AMT woes south of the border – what about us?

The Alternative Minimum Tax is getting a lot of coverage in the US since changes made by Reagan in the 80s are causing it to affect 80% of “families with an adjusted gross income of $75,000 to $100,000,” in other words, a lot of frickin’ families.

When the tax was first introduced in 1969, it was intended to catch only the wealthiest members of American society who were paying little to no tax thanks to various deductions, loopholes and shelters.

But in 1986, … the law was subtly changed to aim at a wholly different set of deductions, the ones that everyone gets, like the personal exemption, state and local taxes, the standard deduction, certain expenses like union dues and even some medical costs for the seriously ill. At the same time it removed and revised some of the exotic investment deductions.

We have AMT in Canada, but since I’m not reading stories in our media about this situation I’m assuming it isn’t a problem. I suppose the fact that we weren’t taught anything about it in any of the three tax courses I took in school supports the assumption that this doesn’t affect nearly as many Canadians.

If I had to guess, it’s because we missed the 1986 adjustments that occurred south of the border.


Apple’s “select” listing on the Nasdaq in jeopardy

Apple logoApple has informed investors that due to the ongoing investigation into their options backdating problems, they may be removed from the Nasdaq‘s special “Global Select Market.” How select, you may ask? Well, a mere 1/3 of companies listed on the Nasdaq are privileged enough to make the cut.

Wait, was that a typo? One-third of companies on the entire exchange are “select?” Kind of redefines the word now doesn’t it? According to the Times Online story:

Membership confers an extra degree of respectability on a company’s accounting and corporate governance procedures and, accordingly, gives investors an increased level of confidence.

Given all the tech companies that are having options troubles lately and the concentration of tech companies listed on the Nasdaq in general, this may not be the last one we hear with their “selectness” up in the air. Heck, Activision‘s on it and they just filed a non-reliance 8K for the past 15 year’s financials last week! More details:

Apple acknowledged in December that it had falsified records to show that a board meeting was held to approve the move when no such meeting took place. Apple also said that Mr Jobs was not aware of accounting implications of backdating and that he returned the options so that he would not benefit from the practice.

Fair enough. He’s not an accountant, after all. But was Mr Jobs unaware of the implications of falsifying records as well? Or is legitimate corporate record-keeping now… obsolete?


BlackBerry maker getting the probe on options backdating

The Ontario Securities Commission has launched a probe of Research In Motion’s stock option practices. An OSC spokesperson said the review was launched in early October, which is not long after the company announced it would have to restate past financials because of its options accounting.

Another tech company is having difficulties with their options accounting. The reason is clear: the prevalence of stock options as compensation in cash-strapped startups.

RIM revealed Oct. 28 that the U.S. Securities and Exchange Commission had launched an “informal inquiry” into the way the company granted stock options. RIM did not disclose information about any similar OSC probe.

And the SEC had announced an investigation over a week earlier! Seems to me that the two major commissions in North America should have been communication between them.

This whole options backdating thing seems to me like it’s something you would intuitively know is against the rules, isn’t it?


Loading springs and dodging bullets

Two terms, “spring-loading” and “bullet-dodging” have reminded me of the tendency in business to put a positive spin on negative practices.

Spring-loading refers to the practice of granting options immediately before releasing good news that will likely increase the stock price, resulting in options that are not in the money technically when granted, but are, shortly thereafter.

Bullet-dodging refers to the practice of granting options immediately after releasing bad news that will likely decrease the stock price, resulting in options that avoid being further out of the money had they been granted before the news.

These practices are shady, dishonest, and similar to insider trading in that they take advantage of the difference in information that company insiders have compared to outsiders.

The use of options to motivate management and align their interests with that of shareholders is still relatively new, but it’s increasingly subject to manipulation that is unfair to ordinary investors.

Along with the ongoing SEC investigations into backdating of options, future investigations into spring-loading and bullet-dodging could turn up more violations of ethics in business.

The attractiveness of options continues to decline with every instance of abuse. As Jack Ciesielski points out:

What made them attractive in the first place was that they were “money for nothing” with little visibility into their disbursement.

Now that options are getting the publicity they deserve, and none of it positive, their use will stay in the spotlight until ethical use becomes the norm.

What do you think about the use of options as compensation? Is spring-loading and bullet-dodging really wrong, or am I up in arms about nothing?


Novell investigating its options grants

Another tech company has announced it is conducting internal investigations into their options grant practices. This time it is Novell, a company known for its NetWare network operating system and more recently as a Linux company.

Novell said its audit committee began the investigation because of news about irregularities in the way that dozens of other companies accounted for stock options grants.

So it appears that Novell’s corporate governance has identified the need to and benefits of resolving any doubt about the company’s options accounting. Tech companies are the most frequent user of options as a form of compensation and have been the primary focus of the SEC investigation.

Options have to be accounted for at fair value on the date granted. If the options are granted in the money, the company must recognize the expense as being the difference between exercise and market price times the number of options granted.

So in the case of options abuses, the options were granted in the money at a certain date, then backdated to when they were out of the money, thus allowing the company to avoid reporting the expense while giving management options that are already in the money.

Stock options have been used as compensation in order to better align the interests of management and shareholders. Shareholders want the stock to go up, so options should guide management in making decisions that increase the stock price.

From a compensation standpoint, backdating makes sense. To reward a manager for doing well in the past year, you could give options dated at the beginning of the year so the manager can take advantage of the increase in the price during the year.

This ignores the more long-term outlook taken by shareholders, however. As well, sound management decisions this year will lead to stock price increases in future years as the benefits accrue over multiple years from, for example, deciding to upgrade to more modern and efficient equipment that decreases costs over its useful life.