The backdating scandal

can someone explain: what is the backdating scandal that a lot of companies have done last year? how and why they did it? 


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Hi,

I will explain in simple terms because it can be, needlessly, complicated.

Backdating refers to stock options recieved by high ranking executives in various "traded" companies.

The price of the stock option is derived from the price of the stock it self. For example: a stock is worth 10$ and the option is let's say 7$. Now if this option is the ability to buy the stock in a "discount" that means that I can make a lot of money. Now the bigger the "delta" between the stock price and the stock option price - the more money I make.

These executives just changed in retrospective the dates of the stock options they recieved in order to increase the "delta" - hence "Backdating".

a good explanation can also be found here: http://www.investopedia.com/terms/o/optionsbackdating.asp

Enjoy,

Boaz


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An option is the right to buy a stock at a predetermined value.

Let's say stock A is at 15 today, it is decided that executives will have the right to buy stocks at 20 in one year.

 It's up to them to make it possible that stock is worth 25 in one year, so they will earn 5 for each stock.

 That's the "fair" (although some hard cooked capitalists like warren buffet do not like that fair as iit encourages executives to cook their accounts or think short term) use of stock options.

 Backdating is that you decide today, when you know the stock is at 25, that you were given one year ago the right to buy stocks at 20 (and probably some moron did forget to write this on a proper sheet of paper. hopefully you've got paper now).

You buy them and sell them, making 5 for each.

It's probably a bit more complex but that is the idea.

 

Now tell me why I am writing in English for a French reader and I am French also ?

 

 


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