We’re on record as skeptics of the great backdating scandal of 2006. But just because you think something was unduly scandalized by an over-eager financial press and over-zealous regulators doesn’t mean it didn’t happen. And there is clear evidence that backdating occurred. In fact, in some sectors—we’re looking at you Silicon Alley tech—it seems to have been a quite common practice.

Now one of the finance professors whose 1997 research helped scholars and reporters at the Wall Street Journal uncover the option-backdating scandal may have discovered another form of backdating, Zubin Jelveh reports on Portfolio.com. It seems that some 20% of chief executives who donate stock to family foundations have suspiciously well-timed the gifts. They make the donations prior to declines in their company’s stock, which suggests that they are either front-running bad news by donating based on insider information or are marking their donations to dates before the announcement of bad news. The former looks like something like insider trading and the latter like backdating.

The backdating panic of last year appears to have largely deflated. The one big conviction from the much-ballyhooed scandal was Greg Reyes, the former head of Brocade. He was tried and convicted in August on charges of conspiracy and fraud in connection to backdating stock options at his company.

But that conviction now looks doubtful. In today’s New York Times, Andrew Ross Sorkin reveals that one of the prosecutions principal witnesses has said that her testimony was untrue.

The Wall Street Journal, which won a Pulitzer Prize for setting off the backdating panic with its breathless, front-page coverage, has oddly enough not found room for this story anywhere on it’s vast website. Is the Journal’s news team not as enthusiastic about backdating? Or do they not hand out Pulitzer’s for writing about how a scandal fades?

Trial Witness Said to Cast Doubt on Part of Testimony [New York Times]

Although it was billed as the latest financial crime of the century, backdating is turning out to have some very minor results. Few prosecutions, stalled or failed lawsuits and increasingly fading from its never prominent place in the ranks of public concerns. But this doesn’t mean the panic hasn’t had serious costs. Public companies have lost a number of top executives and a handful of the accused have been actually prosecuted as criminals
Yesterday we got the news that former UnitedHealth Group executive William McGuire had agreed to forfeit $620 million in compensation to settle backdating is giving back $620 million in compensation to settle backdating claims. It’s unlikely that he will face any criminal charges.

As Larry Ribstein points out today, this is in marked contrast to the fate of Brocade’s former hr director, Stephanie Jensen, who never personally benefitted from backdating but who was found guilty of two criminal counts. “In one the chief executive and main beneficiary likely will walk away with hundreds of millions of dollars. In the other, an underling who didn’t profit from the offenses likely will go to jail,” Ribstein points out.

The point isn’t that McGuire needs to serve jail time. Rather, the point Ribstein is making here is that the criminal process is wildly inappropriate for these kind of cases. It amounts, Ribstein writes, to a corporate crime lottery: the winners pay fines and the losers go to jail.

“These two cases are only the most recent examples of the lottery in action. Not much is gained from criminalizing this conduct over the many remedies, including the corporation’s own right of recovery, available for any wrongs that occurred (mostly inadequate disclosure). But much is lost from the odor of injustice that wafts over these disparate results,” he writes.

The backdating lottery continues [Ideoblog]

We caught a lot of flak from the self-styled guardians of corporate governance for our repeated insistence that the Great Backdating Scandal of 2006 was overwrought. The financial press treated backdating as if it was a new form of embezzling even though it was, typically, nothing more than a quite common workaround of complex accounting and tax rules that made granting “in the money” options more costly, at least on paper, than “at the money” options. Our sober take on backdating was seen as an endorsement of corporate fraud by our critics.

So what ever happened to the Great Backdating Scandal? It looks like it has largely fizzled. The Securities and Exchange Commission has ended several investigations without filing formal charges, the Wall Street Journal reported yesterday. And despite the fact that scores of companies engaged in backdating, no one expects any more a handful of additional serious civil or criminal cases to emerge from this affair.

Which is not to say that the backdating scandal has been costless. More than 80 companies have had to restate their financials and dozens of executives were dismissed at the height of the affair. Companies and executives have spent millions of dollars and untold hours complying with investigations and fending off possible cases.

