Stock options are often given to executives as a form of compensation. The holder of an option is allowed to purchase stock at a later date at a price set when the option is granted.
For example, a company president could be given the option to purchase 100 shares at $20 each on March 1. This price -- called the "strike price" -- is determined by the market value of the shares on the date of the grant.
If a company's stock rose to $25 in June, that executive could "exercise," or buy, the 100 shares at the strike price of $20, immediately realizing a profit of $500 if they sold the options. If the price dropped, the person would not have to purchase the shares at all.
The idea behind giving executives stock options is that it gives them a personal incentive to have the company's stock price rise.
But some companies went one step further by backdating those options, effectively setting the strike price lower than it should have been.
Under that scenario, an executive is given the option to purchase those same 100 shares in March. But instead of using the March 1 stock price as legally required, the company would say the options were issued on Feb. 5 when the stock price was $17 a share -- effectively "backdating" the options.
The options backdating scandal goes well beyond Apple.
The Wall Street Journal, which recently won a Pulitzer Prize for its coverage of the issue, says that 140 companies have been implicated and that 80 executives have lost their jobs.
"In terms of the culture in general, we're talking about something that started during the '90s. Everybody was doing it," said Alexandra Higgins, senior compensation analyst with the corporate governance research firm The Corporate Library. "You'll find people who will admit to that. They didn't really think they were doing anything wrong because everybody was doing it."
"That's not to say that's [an] excuse, but that's how the practice perpetuated," she said.
The old saying on Wall Street is: Buy low, sell high.
The problem is, investors never know when a stock is going to go up or down. With backdating, though, company executives are guaranteeing that they are buying low.
"They intentionally went to a date, prior to the date of grant, where they saw their stock price was at a low," Higgins said. "Shareholders don't have that option."