Start Brocade backdating scandal

Brocade backdating scandal

ONLY yesterday stock options seemed to be a sort of corporate wonder-drug, doing to business what steroids do to weight-lifters: dose up your executives, and watch your profits grow.

Backdating is not per se illegal, but, under the Sarbanes-Oxley Act, top executives must report grants made to them within two days of the grant (before Sarbanes-Oxley, it was 45 days).

Volatility is especially significant: 29% of companies with high volatility appear to have manipulated grant dates, compared to 13% of those with low volatility.

New rules under the Sarbanes-Oxley Act have reduced the practice to 10% of the companies granting options.

One possible explanation is that everyone in Silicon Valley at the time was so convinced in the potency of options that the possibility of illegality was not even contemplated.

After all, the accounting rules did not even count options as a cost of doing business—unless, as it turned out, they were backdated.

To test these theories, they examine the impact of the options awarded to the chief executives of some 950 American firms during 1993-2000.

This showed that the bigger the role played by share options in the boss's pay package, the more likely firms were to invest heavily in risky activities.

So Microsoft, on the advice of its auditors, issued the option at the lowest price over a 30-day period.