[More on the deflating backdating panic after the jump.]

Steve Jobs has been subpoenaed by the SEC to be deposed in a backdating case against Apple’s former general counsel, Nancy Heinen. Though the news sent shares of the fruit down 1 percent, with a $140.31 close (-0.33%), investors should rest assured that while Heinen may fry, this doesn’t mean jack for the company or Steve.* Why? Because, in SJ’s words, “Fuck you, that’s why, I’m Steve Jobs. Death to the right click. Buy an iPod. Or don’t. I could really care less either way. It’s your funeral.”

Jobs subpoenaed over Apple stock scandal [The Guardian]

*Who backdating specialist Al Gore cleared of any wrongdoing earlier in the year.

The prosecution for stock options backdating related charges against former Brocade chief executive Gregory Reyes rested its case last Wednesday. But instead of spending the weekend preparing for the case the defense lawyers were scheduled to begin making on today, they wound up preparing an 18 page summary of their evidence that Reyes willfully ignored accounting standards and violated securities laws.

On Friday Judge Charles Breyer instructed the prosecution to deliver a written response to a defense motion to dismiss the case for lack of evidence. Although these motions are quite standard in criminal cases, the judge’s order for a written reply focused on the mens rea appears to indicate that he is at least taking seriously the defense contention that the prosecution has failed to present evidence that showing that Reyes understood the accounting rules that backdating violated.

The case is the first criminal case to go to trial following last year’s spate of revelations that many companies had backdated stock options. In many ways it is a test case of the government’s theory that backdating was a way to deceive shareholders in violation of securities laws. The defense in the case has argued that backdating was simply a tool for recruiting and retaining talented employees, and therefore may have actually benefitted the company and its shareholders.

Law professor Larry Ribstein, writing at Ideoblog, points out that whatever the judge decides here will shape future backdating cases. “Note that, if it is the case that Reyes can be prosecuted without proof that he knew the options were improperly reported, Steve Jobs better start suiting up (or whatever his equivalent is) for trial,” Ribstein writes. “On the other hand, if the Brocade case goes down, government criminal prosecution of backdating is in deep doodoo. We will then be left with civil cases focusing on bad disclosure — precisely where I have always thought we should be.”

The judge did not immediately rule on the defenses motion or the prosecutions reply. The defense case began today.

Judge Considers Dismissing Brocade Backdating Case [Wall Street Journal]
The Winds Shift in the Brocade Backdating Trial [LawBlog]
The Brocade trial gets interesting [Ideoblog]
Defense’s motion to dismiss [via WSJ]
Prosecution reply [via WSJ]

Kobi Alexander’s extradition hearing in Namibia is happening today (might’ve already happened, not sure with the time difference). The biggest charge in his 35-count federal indictment is money laundering. But he may not be going downtown for his little fraud dealings. Why? Since he fled to his African hideaway last October, Alexander’s been building affordable housing units, setting up scholarships for gifted students, and generally doing good humanitarian-type stuff*. The kind of stuff that might perhaps save one from those damn U.S. white-collar criminal courts. Someone had to say it.

And apparently we’re not the only cynical assholes to think this might be the case. CNBC’s Senior African Extradition Hearing Correspondent and Windhoek Bureau Chief, Scott Cohn, wondered aloud yesterday, “Of all the places in the world that need help with education, why Namibia? Could it be because in this young country—just 17 years old—money laundering, per se, is not a crime?”

According to Alexander’s attorney, absolutely not. Kobi’s not trying to buy off Namibia. As “an Israeli citizen,” Richard Metcalfe said yesterday, “Alexander is continuing the esteemed Jewish tradition of t’zedakah— good works, charity, empowering those less fortunate.”

Update: Hearing postponed to June 25.

Reporter’s Diary: ‘Kobi’ Alexander’s Namibia [CNBC]

*with what not a few people believe is shareholder money.

