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More on the Options Backdating Fraud

Discourse.net on the options backdating fraud:

Discourse.net: A Resource is a Resource -- Of Course, Of Course: Yesterday, the SEC bought the first criminal charges against a Gregory Reyes, the CEO of Brocade Communications, the company's CFO, and Brocade's VP for human resources for options backdating. This is the first criminal action brought with regard to the growing option backdating scandal. The SEC also indicated that at least 80 companies are under investigation.... [T]his seems like a good time to review what the problems are here....

[T]he lying.: The shareholders' authorization was to grant options at the stock price on the award day, not on an earlier day. Thus, management had to lie ("backdate") for these options to seem valid.... [E]ven under the old rules for accounting for stock options, the discount was accounted for as an expense (prorated from the grant day to the exercise day). Backdating hid this expense, making these companies seem more valuable.... [I]n Brocade's case... proper accounting under the old rule turned the improper, originally-reported $68 million profit into a $951 million loss [for 2002]. (In some cases, the fraud also kept the companies from claiming huge, legitimate tax deductions, while hiding the employees' tax liability.)

And then there is the theft: First, the employees were buying stock at unauthorized discounts. Second... [t]he options could not have incent[iviz]ed the employee to work harder from the backdated day to the real grant day, as the employee did not own the option in this period, yet the employee got to enjoy any stock value run-up in value during this period...