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Subject:  Re: The WSJ: New Look, Same Blind Spot Date:  1/4/2007  1:59 PM
Author:  HarryHope Number:  200305 of 603896

Now the bad thing about the backdating shenanigans is supposed to be the dilution of shareholder value. I don't know how to calculate the loss due to dilution by those stock options, but during the subsequent years, AAPL went from the 4 - 6 dollar range to the 60 - 85 dollar range. As a long-term AAPL holder, I am happy enough with the stock performance that I find it impossible to get upset about the dilution.

To each there own but backdating as Apple did is illegal and dishonest. So boardmembers/executives enrich themselves illegally and dishonestly? I'd rather put my money elsewhere.

Is backdating of ESO grants illegal?

Backdating of ESO grants is not necessarily illegal if the following conditions hold:

No documents have been forged.

Backdating is clearly communicated to the company's shareholders. After all, it is the shareholders who effectively pay the inflated compensation that typically results from backdating ESOs.

Backdating is properly reflected in earnings. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant. (Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money. However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years.

Backdating is properly reflected in taxes. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient. Thus, an artificially low exercise price might alter the tax payments for both the company and the option recipient. Further, at-the-money options are considered performance-based compensation, and can therefore be deducted for tax purposes even if executives are paid in excess of $1 million (see Section 162(m) of the Internal Revenue Code). However, if the options were effectively in-the-money on the decision date, they might not qualify for such tax deductions.
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