Slashdot Mirror
A 'Witch Hunt' in Silicon Valley
garzpacho writes "BusinessWeek Online has an interview with Daniel Warmenhoven (CEO of Network Appliances), who joins a growing list of technology executives in saying that the government's search for backdated options among tech companies is going too far: 'It's become a witch hunt. I think the government is looking to find some egregious examples [of wrongdoing] and to publicly hang people for them. That's fine. But where does it stop? I'm not saying the past practices were all good. But I thought the SEC's role was to build investor confidence. What they're doing right now is destroying it, and I don't see the purpose. They're penalizing today's shareholders for events that occurred five years ago. But who is this protecting, exactly? With Enron, every shareholder in the company lost money. The same with Qwest, and with MCI-Worldcom. But I don't know who the injured party is here.'"
Sadly, when the board is found to have defrauded and misled investors by doing things like this, the penalty for it, most often, is to fine the company, i.e. its investors.
... like oh, a certain Enron CEO.
We do, actually, have a method of dealing with this, in fact, quite a few.
One, is a civil trial for theft. With awarded damages (treble in this case, as I recall, due to Sarbanes-Oxley).
Second, is federal or state fines for the CEOs and execs who steal the money from the shareholders.
However, I should point out that more than 80 percent of the CEOs and execs who steal the money and are fined, never pay the fines.
Or, in the case of some, they pretend to die of a heart attack after a visit to an island famed for zombie drugs, and after much money had disappeared overseas in numbered accounts
-- Tigger warning: This post may contain tiggers! --
The answer is obvious. Backdating options to the lowest price point of the underlying stock is essentially paying cash to the employees receiving the options. Backdating removes all the risk.
When you pay cash from the company's coffers to the employees, you must register that cash as an expense, thus reducing the net profit of the company. However, most companies in Silicon Valley did not adjust their finance sheets to reflect the expense of backdated options. As a result, the current stock price of the affected companies do not reflect the true value of the company. The companies, in effect, are worth much less than what the long-term stock price indicates -- since backdating stock options has been an ongoing but hidden (or so the crooks thought) problem for years.
The person who was hurt by the backdating is, like always, the small investor: you and me. You can be sure that the "big boys" like the money managers at Schwab and Merrill Lynch knew what was happening since they play golf with the CEOs of most of the companies in which the money managers are invested.
After the SEC forced several companies in Silicon Valley to re-do their financial statements dating back as far as 1996, the stocks of these companies have nosedived to reflect that loss in value of these companies.
What is interesting is that the CEO complaining of a "witch hunt" is actually the head of a company purchased by Juniper. If you search the Internet for news on Juniper, you will find that Juniper has been quite dishonest in how it has conducted its business.
To the cries of "witch hunt", I say, "Burn them at the stake. Protect the small investor." Can someone please ask Elliot Spitzer, the champion of the little person, to file some lawsuits against some of these dishonest companies?
If a cop knocks on your door tonight and asks if he can look around without a warrant and no apparent reason.
Wouldn't you ask him "for what purpose?"
Sure I would. But I did not sign a contract that said the cops could come take a look around anytime they want to. These companies all did sign such contracts in exchange for the public listing of their shares.
If they don't like it, they can buy back their shares and go home.
I have to assume when they say backdated they mean dated to a period before they were issued. Furthermore, that they mean the date of issuance was altered when the party was ready to redeem the options.
Backdated stock options carries no risk and 100% reward. Backdating stock options sets the strike price to the lowest price point in the past.
Backdated stock options must be treated as cash and must be expensed on the balance sheets. Giving cash (e.g., wages) to the employees must always be expensed on the balance sheets.