A key question in the great brouhaha over backdating—dating stock option grants on days when the stock was at a historic low rather than the date they were actually granted—has always been whether or not it matters to shareholders. Was backdating a trivial accounting matter that potentially increased compensation for those receiving the backdated options but had no serious effect on a company’s bottom line? Or did it represent something more serious that investors should have known about?

On Friday, a federal judge overseeing the trial of a former executive accused of fraud stemming from backdating declared that backdating was “material” to investors. But the way he arrived at this result has some legal scholars scratching their heads.

[We get scratchy after the jump]

Also: Apple posts higher profit on strong MacBook sales [Reuters]

The force field that seems to have protected Steve Jobs from the harsh scrutiny that the press and regulators have applied to other executives allegedly involved in stock options backdating is being put to the test today. The Securities and Exchange Commission filed charges against two former Apple executives—former chief financial officer Fred Anderson and former general counsel Nancy Heinen. And one of them has reacted by pointing an accusatory finger at the man at the top of the Apple.

Each of the two formers have reacted very differently to the charges. Heinen has vowed to fight the backdating charges, joining the thin ranks of other corporate executives who have decided to fight the SEC rather than settle. Anderson is going the other way. The announcement of his settlement with the SEC was made right after the charges were filed. But Anderson didn’t just settle—he released a statement placing the blame for the backdating of stock options at Apple squarely on the shoulders of chief executive Steve Jobs.

The statement shreds one of Jobs strongest lines of defense—that he didn’t understand the accounting implications of changing the options grant dates. Anderson’s statement has Steve Jobs as the key actor at each of the critical points. It sounds as if the ‘Apple Rule’—the unwritten rule protecting high-profile, popular executives (but not unpopular executives or formers) that regulators, prosecutors and the press seem to follow on backdating—is about to take a pounding.

The stock is trading up on the news—perhaps under the impression that the Apple Rule will continue to protect Jobs—but the reactions from the press and online media have been swift and punishing.
ValleyWag predicts that Jobs may face charges, going so far as to announce that its editor has sold out his position.

“Disclosure. I just sold all my Apple stock, before writing this post. (The stock is soaring, but I can’t believe traders have properly digested the news.) Steve Jobs, the company’s hugely valuable chief executive, must now be squarely in the sights of securities regulators,” ValleyWag says.

Endgadget also smells blood in the waters of Cupertino, where Apple’s headquarters is located. “The tech exec superstar who’s largely gotten off clean despite Apple’s lingering backdated stock options scandal is now being publicly blamed for wrongdoings by former Apple CFO Fred Anderson,” Endgaget writes.

Perhaps the most surprising reaction comes from Business 2.0’s blog, which examines how Jobs and Anderson dealt with their backdated stock options and concludes that the difference proves that Anderson is financially much smarter than Jobs. Anderson reportedly made as much as $3.5 million on his backdated stock options—an amount he has now agreed to “disgorge” (read: fork-over) to the government—while Jobs exchanged his backdated stock options for restricted shares. Jobs trade means he missed out on a $3.6 billion gain.

Oddly enough, that financially unsound decision may be what keeps Jobs out of trouble on backdating. He can credibly claim that he did not profit from the backdated stock options since he never cashed them in. But prosecutors and regulators have already shown a willingness to bring charges in other cases where executives did not personally see profits from backdating, so this might not be enough to keep the Apple Rule intact.

SEC files charges against 2 former Apple officers over options [Associated Press in the International Herald Tribune]
Former Apple CFO settles with SEC [Reuters]
Former CFO blames Jobs for backdated options grant [San Jose Mercury News]
Ex-CFO says Jobs was warned of options dates [Market Watch]
Attorney for Fred Anderson Issues Statement Regarding Settlement of Claims with the SEC [Press Release via Business Wire]
Steve Jobs in regulators’ sights [ValleyWag]
Former Apple CFO publicly blames Jobs for stock options scandal [Endgadget]
Why Fred Anderson Is Smarter Than Steve Jobs [Business 2.0]

Earlier on DealBreaker: Backdating and Apple stories from the DealBreaker Archives.

