Backdating scandal


17-Dec-2019 23:13

For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape million in taxes and required the IRS to keep quiet about the option terms.Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of

For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.After these stock option terms came to the attention of the IRS in 2002, it worked out a secret deal with Micrel that would allow Micrel to escape $51 million in taxes and required the IRS to keep quiet about the option terms.Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code).However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.

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For several years, Micrel allowed its employees to choose the lowest price for the stock within 30 days of receiving the options.

million (see Section 162(m) of the Internal Revenue Code).However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.Remy Welling, a senior auditor at the IRS, was asked to sign the deal in late 2002.

Indeed, we found that the stock price pattern is much weaker since the new reporting regulation took effect.

There is also some relatively early anecdotal evidence of backdating.

A particularly interesting example is that of Micrel Inc.

Any remaining pattern is concentrated on the couple of days between the reported grant date and the filing date (when backdating still might work), and for longer periods for the minority of grants that violate the two-day reporting requirements.

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We interpret these findings as strong evidence that backdating explains most of the price pattern around ESO grants.In particular, he found that stock prices tend to increase shortly after the grants.