EXERCISE BACKDATING

A practice where option holders fraudulently claim to have exercised their call options at a specific time in the past, where in reality, the options were exercised much later. Exercise backdating is often performed by executives who wish to illegally reduce the amount of capital gains taxes they have to pay as a result of exercising the options.

An executive will save on capital gains tax if he or she sells shares that have been gained from options (which were exercised less than a year ago). The total amount of taxes on any realized profits could be as high as 35%. However, if those option-granted shares were held for over a year, the total amount of taxes paid could be reduced to as low as 15%. Since some executives have options where the total value of underlying securities are worth millions of dollars, so backdating the exercise date would save them tens of thousands of dollars in taxes.