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November 13, 2006 Backdating Options = Embezzlement
The option backdating scandals continue to get an enormous amount of
attention in the financial rags. The lead Business and Finance article in
today's Wall Street Journal is on yet another CEO, Bruce Karatz with KB
Home, who "is leaving the housing-construction giant after an internal
investigation found he backdated his own option grants". It is absolutely
amazing however, that America in general is not simply outraged at these
crimes. Some people believe that the backdating issue is either "just an
accounting issue" or "simply the way things were done at the time". While I
understand that in some circumstances backdating may well have to do with
proper record keeping, in many of the situations its simply taking cash
directly out of the company account and putting it in your own name.
Its a form of embezzlement that has nothing to do with accounting and
everything to do with greed. Backdating is simply deciding to buy a stock at
the lowest price over a certain period. In the case of KB Home, the Journal
reported that the CEO "will forfeit $13 million in gains from backdating". A
simple parallel would be that you buy a share of Google for $475 today and
six months from now decide to adjust your cost basis to $350. Then when you
sell at $550 you make $200 instead of $75. So who gets hurt? In the case of
backdating its every single other shareholder in the company. By backdating,
you simply reduce the price that you have to pay the company (e.g. the other
shareholders) to buy the stock ($475 to $350). So as you read about the
backdating scandal and its prevalence, recognize that it is like writing an
unearned check to yourself out of cash.
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