As a way of saying thank you for the Pulitzer, the Journal has opened up its backdating archives. You can read all about the scandal, starting from the very first story published thirteen months ago. (Has it only been 13-months? It seems like we’ve been writing about backdating forever. Oh, right. That’s because DealBreaker started just eleven days later.)

This video—which we found thanks to Barry Ritholtz—is actually a good introduction to backdating, and good background on how the Journal discovered the story and pursued it. In many ways, it is superb journalism, and congratulations are due to the reporters who performed it. Rather than purely old-school investigative journalism—the kind that relies on leaks, anonymous sources and (possibly) manipulation by government agents—the Journal’s backdating coverage was a new style of investigative journalism. They took the work of academics and applied it to the real world of business and individual corporations and corporate leaders. As academics increasingly note the costs of Sarbanes-Oxley and the dangers of criminalizing agency-costs, there might be hope that this kind of investigating the arguments of academic reporting may help enlighten the public rather than add more confusion and ignorance.

And there is little doubt that a lot of the reporting on backdating was poorly reasoned and misleading. The worst of it came not from the Journal but from reporters and editorialists who tried to make up for what they lacked in original findings by adding more outrage and inferring even more criminality. There still are many out there who believe that backdating somehow proves that corporate is under-criminalized.

“Much reporting has made it sound like backdating was the equivalent of executives taking erasers and white-out to their paychecks to add a couple of zeroes — and public understanding still suffers from this bum steer. But all that backdating comes down to is a nonmaterial accounting irregularity (yes, readers, accounting rules should be obeyed!) involving a defective judgment about whether ‘in the money’ options needed to undergo expensing,” Holman Jenkins wrote in an article that all but indicted his own paper’s coverage.

Why did the backdating story get reported like this? The outcome was probably over-determined. Scandal sells papers whereas reports about nonmaterial accounting defects do not. It also wins prizes. But something more than that was in play, as well. And that something is a political agenda. It is clear from the video is that the Journal reporters see the backdating story as just a smaller part of the struggle for truth, justice and reducing executive compensation.

But don’t take our word for it. Listen to leading Wall Street Journal backdating reporter Charles Forelle.

“Besides the individual who may face jail sentences or SEC sanctions, there’s the broader issue of executive compensation being thrown into the limelight again,” Forelle says around the five minute mark in the video. “Companies are starting to show at least a glimmer of thinking more carefully and more intelligently about how they give options to CEOs since options are by far the instrument that’s caused the majority of the rise in CEO pay over the last couple decades.”

A Pulitzer for A Perfect Payday [Wall Street Journal]

Don’t say we didn’t warn you. After it’s relentless and breathless coverage of corporate stock option backdating, the Wall Street Journal has reaped the ultimate reward in journalism—a Pulitzer Prize.

We’ve been one of the unfortunately rare sources of criticism of the Journal’s coverage of backdating. (Larry Ribstein and the Journal’s own Holman Jenkins are also among the thin ranks of critics.) It always stuck us as unduly scandalized, uncritically assuming that it was all a day of executive greed and theivery and misleading about the nature backdating. But like the Spartans at Thermopylae, it seems we’ve been overcome.

It was obvious that the Journal’s editors were gunning big-time for the prize. They released a front-page story on backdating on the last day the nominating juries were meeting at Columbia. But there’s no denying the reporting has had a major impact on the public discussion, as well as on corporate America, where chiefs have been toppled, prosecuted and, in one case, forced to flee the country.

It all started with a very simple idea—get some reporters to start digging into the findings of a few Midwest academics who had observed that many stock options grant dates were improbable. They seemed to have fallen on a perfect day for granting options—when the stock price was at an annual low. The academics concluded that it was more likely that the grant dates had been manipulated. The Journal simply followed up on this conclusion by naming names of the probable manipulators. It was classic muck-raking journalism that has succeeded beyond the dreams of most muck-rakers—and, in the process, has thrown a lot of muck into the public’s eyes.

