Backdating options definition
It’s fraud when options are backdated without telling shareholders or when companies change documents such as board meeting minutes or board approvals to support the backdating.
Companies have historically granted stock options “at the money,” meaning the exercise price is equal to the stock’s fair market value on the grant date.
But backdating options allows companies to set an exercise price that's lower than the current value of the company's stock.
This makes the options in-the-money for the grantee (Jane Smith, in our example), basically giving her options that are instantly profitable.
Those options give Jane the right, but not the obligation, to purchase 1,000 shares of Company XYZ stock at the market price on the date of the grant.
Regulators recognize that legitimate discrepancies may exist between the date an option is granted and the date it’s finalized due to innocent administrative delays.Under normal circumstances, she pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000 total.But if Jane's options are backdated per the example above, then her exercise price would be only per share.Typically, the grant date of the stock options is the same as the date of the board meeting.This is important because the grant date is what determines the exercise price on the options.