The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs.
the much different – and more financially beneficial – tax rules that apply when issuing “at the money” or "out of the money" stock options.
Although this practice gave the senior executives significant stock holdings, since the grant was issued at-the-money, the share price had to appreciate before the executives would actually earn a profit.
A 1982 amendment to the tax code created an incentive for executives and their employers to work together to break the law.
The amendment labeled executive compensation in excess of $1 million as unreasonable, and thus not eligible to be taken as a deduction on the firm's taxes.
Performance-based compensation, on the other hand, was deductible.
and dozens of lesser-known technology firms were implicated in the scandal. .) Read on to find out how the scandal emerged, what brought it to and end and what you can learn from it now.