And yet. And yet. We find ourselves still able to hope that this might lead to something that would be even more valuable than the Pulitzer Prize: a reconsideration of the criminalization of corporate governance. With so many c-level executives now former executives, the stocks of so many companies besmirched by the taint of scandal, some of those formers paying heavy fines and possibly facing serious prison time, the public might start to wonder whether we’ve pushed the Rudy Giuliani model of treating corporations like criminal families too far. A rollback of our rogue regulators might still be in the cards.

We apologize for our unusual optimism today. But as the champagne corks pop over at the Journal’s headquarters in One World Financial Center, we’ll comfort ourselves with the notion that the fall-out from the Journal’s backdating reporting could ultimately result in Jeff Skilling seeing freedom sometime before the twenty-plus years he was sentenced to by a federal judge.

Journal Wins Pulitzers For Options Probe, China [Wall Street Journal]

A Post-It note stuck into the board minutes of Affiliated Computer Services Inc. has come back to haunt Darwin Deason, the company founder and chairman who recently announced plans to take the company private.

An investigation into options backdating at Affiliated Computer Services Inc. unearthed a handwritten note in which ACS Chairman Darwin Deason discusses the practice of “always” picking the “lowest” prices “so far” in the quarter to award stock options.

The note raises questions about the company’s prior assertions that Mr. Deason, its founder, knew nothing about widespread options backdating at the company. News of the note’s contents comes at a sensitive time for Mr. Deason, who earlier this week joined with Cerberus Capital Management of New York in a $5.9 billion offer to take ACS private.

Just in case you don’t get the message that Deason is obviously a bad man—backdating! cooperating with private equity! management buyout!—the Journal includes a small box giving the background of the story: “Some have asked whether Chairman Deason is trying to scoop up ACS at a bargain price.” At first the connection between the backdating revelation and the buyout was lost on us but then we remembered you have to think like a criminal prosecutor to understand the Wall Street Journal’s backdating coverage. And then is obvious: backdating=looting from shareholders=management buyout=looting from shareholders.

Note Raises Pressure on ACS [Wall Street Journal]

Yet another company has cleared Steve Jobs of any wrong-doing in the backdating of stock options that occurred while he was hanging around. Pixar, which is owned by Disney, issued a statement declaring that “no one now associated with Disney committed ‘any intentional or deliberate acts of misconduct,’” according to the Wall Street Journal. Since Jobs is now a director at Disney, this is pretty much meant to clear his name.

Roger Parloff at Fortune finds this a bit implausible.

The story line at both Apple and Pixar appears to be that Jobs, the notorious micromanager who headed both companies at the time of the backdating, did not understand the legal or accounting ramifications of backdating. Interestingly enough, virtually Jobs’s only compensation at either company during this period was coming from the Apple options whose workings he so poorly understood. (During the relevant years, his salary at Apple was famously just $1 per year, while at Pixar it was about $55 per year.)

The thing that puzzles me most is this: If you don’t understand the accounting ramifications of backdating, why do it? Why not just issue the options dated as of the actual date you’re issuing them, and simply choose whatever strike price you think is appropriate — even though it may not correspond to the current stock price?

Meanwhile, over at Ideoblog, Larry Ribstein wonders how Jobs’ case is different from executives who have been indicted for their role in backdating stock options grants. One possibility:

Of course, if Jobs were charged, and Apple crushed, lots of people might start asking whether this whole corporate crime thing has gone too far.

Disney clears (wink-wink) Steve Jobs of options backdating misconduct at Pixar [Fortune]

Disney and the Apple rule [Ideoblog]

[Cross-posted from the original on SuperMogul]

The latest backdating scandal to erupt may be the most shocking yet!

