Saturday, March 8, 2008

Another Back-Dating Scandal on the Horizon?

I just stumbled upon this article today. (I literally stumbled upon it, and if you haven't tried stumbleupon, you are missing out on great web sites, and one of the best time-wasters invented by modern man).

The article at portfolio.com discusses a study that found that CEOs of public companies apparently have an uncanny ability to time their stock donations so as to increase the value of that donation. And, they are making the donation to their family charitable foundation.

That is all well and good, and while we can debate the concept of giving billionaires yet another way of avoiding paying taxes, there is nothing illegal about making this donation. However, it is a problem if they making the donation shortly before a significant price decline, in possession of material inside information. Now the article maintains that using inside information to time a charitable donation is not illegal. I am not so sure that this is true (think of the now-quaint requirement of 10b-5 - "in connection with the purchase or sale of a security) - but there is an argument that a donation is not a purchase or a sale, and therefore the anti-fraud provisions of the Act does not apply.

Assuming this is actually the case, there is a huge loophole here. CEO knows his stock is going to tank because of bad earnings, CEO donates a million dollars in stock to his own family's charitable foundation, and gets a million dollar tax deduction, on for donating stock that, a week later, after the news, is worth significantly less.

That hardly seems to be just or equitable. But then we get to the next part of the article...it appears that these CEOs are backdating their donation dates! Well, that is just perfect. Take an inequitable tax loophole, and then backdate your donation date to avoid the loss on your stock!

Now THAT sounds illegal, and if the article is correct, we have a yet another scandal brewing.
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