News & Events

Lie Assisted In Backdating Analysis

The practice of illegally awarding stock options to executives at artificially low prices has become the focus of the biggest U.S. investigation on corporate wrongdoing since the probe into illegal mutual-fund trading led to $4.3 billion in penalties. Companies ranging from tiny Nyfix Inc., a money-losing supplier of trading systems, to UnitedHealth Group Inc., a health insurer valued at $57 billion, may have defrauded investors by deliberately backdating option grants to coincide with low stock prices. The lower the price, the more an executive stands to make by exercising the options when the shares rise. While companies are allowed to award executive options at below-market prices, they must charge the difference in value against earnings and potentially lose the right to tax deductions on compensation exceeding $1 million. Backdating gives executives a similar benefit without the extra corporate costs. The Wall Street Journal drew attention to the possibility of illegal options backdating in a March 18 story that mentioned stocks including United Health and Dallas-based Affiliated Computer. With the help of University of Iowa associate professor ERIK LIE, the newspaper listed companies that made stock-option grants that were followed by large gains in share prices.

Return to top of page