesome outcome for a corporation is that the SEC will bring civil fraud charges stemming from options backdating in all cases where criminal charges have been filed.
Such cases are brought under the guise of both class actions and shareholder derivative proceedings.
Fifty-two companies currently under criminal investigation. Moreover, the company avoids having to expense the options as current compensation, thus increasing earnings in the near term.
As a consequence, the option is immediately profitable, or “in the money,” to the option holder.
“Spring loading” involves the issuance of options immediately prior to the announcement of favorable financial news expected to have a positive impact on the underlying share price, thereby providing an immediate profit to the option holder.
the release of bad news that cause the stock price to take a temporary dip, which increases the probability that the option will become profitable in the short term.