Backdating: Is It Corporate Theft?
A federal investigation into what could be a widespread corporate stock scandal.
April 24, 2007 — -- Bob Chapman is an investor and shareholder activist, who relishes his reputation as a "tough guy" on Wall Street. Chapman's critics might call him a bully because of his sharp, abrasive style, but there's no denying that he draws much-needed attention to controversial issues.
Chapman's most recent frustration stems from the latest scandal to hit Wall Street: the often illegal practice of backdating stock options so company executives earn greater profits than they deserve.
On the subject of backdating, Chapman's stance is clear. "It truly is as bad, in my mind, as if the board of directors or the beneficiaries of the backdated options went into the treasury, opened up a safe, took money out and handed it to somebody, and told the board of directors it was OK," he told ABC News. "I think it is a subtle yet egregious form of theft."
Essentially, options backdating means granting an employee an option to buy stocks in the company at an artificially low price dated before the company actually granted that option.
The low price ensures a handsome profit when the stocks are then sold at a higher price. The practice is tantamount to handing cash over to the grantee at the expense of the shareholder.
Investors believe the practice is unfair. Regulators say if the backdating is concealed, it is also illegal. "We'd all be millionaires if we could choose the lottery numbers after the drawing," said Tim England, assistant director at the Securities and Exchange Commission. "That's fraud, and that's rigging the game."
England and his fellow investigators at the SEC are taking a hard look at well over 100 companies they suspect of fraudulently backdating their stocks -- and the number seems to keep growing. "The range of companies that are being investigated by us," England told ABC's "Nightline," "include Fortune 500 companies, as well as smaller mid-to-smaller cap companies that span sectors and industries and time periods."
The FBI has also launched criminal investigations. Several executives, including the former CEO of Take Two Interactive, as well as the former top lawyer of Monster Worldwide, have already pleaded guilty.