Jesus’ (depicted here on the coolest Trapper Keeper cover ever) body may have been found in your mouth every Sunday, mystery solved! a Jerusalem tomb, according to the Discovery Channel Documentary, “The Lost Tomb of Jesus,” which aired Sunday. Despite the fate of Jesus’ corpus warping world history for the last couple thousand years, apparently it was only until recently that the SEC decided to investigate Jesus’ incorporation in “Heaven,” and verify actual residency requirements. Turns out Jesus may be using Heaven as a tax shelter, and has been hiding out in a tomb in Jerusalem all along, completely dead for starters, which means he could owe a substantial amount in back taxes, let alone estate tax (although conflicting values of Jesus’ estate range from 2 goats and a cistern bestowed by Joseph and his cousin Sal (his little known cousin Sal), to the entire universe… paternity test pending (Next on Maury, “God…(Maury opens envelope), you’re not the father of Mary’s baby. (God starts jumping around the stage and raising the roof, Mary starts sobbing on Maury’s shoulder).”

From the Numbers Guy in the Wall Street Journal regarding the tomb explored in the documentary:

The tomb is a set of 10 limestone coffins, or ossuaries, found in Jerusalem in 1980, bearing the names Yeshua bar Yosef (Jesus, son of Joseph), Maria (Mary), Matia (Matthew), Yose (a nickname for Joseph), Mariamene e Mara (a form of Mary) and Yehuda bar Yeshua (Judah, son of Jesus). Prof. Feuerverger calculated there is just a one-in-600 chance that those same names would have come together in a family that didn’t belong to Jesus of Nazareth.

The Discovery channel reached the disciple Peter for a comment (found in a ceramic pot):

Ok, so we lost touch with the funeral planner and couldn’t find the J-man’s body. Supposedly there was a mix up with the crucifixion people, our guy (sigh…Judas) filled out the wrong form and showed up the wrong day to reclaim the body. Heh, those Romans, so bureaucratic… but yeah, so we looked for about three or so days after work to find out where they put him, and I mean, we’re really talking a needle in a haystack here. Do you have any idea how many people the Romans were executing back then? Supposedly they had to import wood from Cyprus just to keep up with cross production, but I’m getting off topic here.

So we’re going around for a few days from tomb to tomb, and I’m getting a bit squeamish because it’s not the most sanitary thing you can do. You’ve got to hand it to the Romans though, they figured that sanitation thing out…well…at least compared to the Egyptians. Filthy buggers – I hear they chop off the noses of all the statues down there because they don’t want any of their kings, gods or relatives to be able to smell that horrible stench in the afterlife. Ok, so we’re essentially tomb raiding, taking a little bit for our troubles, you know. It’s not like a little coveting of thy dead neighbor’s goods ever hurt anyone, because I mean, where the hell are we going after all this? It’s not like dust can use that nice copper sundial. And what if you contract something? You poke around in the wrong tomb just once and boom, you’ve got leprosy. A couple of working stiffs like us can’t afford health insurance and unfortunately top notch medical care is really the only thing that’s going to cut it for most of the stuff going around these days.

So it’s near the end of day 3, we just finish searching this enormous tomb, and I joke to Simon Peter, “Well looks like his body’s not here, I guess he rose from the dead or something.” We laughed and laughed. Apparently, and this is only what I’ve heard, Mary Magdalen, who is a little cuckoo in the head these days (we think it’s from syphilis but you didn’t hear it from me – that batty ol’ whore!) was outside the tomb and misheard us. So she books it into town, running and screaming, and next thing you know you’ve got a bunch of people talking about the “miraculous” resurrection of Jesus. I mean, seriously. Communication back then was worse than the telephone game – you know the one you play when you’re a kid and you whisper messages to each other around a circle – one kid would start off with, “Your mom’s a hairy gorilla,” and by the end of the circle the first kid would be a deity. People were really batty back then, maybe trying to fill a void of some sort, I dunno, you tell me. Anyway, yeah we sort of gave up after that – it was BINGO night at the temple. Our bad.

