The tech industry's stock option backdating scandal appears to be gathering steam.
Last week, federal investigators announced criminal charges against former executives of Brocade Communications Systems, and they're hinting that more cases may be on the way. Meanwhile, Silicon Valley's top lawyers are scrambling to assuage their clients' fears, and the U.S. Security and Exchange Commission has said that the investigation will expand beyond technology companies to other publicly traded outfits. Already, some companies have begun restating years worth of financial results.
To try to answer some questions about what's going on, CNET News.com has compiled the following list of frequently asked questions.
Q: What is stock option backdating?
Backdating, which refers to the practice of altering the dates of grants, is a way for employees of a company to make additional money from stock options. While it's not necessarily illegal, in many cases it could be.
Q: How do stock options work?
Stock options give the recipient the right to buy a share of a company's stock at a price called the strike price, which is equal to the value of the stock on a certain date. If, for example, the strike price is $10 and the shares now trade at $15, each option would be worth $5. (The options would be worthless if the stock fell to, say, $7.)
Think of options as coupons you can sell. If you have a coupon to buy a Ferrari for $110,000, and the market price of the car is $120,000, your coupon is worth $10,000. But if you're lucky enough to have a coupon that lets you buy a Ferrari for a mere $50,000, your piece of paper would have a far more handsome market value of $70,000.
The same goes for stock options. If an executive is able to change the grant date o ...