Companies sometimes give their employees the right to buy shares at a fixed price for a number of years while they are with the company. Since you will only make money if the stock prices go up, your profits increase if the price at which you are allowed to purchase the stock is very low, and the stock price subsequently rises.
What Does Backdating Stock Options Mean?
The fixed price at which an employee can purchase stock is supposed to be whatever the selling price was on the day that the option was made available to them. However, some companies manipulated this data by creating documentation to make it look as though the option was granted on a day when the price was very low. This practice of changing the so-called date that the option was granted to the employee is called "backdating," and is illegal.
Why Would a Company Do This?
Companies generally use stock options as an incentive to the employees. By providing large profits for its employees through stock options, a company can lure qualified individuals to come work for them, and make sure that they have incentive to stay with the company and not go to work for a competitor. By backdating stock options, that employee’s profits are even larger, providing even more incentive for the employee to work hard and stay with the company.
What Is Being Done to Stop This Practice?
A number of companies are currently undergoing investigations into this matter by the Securities and Exchange Commission (SEC). Backdating is difficult to identify, however, and it is often unclear exactly which practices are intentional and illegal and which are genuine mistakes or miscalculations.
The Sarbanes-Oxley Act, passed in 2002, requires that options be reported to the SEC within two days of the grant, and makes backdating harder to do.
Should I Contact an Attorney?
In order to recover damages in a lawsuit against your company for backdating, you will have to prove fraudulent intent, which can be very hard to do. An attorney with experience in securities law will be able to represent you should you wish to take action against the illegal pratices of your company.