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11-Mar-2015 17:46

This is important to note, because the grant date is what determines the exercise price on the options.For instance, if the board meeting is on January 3, 2012, and Company XYZ stock closes at per share that day, then the exercise price of John's 2012 stock are backdated, then his exercise price is only per share.In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the within two business days.In addition to being illegal, backdating isn't always a sure thing.The board formally grants the stock options to John every year at its January board meeting.Typically, the grant date of the stock options is the same as the date of the board meeting.Here are some guidelines as to what may be possible from a legal perspective.21, 2014 /PRNewswire/ -- Shares in Ocwen Financial Corporation ("Ocwen" or the "Company") (NYSE: OCN) have plunged approximately 20%-its largest intraday drop since October 2008-after New York's Department of Financial Services accused the company of improperly option grants to periods of lower share prices (Yermack, 1997; Aboody and Kasznik, 2000; Chauvin and Shenoy, 2001; Lie, 2005; Heron and Lie, 2007; and Narayanan and Seyhun, 2006), or decreasing earnings to suppress share price when options are granted (Baker, Collins, and Reitenga, 2003; Cheng and Warfield, 2005; Bergstresser and Philippon, 2006; Cornett, Marcus, and Tehranian, 2008; Mc Anally, Srivastava, and Weaver, 2008).

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The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee.

Sometimes a group of companies which has reorganised itself will want to backdate some of those changes, perhaps to backdate an intra-group transfer of business so that it coincides with the previous year end.

The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.

Those options give John the right but not the on the date of the grant.

He 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.Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.