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Answers - Stock Investing-The Real Deal On Options Back Dating And What It Means For Stock Investing
Just when you thought it was safe to write a check for stock investing, the options backdating scandal hits. Our problem as money managers is that much of the information that has been disseminated about options back dating, and stock investing is just pure WRONG. The purpose of this article is to clear t
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
he air, and inform you as some one in need of stock market information just what you need to know about this scandal.
Let’s begin. CEO’s and senior management at any company whether it’s Steve Jobs at Apple, or over 100 other companies in question receive their executive compensation in two forms. The fi
Let’s begin. CEO’s and senior management at any company whether it’s Steve Jobs at Apple, or over 100 other companies in question receive their executive compensation in two forms. The fi
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
rst form is an outright salary grant. Let’s say $5 million per year. No one is challenging that there have been any games with this part of the compensation package.
The second form of payment is stock options of which there are many types. We are going to use the most common form of stock options which
The second form of payment is stock options of which there are many types. We are going to use the most common form of stock options which
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
s a straight options grant. Let’s create an example. Let’s say John Smith is CEO of ABC Computer and he was given options on 1,000,000 shares of ABC Computer this afternoon which is January 22, 2007 at $10 per share which is the selling price of the stock on the open market.
Now let’s say back on Decembe
Now let’s say back on Decembe
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
r 15, 2006 the stock was trading at $5 per share. The compensation committee at the corporation in question wants to do the CEO John Smith a favor. They BACKDATE the options agreement to December 15, 2006, when the stock was selling at $5 per share. The date of the options agreement is called the GRANT DA
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
E. You need to remember this term.
Under the IRS Code, an executive must hold the option for 2 years. It is now 2 years and one day later. Let’s make it December 16, 2008, and the stock is selling for $15 per share. John Smith the executive exercises his options and sells 1,000,000 shares at $15 per shar
Under the IRS Code, an executive must hold the option for 2 years. It is now 2 years and one day later. Let’s make it December 16, 2008, and the stock is selling for $15 per share. John Smith the executive exercises his options and sells 1,000,000 shares at $15 per shar
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
e on the open market. Because of options backdating, he is showing a grant price of $5 per share, on December 15, 2006. His profit is $10,000,000.
You get the profit by selling one million shares at $15 per share, with a cost price of $5 per share. It’s a $10 per share profit on one million shares, or $1
You get the profit by selling one million shares at $15 per share, with a cost price of $5 per share. It’s a $10 per share profit on one million shares, or $1
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
million profit. If the company had used the correct date of January 22, 2007, the grant price would have been $10 per share, and the selling price would have remained the same at $15 per share. The profit would have been $5 million dollars or half the profit that was made by BACKDATING.
Of course, John
Of course, John
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
Smith CEO would have had to wait until it was two years past the real grant date of January 22, 2007 to sell his stock in order to meet the IRS requirements. We now see that because of options backdating, this CEO executive John Smith made $10 million exercising his options as opposed to $5 million. There
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
are several more things you need to know in order to understand what’s at work here.
• What is the nature of the compensation when the options are being exercised? Is it ordinary income, or capital gain? The answer is that the sale of the options after two years from the grant date is ordinary income. M
• What is the nature of the compensation when the options are being exercised? Is it ordinary income, or capital gain? The answer is that the sale of the options after two years from the grant date is ordinary income. M
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
r. Smith in this case has $10 million in ordinary income on top of what he is paid in compensation by ABC Corporation.
• Is the IRS being defrauded by options backdating? The answer is no, the $10 million is being declared as income and is includible in income. The IRS is not being defrauded by OPTIONS
• Is the IRS being defrauded by options backdating? The answer is no, the $10 million is being declared as income and is includible in income. The IRS is not being defrauded by OPTIONS
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
BACKDATING, although the media would have you believe this is the case. If anything, the IRS is getting more taxes than it is entitled to because the compensation declared is $10 million. If the correct grant date were used the compensation would have been $5 million as we talked about above.
• Is anybo
• Is anybo
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
y getting defrauded?
You bet, the shareholders of the company are being defrauded by whoever is granting the options, and the recipient of the options if he or she DIRECTLY knew about the backdating. In this case, the fraud amounts to $5 million of excess compensation paid because of the backdating. You
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
get that number by figuring out what the compensation would have been if the correct GRANT DATE were used, as opposed to an erroneous earlier date, or backdating.
• Is there any way that an executive can make his gain a CAPITAL GAIN and pay the Capital Gains rate on the transaction? Yes, but it involve
• Is there any way that an executive can make his gain a CAPITAL GAIN and pay the Capital Gains rate on the transaction? Yes, but it involve
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
the executive in question declaring the value of the option on the grant date, and paying ordinary income taxes on the grant date to the government. This is a section 83b election under the IRS code. The executive then can convert his gain to a capital gain on the date of sale 2 years later. This basical
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
ly only happens if the stock is very cheap, pennies per share on the grant date. During the Internet go-go years, executives who elected this option got huge tax bills that they could not pay because stocks went from pennies a share to hundreds of dollars per share, and then collapsed before they could se
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
l them, leaving the executive with a huge tax liability.
Another thing an executive can do is exercise his option on the exercise date 2 years later and then NOT SELL, but hold on. He will begin a capital gain holding period on the exercise date 2 years later. Keep in mind that this means the executive i
Another thing an executive can do is exercise his option on the exercise date 2 years later and then NOT SELL, but hold on. He will begin a capital gain holding period on the exercise date 2 years later. Keep in mind that this means the executive i
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
s now at risk.
Conclusion
The options backdating scandal has resulted in the shareholders of the companies in question being defrauded by the amount of excess compensation that was earned by the executive granted the option. The IRS was never defrauded by the company. In fact the IRS benefited in the ex
Conclusion
The options backdating scandal has resulted in the shareholders of the companies in question being defrauded by the amount of excess compensation that was earned by the executive granted the option. The IRS was never defrauded by the company. In fact the IRS benefited in the ex
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
ess compensation paid the executive by receiving additional taxes from the executive.
Options backdating should not be tolerated by any Board of Directors of a company, and certainly not by the shareholder base. To the extent that it is, the Directors are violating the rules of corporate governance that
Options backdating should not be tolerated by any Board of Directors of a company, and certainly not by the shareholder base. To the extent that it is, the Directors are violating the rules of corporate governance that
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
they have a fiduciary responsibility to uphold.
Bill Gates of Microsoft has said publicly the most useful skill he ever learned was a working knowledge of the tax code. Now having said that, where do we sign up to get some of these stock options?
Goodbye and Good Luck
Richard Stoyeck StocksAtBottom.co
Bill Gates of Microsoft has said publicly the most useful skill he ever learned was a working knowledge of the tax code. Now having said that, where do we sign up to get some of these stock options?
Goodbye and Good Luck
Richard Stoyeck StocksAtBottom.co
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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