In 2005, a Norwegian professor at the University of Iowa discovered something that would shake corporate America: CEOs weren’t getting lucky with their stock option timing; they were cheating. By looking backward and cherry-picking dates when their company’s stock hit rock bottom, executives at more than 130 major corporations were guaranteeing themselves millions in profits.
That professor, Erik Lie, shared his story with Caleb Newquist in a recent episode of the Oh My Fraud podcast.
The Accidental Fraud Fighter
Erik never set out to expose corporate fraud. Growing up in Norway, spending time skiing in the mountains and playing by the water, he was just a kid who was good at math. His path to becoming one of TIME magazine’s 100 Most Influential People in 2007 started with simple curiosity.
Erik’s work at the University of Iowa’s Tippie College of Business didn’t involve trying to catch cheaters. He was studying how stock options affected executive behavior. But what he found in the data was too strange to ignore.
Stock options give executives the right to buy company stock at a fixed price in the future, usually set at the market price on the grant date. Thanks to a 1993 tax law, they’d become hugely popular as “performance-based” compensation that companies could still deduct from their taxes. By the early 2000s, tech companies were handing them out like candy.
When Lucky Timing Becomes Mathematically Impossible
Erik was looking at what happened to stock prices around option grant dates, following up on earlier work by NYU professor David Yermack. But where Yermack found a modest pattern in early 1990s data, Erik discovered something explosive in more recent numbers.
“You see the stock price during the month beforehand, on average, go down by about 4%. And then right on the grant date, it turns and it goes up 4% afterward,” Erik explained. “This is crazy to find something like this.”
The pattern wasn’t just in individual stocks; it showed up in the entire market. As Erik put it, “The whole market is moving in that same direction. And you ask yourself, how could these guys predict the market? And how come they’re not working for a hedge fund in that case, instead of for a company out there in the Midwest?”
Some companies hit stock price lows for their option grants five years in a row. The odds of this happening by chance were astronomical. While defense lawyers would later claim their clients just “got lucky,” the concentration of perfect timing across hundreds of companies told a different story.
Breaking Academic Boundaries
When Erik read a Wall Street Journal article about the SEC investigating companies for “spring loading”—granting options before releasing good news—he did something unusual for an academic: he reached out to regulators.
“I contacted SEC, and this is not normal for me either,” Erik recalled. “Usually I stay in my bubble. But something compelled me to contact SEC and say, ‘Hey, I think you’re on the wrong path here.'”
His theory was simple. Companies didn’t have to disclose option grants until months later in their proxy statements. This meant executives could look backward and pick the most favorable dates. “They can essentially stand in March of a year and say, ‘Hey, we’ve got some grants last year, didn’t we? Let’s just pick a date to make that official date. And look at that—June 7th had a very low price.'”
Unlike Harry Markopolos, who was desperately trying to get the SEC to investigate Bernie Madoff during the same period, Erik found a receptive audience. One SEC staff member called him, asked for data, and appeared to take his findings seriously.
The Story Goes Public
To strengthen his case, Erik teamed up with colleague Randall Heron to study what happened after Sarbanes-Oxley required option grants to be reported within two days. Their findings were damning: companies that complied with the new rule showed no suspicious timing patterns. The magical ability to pick perfect grant dates vanished the moment executives had to report in real-time.
But academic papers rarely make waves. “People will not read these academic journals for the most part,” Erik admitted. “No one cares about these things.”
Enter Mark Maremont, a senior Wall Street Journal reporter who immediately grasped the story’s explosive potential. His team spent months analyzing data and contacting companies. The resulting March 2006 article, “The Perfect Payday,” featured colorful graphics showing company after company somehow granting options at exact stock price bottoms.
“One executive fled the country very quickly,” Erik noted about the aftermath. “I think it’s pretty clear that something is going on.”
The Journal won a Pulitzer Prize for its coverage. More than 130 companies faced investigations. Seventy executives lost their jobs.
Why Proving Fraud Is Harder Than Finding It
Despite overwhelming statistical evidence, criminal prosecutions produced mixed results. The challenge was, while Erik’s data showed undeniable patterns across hundreds of companies, prosecutors had to prove criminal intent for specific individuals.
“With enough data, you can see these patterns, but if you narrow it down to one data point, you can’t see what’s happening in that context,” Erik explained.
Smart executives had even built in deniability. “Some of them would intentionally not pick the lowest because it would seem so obvious,” Erik revealed. By choosing the second or third-lowest price, they created enough ambiguity to defeat prosecution while still enriching themselves.
The harm was real. Shareholders were deceived about compensation costs. Companies illegally claimed tax deductions. And as Erik pointed out: “If this is all harmless, then why not just do it out in the open?”
Lessons for Today’s Fraud Fighters
Erik’s story demonstrates what Caleb calls the “privatization of enforcement,” where academics, journalists, and others help catch fraud that overwhelmed government agencies might miss. But unlike traditional whistleblowers who face retaliation, Erik experienced little pushback.
“I wasn’t scared at all. I just thought it was a whole lot of fun,” he said, attributing his lack of fear partly to Norwegian culture where “any celebrity can go around in the street or take the bus.”
His new book, “Catching Cheats: Everyday Forensics to Unmask Business Fraud,” shares these and other stories about using data to spot deception. For accounting professionals dealing with an era of sophisticated financial manipulation, his work offers an important lesson: patterns in aggregate data can reveal frauds invisible at the individual level.
The backdating scandal largely ended once transparency was required. When executives could no longer manipulate timing in secret, the practice stopped. As Caleb observes in the episode, “These are rich and powerful people, executives at public companies. And we should want those people to be accountable for their actions.”
Sometimes catching cheats doesn’t require being a traditional whistleblower risking everything. Sometimes it just takes curiosity, rigorous analysis, and the courage to tell regulators when they’re looking in the wrong direction. In a world drowning in data, the ability to spot patterns others miss might be our best tool for keeping the powerful honest.
Listen to the full episode to hear Erik’s complete story, from his Norwegian childhood to becoming one of TIME’s most influential people, and learn how academic curiosity exposed one of the most widespread corporate frauds of our time.