Twenty years ago, I published a paper that helped uncover one of the largest corporate scandals in U.S. history. More than 100 public companies were implicated, dozens of executives resigned or faced criminal charges, and billions in earnings had to be restated.
I never intended to be a whistleblower. I was simply doing what academics are trained to do: ask questions, follow the data, and let the evidence speak. But what the evidence revealed was staggering: executives at hundreds of companies were manipulating stock option grant dates to enrich their executives at the expense of shareholders. The practice became known as backdating.
Now, on the 20th anniversary of that research, I see troubling parallels emerging in other corners of the financial world.
A pattern too precise to be chance
My journey into this murky corner of corporate behavior began with a desire to understand how executive compensation influenced firm decisions. While analyzing large datasets of compensation and stock prices, I noticed something peculiar: stock option grants often coincided with recent dips in the company’s share price. Too often.
The pattern was statistically improbable. It was as if executives had a crystal ball, repeatedly receiving options at the most opportune moment. But the truth was more mundane—and more troubling. Companies were retroactively selecting grant dates that coincided with low stock prices, effectively locking in instant, unearned gains. This allowed executives to buy shares at a discount while maintaining the illusion that they had to earn the discount by lifting the stock price.
The simplicity of the scheme
What made the fraud so insidious was its simplicity. Backdating didn’t require complex financial engineering or elaborate cover-ups. It was a quiet manipulation of paperwork—choosing a date in the past when the stock price was low and pretending that was the day the options were granted.
That simplicity likely contributed to its spread. There’s evidence that individuals on multiple boards passed along the practice. But even isolated executives and directors could easily conceive the scheme, much like someone backdating a check to make it appear they paid a bill on time.
Hidden in plain sight
What struck me most was that backdating went unnoticed for at least a decade. It was a silent epidemic of opportunism. The option grant data was public. Thousands of participants were involved. Surely some auditors must have seen isolated traces of the fraud. But no one connected the dots.
My research, combined with a timely nudge, eventually prompted the SEC to launch targeted investigations. Journalists followed, including a team at The Wall Street Journal with the time, resources, and incentives to pursue the story. Their work earned the paper its first Pulitzer Prize for Public Service.
Parallels in other scandals
I’ve since seen parallels of backdating in other financial scandals. For example, backdating is not the only fraud that depends on simply picking prices from the past. Bernie Madoff’s infamous Ponzi scheme used fabricated trades based on stale prices. Remarkably, Madoff’s investors accepted these reports for years, despite the implausibility of the returns. Similarly, the mutual fund late-trading scandal allowed favored clients to illegally trade mutual funds late in the evening at stale prices from the end of the trading day.
These cases show how much easier it is to perform well when you can reach back in time and choose a favorable moment to act.
Today, I worry that similar dynamics may be unfolding in private equity. Many funds report valuations based on internal or third-party estimates shortly after acquiring assets. These valuations often appear inflated—sometimes even acknowledged as such by the firms themselves. Yet these funds are increasingly included in pension portfolios, exposing everyday investors to risks—and potentially fraud—they may not fully understand.
The paradox of corporate fraud
That’s the paradox of corporate fraud: it’s both obvious and invisible. The data is often there. The patterns are detectable. But with silent perpetrators, the deception persists.
What gives me hope is that our tools for detecting fraud are more powerful than ever. We have better data, sharper analytical methods, and a growing community of skeptical citizen watchdogs.
Because the next scandal won’t be stopped by regulators alone. It will be stopped by someone who notices a pattern, asks a question, and refuses to look away.
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