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On the theory that backdating’s not illegal if you account for it correctly

Whenever I write about backdating, many people write in to tell me that backdating’s not illegal; you just have to account for it correctly.

Since so many people think this is an important point, I thought I’d do a post addressing just that contention.

It’s not really true. What I assume people mean is that granting in-the-money options is not illegal, so long as you account for it properly. That’s true. But the whole point of backdating is to pretend that you’re not granting in-the-money options when in fact you are. And to say it’s up to the bean-counters to catch this situation is silly, because the whole reason you’re using phony dates is so that the bean-counters won’t know what you really did.

And this is why defenses to backdating sometimes get hard for me to understand. Sure the accounting rules are arcane and most people don’t know them. But if someone asks you to write down a date from a month ago on a legal document, rather than today’s date, doesn’t it give you pause? If someone presents you with a spreadsheet of the last month’s stock prices and asks you to pick the date on which you want to pretend that you granted, or were granted, several million options, might that not at least spur further inquiry?

When then-general counsel Nancy Heinen emailed Apple (AAPL) CEO Steve Jobs such a spreadsheet on January 30, 2001, she noted that it was a bad idea to choose January 2 as the grant date–even though that was the day the stock had been at its lowest–if they wanted “to avoid any perception that the Board was acting in appropriately [sic] for insiders prior to Macworld announcements.” (They ultimately chose one of the next-best dates from after Macworld.) Now isn’t it obvious to everyone on that email that shareholders are being misled? She’s saying that shareholders will naively think that the options were really granted on January 2, leaving them suspicious of springloading. It goes without saying that they also won’t realize that, in reality, it’s all being done a month later.

Now the fair response in Jobs’s defense at this juncture would be to say: “Well, look, people just didn’t look at this stuff the way they do today, post-Sarbanes-Oxley, and so on. This was spitting on the sidewalk back then.” And I can understand that argument. My question is, if that’s your position, how can anybody be feigning shock that Nancy Heinen then went on to file all the false documents that would be required in order to carry out what everyone understood to be a spitting-on-the-sidewalk type infraction they were willing to commit. At a public company, it’s not just foreseeable that any deception upon shareholders will eventually have to be reduced to writing–it’s inevitable.

Last October I interviewed Scott McNealy, CEO of Sun Microsystems (SUNW), for a different story, and I brought up the subject of options backdating. I thought his comment was telling: “When I sign a document and it has a date thing there? Usually I write down the date when I sign it. I didn’t even go to law school, and I figured out that that’s probably the most appropriate thing.”

By the way, even in the unlikely event that someone backdates options and accounts for them properly–i.e., treats them as in-the-money options–he would still almost always be violating the terms of the stock option plan which has been approved by shareholders. Those plans almost always require that the options be granted at fair market value on the date of the grant. And if  there is a stock option plan that doesn’t contain that language, the backdater would still have to make disclosures in a half-dozen publicly filed documents about what he was doing. And what a weird disclosure it would be. Something like: “Please note that when we grant options, we sometimes pretend that we grant them on certain dates when in fact we grant them weeks later. Not to worry, though. We just do this to amuse ourselves, because we account for them properly using the real dates.”

Could the next person who writes in to remind me that backdating isn’t illegal do me a favor? Please name for me one company that has ever, in the history of corporate law, backdated stock options and yet properly disclosed and accounted for them.