For the aspiring investor, there’s no greater accomplishment than successfully timing the market. No nuance is too subtle, and the books and articles written on this subject would easily fill a library. Consistently picking the right moment to buy or sell a security is a talent that few persons master. It’s for this reason that when connivance is possible, human nature steps in. Let me explain.

During the past months we’ve witnessed the latest corporate exposé: evidence that over the years, large numbers of public companies have engaged in massive option backdating to improperly enrich their officials. The technique is simple. A firm’s Board of Directors grants to favored executives options to purchase company shares at a pre-designated price—a thoroughly reputable practice when authorized legitimately. However, as insiders who are able to game the system, the options are backdated, usually to a date when the value per share was low, enabling the recipient to exercise the option and dispose of the shares simultaneously, ensuring an instantaneous profit. As the contrivance is normally done in secrecy, all other stockholders are unaware that they have been shortchanged through share dilution.

What I’d now like to do is put this outrage in perspective. The practice of fraudulently backdating documents enjoys a long history. One common practice throughout the ages has been land ownership confirmed through deeds predated, in some cases, by centuries. Another often-employed procedure is conveyance of assets by last will and testament forged after a decedent’s death. One of the more notorious instances of backdating came to light in 1974 concerning a tax-deductible contribution of vice-presidential papers by President Richard Nixon. In an attempt to circumvent a July 25, 1969, cutoff date established by Congress for such deductions, the documents effecting the gift were backdated by a year. A suspicion of similar abuses by two other former vice presidents, Lyndon Johnson and Hubert Humphrey, demonstrate that backdating can occur at the highest level. The point I seek to make is that this sort of deception is neither new nor uncommon. Rather, it depicts an integral characteristic of the human psyche.

It’s not my intent to condone immoral or illegal practices. Neither do I advocate that anyone engage in such actions. My aim is merely to inject some reality into our consciousness. It’s only when you understand how mankind actually functions that you can take measures to protect yourself in this duplicitous world.

A concluding thought:
There is one characteristic basic to our species that must never be ignored: Human nature is such that insider abuses of any organizational system are, and always have been, integral to the system, not aberrations from it.