This proves that the Church has been involved in its own backdating scandal for years, since Jesus has not been resurrected yet. The church is conspicuously listed as buying Jesus resurrection options when they were relatively cheap (insignificant on the world stage, important only to an obscure religious cult and small investing body), and is waiting for the resurrection, some 2,000 years later, to cash in big.

The church has seen substantial corporate growth over the last 8,000 quarters, able to significantly leverage itself using the perceived value of these resurrection options as collateral for large bank loans, A/R securitization facilities, pillages, mercenary armies and the occasional crusade.

-Keith Hahn

Odds of ‘Lost Tomb’ Being Jesus’ Family Rest on Assumptions – [WSJ]

The boys at Deal Journal have noted an interesting trend Re: company backdates, company gets acquired.

SafeNet’s deal to be acquired by Vector Capital for $634 million follows disclosures of Securities and Exchange Commission and Department of Justice investigations into its stock-option grants, and the subsequent resignation of its CEO. By our count, that swells the ranks of those that have disclosed backdating issues and later gone on to find suitors to at least 10, out of a running WSJ.com tally of 120 companies that have been sucked into the scandal.

DJ also goes on to guess the next backdaters likely to be picked up: Barnes and Noble, Sepracor, Sonus Networks, Bed Bath & Beyond, and L-3 Communications Holdings. Trend or coincidence? We’re not sure. But it’s like a good friend of ours always says: [Stewie looks into the mirror after applying some lipstick to his face] Well, I say, look at you there. You’re a filthy girl, aren’t you? Yes. You’re looking for a bad time. That’s what you’re after. You’re a dirty flirt. You want it bad. You don’t care where you get it becasue you have no self-respect and that gets you off, doesn’t it?

The Backdaters’ Ball: 5 Possible Acquisition Targets [WSJ]

The Wall Street Journal’s backdating reporting is short-listed for a Pulitzer Prize, Editor & Publisher magazine’s website revealed this afternoon. Less than one day after the Pulitzer juries completed three days of judging at Columbia University, E&P has published what it describes as “a likely list of eight of the 14 journalism finalist groups.” Among those groups is the Pulitzer for “Public Service” journalism, with the Wall Street Journal named as a finalist for its work on the backdating story.

The Journal broke the backdating story wide-open last year when it followed up on the work of academics whose studies had shown that hundreds of companies had granted stock options dated on days when the price of their stock was hitting historic lows. The likelihood of this being a coincidence, the academics, concluded was extremely unlikely. Far more likely was that companies had gone back and dated—or backdated—the grants to match the dates when shares hit lows, making the grants potentially more valuable to recipients than if they had been granted on dates when the share price was higher. When the Journal began naming the names of companies who had likely engaged in backdating, public scandal ensued.

Of course, there have been serious questions raised about whether the front-page scandalizing, perp-walk style coverage has helped or distorted the public understanding of backdating, and whether the Journal and others were over-hyping the scandal. But the Pulitzer juries have spoken. And it looks like the Journal is climbing its way toward the prize. Whether it climbed a mountain or molehill, well, the jury is still out on that one.

FLASH: Here We Go Again — Pulitzer Finalists Leaked! [Editor & Publisher]

Wel, we didn’t quite say that backdating doesn’t matter. The point we’ve raised here (and that’s been raised over and over again by Larry Ribstein) is not about whether backdating matters in some sense of universal, metaphysical justice. That sort of thing is in the eye of the beholder. Or the Creator. Or…well, you get the point.

The question we want to ask is: does backdating matter to investors and analysts? In the primary and most important sense, the answer is clearly “no.” And the reason is simple: because investors and analysts do not usually take stock options expenses in account when assessing the value of the company. There are all sorts of reasons why this is true—that the officially recognized, SEC-approved accounting method is backward looking and inexact, for instance—but there’s little argument about whether it is true.

