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 possibility is made more plausible because the disclosure rules for charitable donations are laxer than they are for options grants or stock sales. Current rules require prompt disclosures of options grants and stock sales, but charitable donations of stock don’t have to be reported for long periods after they are made. That’s plenty of time to find the low point in a stock price and peg the donation date to that point.
Why would CEOs backdate charitable stock donations or employ insider trading in this way? By donating at high points in the stock’s price, they would achieve the maximum tax write-off for their donation. The gains are relatively small but you can see how this sort of thing might appeal to a tax lawyer or accountant trying to show his client some extra savings.
Interestingly, executives would be better off if they were trading on insider information rather than backdating. The rules prohibiting insider trading make exceptions for certain charitable donations, according to Jelveh’s reporting. So while they may be donating and benefitting from non-public information, they might not run afoul of any legal strictures. Backdating, however, may amount to tax fraud.
As you might suspect, the corporate governance types are up in arms. They don’t like the delayed disclosure for gifts. They think shareholders would benefit if they knew about the gifts at the time they were made, as it may tip them off about bad news coming. The exemption from insider trading also comes under fire.
"Just because the form is different doesn't mean the substance of what these rules are about should be different. The same kinds of restrictions should apply to gifts as to regular insider trading," Eleanor Bloxham, president of the corporate governance consultancy Value Alliance, tells Portfolio.
Of course, obligations to disclose gifts promptly or refrain from giving when in possession of material non-public information, might simply deter giving. This would mean that shareholders still wouldn't get the information the governance advocates want them to have, and the charities wouldn't get the gifts. The only thing achieved would be depriving the chief executives of a bit of tax savings. Given the minimal gains potentially large social costs, it’s hardly self-evident that the same rules should apply.
C.E.O Gifts Questioned [Portfolio.com]