Note: The Wall Street Journal series based on Lie's work has received a Philip Meyer Award for investigative reporting that uses social science methods.
When Erik Lie saw corporate executives making big money on stock options, he suspected more than simple luck or clever timing. Since 2003, he’s discovered that more than 2,200 companies may have illegally backdated options to generate larger returns for executives.
Stock options give employees the right to buy shares of a company over time at a fixed price, usually the market price on the date when the options are granted. Lie, an associate professor of finance in the Tippie College of Business, studied nearly 6,000 option grants for signs of backdating. He found evidence that executives retroactively chose dates with low stock prices as the option grant dates, allowing them to later buy stock at these low prices.
Lie’s work drew interest from regulators, informed a 2005 Wall Street Journal series on backdating, and took him to Capitol Hill last fall for testimony before a U.S. Senate committee. Fortune magazine credited Lie with exposing the stock option scandal, and SmartMoney named him one of the 30 most influential people on Wall Street.
Most backdating occurred from the 1990s through mid-2002, often at high-tech companies, small firms, and companies with volatile stock prices. Since the practice came to light, 21 executives have resigned from companies investigated for backdating by the Securities and Exchange Commission and the Justice Department, but Lie says most offenders may never be caught.
New rules established by the Sarbanes-Oxley Act of 2002 have made backdating harder to get away with. Lie continues to investigate stock option practices, assessing the impact of the Sarbanes-Oxley requirement that option grants be reported within two business days.
Lie advises companies tainted by backdating allegations to come clean. Backdating may be hard to prove, but watchdogs like Lie are reviewing the documents, charting the share prices, and crunching the numbers to do so.