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(Jason Mark Anderman illustrates the logistics problem well in this comment to a backdating post on Ken Adams’s blog.) There’s nothing inherently illegal or unethical about backdating contracts, although backdating can certainly be both unethical and illegal, depending on the situation.For those with an hour to kill thinking about the issues, Jeffrey Kwall and Stuart Duhl wrote an excellent article on backdating that was published in Business Lawyer in 2008.The trial court granted the defendants summary judgment, holding that FH Partners didn’t own the loan and so it couldn’t enforce it.On appeal, the Missouri Court of Appeals, Western District agreed.It’s not unusual for parties to a contract to want the written agreement to cover a period before it’s actually signed.There are any number of contexts where this comes up — some legitimate and others not exactly aboveboard — but the logistics of negotiating and signing contracts are such that the issue is unavoidable.
Professor Lie concluded that the robust profitability of so many options was statistically impossible absent some artificial influence such as backdating.
Under previous regulations, corporations could wait 45 days or, in some cases, over a year to report options, thus providing ample time for backdating.
Other similar practices are being reviewed by government officials as well.
In some cases, the date of exercise, rather than the date of grant, was changed to an earlier date to convert ordinary income into capital gains.
In general, companies engaging in a classic backdating transaction chose a date when the stock price was at a low point and chose that favorable date as the grant date.