Tencor scandal options backdating
Although pricing the options below current prices required the company to report a compensation charge under "well-settled" accounting principles, former KLA officials avoided reporting the charges by falsely documenting that the options had been granted on an earlier date, according to the complaint.
The backdated grants "resulted in materially misleading disclosures," the SEC asserted.
In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.
In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.
Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.
This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.
The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.
Stephen Taub, | USJuly 26, 2007 The Securities and Exchange Commission has charged that KLA-Tencor Corp., and its former chief executive officer, were involved in an illegal scheme to backdate stock option grants. The SEC charged that since 1997, the semiconductor equipment company concealed more than 0 million in stock option compensation by providing employees and executives with potentially lucrative "in-the-money" options while secretly backdating the grants to avoid reporting the expenses to investors. Schroeder, the former CEO, repeatedly backdated options between 19, and once in 2005, even after he received advice from corporation counsel that retroactively selecting grant dates without adequate disclosure was improper.It claimed that the company overstated net earnings in fiscal years 1998 through 2005 by as much as 156 percent.In a separate complaint, the SEC charged that Schroeder repeatedly engaged in backdating after becoming CEO in 1999, including pricing millions of dollars worth of in-the-money options awards to himself.The agency’s machinery has been clicking along a bit faster lately, and yesterday the Commission announced that it was filing backdating-related charges against semiconductor company KLA-Tencor and its former CEO Kenneth Schroeder.The routine backdating schemes overstated KLA-Tencor’s net income in fiscal years 1998 through 2005 by as much as 156 percent.