The following excerpt is from an article in Bloomberg Business "Ex-brocade Chief Reyes Conviction for Backdating Upheld":

Greg Reyes, the former chief executive officer of Brocade Communications Systems Inc., lost a bid to reverse his conviction for backdating employee stock option (ESO) grants and hiding the practice from auditors and investors.

The U.S. Court of Appeals in San Francisco upheld the 18 month prison sentence and $15 million fine imposed after his second criminal trial. Reyes' first conviction was thrown out by the same appeals court in 2009 because of prosecutorial misconduct.

The three judge appeals panel said that it found no misconduct in the second trial and that there was sufficient evidence that the backdating was material to investors. Reyes, 49, argued that prosecutors had falsely alleged that he granted himself backdated stock options and had made other mistakes at trial.

i. Greg Reyes was charged of grating himself backdated stock options. What is employee stock option backdating? How can regulation effectively constrain stock option backdating?

ii. Before 2005, firms were not required to expense ESOs if they were granted at the money. However, investors were concerned that this would reduce the usefulness of financial reports. Explain why.

iii. In the UK, performance-vested stock options (PVSOs) are granted to incentivize executives. PVSOs can be taken as ESOs with additional performance targets attached. Compared to ESOs without performance targets, explain one benefit and one cost of adding EBIT as an ESO performance target.