Holman Jenkins illustrated this nicely in yesterday’s column:

Look at Yahoo’s latest earnings release, which flags several versions of income and cash flow that leave out stock compensation charges. Says Yahoo: “Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to understand the impact of stock-based compensation expense on our operating income.”
Look at any news account of company earnings in which options cost is a significant factor: “Sysco Profit Falls On Stock-option Expense, Fuel Costs,” reported a Dow Jones Newswires headline last year. “Excluding stock-option expense, earnings would have been 34 cents a share,” said the story’s third sentence.

The legal eagles have a word for things that don’t matter to investors or stock analysts—“immaterial.” And when it comes to the prosecution of crimes such as stock fraud—the hammer which the authorities have been using to beat alleged backdaters—this does matter because immaterial errors or omissions in a companies financial disclosures don’t typically amount to criminal acts.

In another sense, however, backdating does matter to investors and analysts. The zeal of muckraking journalists and status seeking prosecutors has made it matter very much, in large part because both groups have chosen to ignore the more important question of materiality in favor of criminalizing and scandalizing. And that has brought down more than a few good otherwise fine executives who might still be leading their companies if not for this kind of irresponsible journalism and law-enforecment.

In today’s Wall Street Journal, Holman Jenkins continues to wage war against his own paper’s page one editors. We’ll save for tomorrow any discussion of two important points that Holman raises—the immateriality of stock options backdating and the mostly likely reason it occurred—and instead give you the good news: it looks like the war against the war against backdating is making progress. To put it differently, at least some newspapers seem ready to back off the lynch mob mentality that initially gripped the business media when the Journal went public with its allegations.

With care and precision, the San Jose Mercury News characterizes the scandal: “Stock options were designed as a form of incentive-based compensation; backdating to a lower price is legal only if it is properly disclosed and accounted for by the company.”

Says the New York Times: “Backdating options is not necessarily illegal, but the practice can raise serious accounting, disclosure and tax issues.”

These are refreshing correctives to presumptions that continue to linger in certain media accounts — that backdating necessarily implies excessive or “stolen” compensation; that backdating violates the “rationale” for using stock options to attract, retain and incentivize employees.

Why such canards persist in the coverage is itself a bit of a mystery, but editors have their reasons. A more important question now is whether prosecutors will be able to scale their efforts to the actual nature of the wrong rather than the inflated version in some media reports. This question may be the hinge on which justice turns.

We wonder if by “certain media accounts” Holman could be referring to these guys?

The Backdating Molehill [Wall Street Journal]

Sure that’s not quite what he writers at the Wall Street Journal are saying in today’s front-page story. But it’s still, you know, kind of the point. The writers are trying to piggy-back their story—backdating—on the moral gravity of a far more serious story—the terrorists attacks of September 11, 2001. Why else lead with something this heavy-handed?

Amid the stock-market swoon that followed the Sept. 11, 2001, terrorist attacks, dozens of companies granted stock options to top executives or other employees. Now, some of those companies are saying the grants were in fact made weeks later — and backdated.

It’s not like we hadn’t read this story before.

There’s something a bit disgusting about this. It reminds us of the time we overheard our friend proposition women on the New Year’s Eve following the attack with the line “If you don’t go home with me, the terrorists win.” Except he didn’t say “go home with me.” He said “f—- me.”

But, of course, the willingness of women to sleep with that guy had no connection at all to terrorism. Similarly, Larry Ribstein writes, “The fact that the backdaters picked a date that has been depressed by tragedy has nothing whatsoever to do with what the backdaters did or didn’t do wrong.”

Yelling “9/11” in an argument is usually a sure sign you’ve already lost it. It’s a desperate, pathetic move. So maybe there is something hopeful about the resort to it on the front page of the Journal. Maybe it means that the official backdating storyline is becoming less plausible. To quote that Ribstein fella again: “So the 9/11 story comes just when journalists needed some fire-fanning to ensure that backdating stays a story about evil executives rather than retreating into the murk of just another story about bad accounting.”

Exactly. There are, after all, still Pulitzer’s to be awarded. Better not let this story die now!

Companies Say Backdating Used In Days After 9/11 [Wall Street Journal]

Backdating and 9/11 muckraking
[Ideoblog]