Broadcom options backdating indictment

and dozens of lesser-known technology firms were implicated in the scandal. .) Read on to find out how the scandal emerged, what brought it to and end and what you can learn from it now.

Options Backdating The essence of the options backdating scandal can be summarized simply as executives falsifying documents in order to earn more money by deceiving regulators, shareholders and the Internal Revenue Service (IRS).

The process became so prevalent that some investigators believe 10% of the stock grants made nationwide were issued under these false pretenses.

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The SEC reported that investors suffered in excess of $10 billion in losses due to share price declines and stolen compensation.

Why It Matters Betting on stock prices when you already know the answer is dishonest.

The roots of the scandal date back to 1972, when an accounting rule was put in place permitting companies to avoid recording executive compensation as an expense on their income statements so long as the income was in the form of stock options that were granted at a rate equal to the market price on the day of the grant, often referred to as an at-the-money grant.

This enabled companies to issue enormous compensation packages to senior executives without notifying shareholders.

You see, if you backdate stock options to a date when the price of the stock was lower, then the options are "in-the-money" when granted.

That means the company incurs an expense equal to the difference in the share price between the two dates.

I count no fewer than 38 top executives at 19 high-tech companies that have bit the dust over this stuff.

We're talking top executives at big-name companies like Apple, Altera, Broadcom, Brocade, Cirrus Logic, Comverse, KLA-Tencor, Maxim, Mc Afee, Rambus, Sanmina-SCI, Take Two, Trident, Verisign, and Vitesse. That's serious fallout considering that options backdating is legit as long as the company reports it and accounts for it accurately.

Although this practice gave the senior executives significant stock holdings, since the grant was issued at-the-money, the share price had to appreciate before the executives would actually earn a profit.

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