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A look forward at backdating

Marketplace Staff Jul 7, 2006

TEXT OF STORY

KAI RYSSDAL: You want your people to work hard. You pay them and you give them other incentives. On Wall Street, those incentives are called stock options, and the way they’re being handed out has drawn the wrong type of attention. You know, the type you get from the Justice Department and the Securities and Exchange Commission.

See, companies have played a little game of ‘pin the date on the option.’ Technically, that’s called backdating. James Angel is a finance professor at Georgetown University.

JAMES ANGEL: What this scandal is about is that what some people did is that they looked at past stock prices and they said ‘hey the stock prices was lower a little while ago,’ so they backdated the date of the option to reflect a lower price. They’re giving people more money in the options — and they are violating the accounting rules for how you report the value of the options.

The Wall Street Journal reported this week the SEC is considering civil charges against Mercury Interactive. Funnily enough, but not in a ‘haha funny’ way, Mercury makes software to help companies meet business regulations.

It seems Mercury didn’t actually comply with accounting rules for stock options. Professor Angel says the backdating scandal is why markets, and the people who profit from them, need to be watched closely.

ANGEL: These are people who were kind of looking around going ‘Hmmm nobody’s ever gone to jail for this, nobody’s ever going to find out about this, so I think I can get away with it.’ That is why we have such high regulation of our financial markets. Because money attracts thieves just like garbage attract flies.

There are at least 56 companies being investigated right now for possible stock-option irregularities. Whole lot of flies to swat, huh?

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