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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.'"
Do you even lift?
These aren't the 'roids you're looking for.
'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.
If they've done wrong, even in the past, shouldn't they have to answer for it?
Seems reasonable to me, should seem very reasonable to those who place their trust in and money at risk with the stock for these enterprises.
As always, those who have done nothing wrong and keep good records have nothing to fear.
A feeling of having made the same mistake before: Deja Foobar
This is about making trades fair. Why should the privaleged few be the ones to make bank while everyone else takes a huge loss? Look at Martha Stewart. She is really great at her appeals to emotion. "Oh wo is me because I'm under house arrest and I had to serve jail time"(paraphrased of course). The point is that nobody should be let off the hook for doing things that the SEC specifically prohibits. Once people understand that they will be prosecuted to the full extent of the law, invester confidence will rise. We will be confident that finally those privaleged few might be too afraid of the reprocussions to go around screwing us small guys.
When will you get your due? Why does the world stack itself against you and scorn your creative ways of taking money from investors and lining your pockets?
I cry for your predicament! Worry not, hell hath no wrath like an MBA wronged!
Yeah, wake me up when we go a solid week without gross examples of cronyism, boards not doing their jobs, and investor fraud. Then do it again for a whole year, then we can complain about the "witch hunts". Instead I'm guessing there's a lot more stuff to uncover. In fact, the louder they complain, then the more there is. If they didn't have anything to worry about, well, there'd be nothing to complain about.
Hey, I'm just your average shit and piss factory.
This guy is an executive?!
Backdating means that the strike price on your option is less than it should be. The 'strike price' of stock options is generally the price on the date the option was granted. If the option is backdated to a date when the stock price was lower, then that extra money comes out of the company's profit, and, thus, out of the shareholders' pockets. Instead of rewarding execs for increasing the stock price in the future, backdating rewards them for increasing it in the past. You can argue that they may deserve the extra. However, hiding the compensation in a stock option intentionally misleads investors.
The injured party is the mope (or market) that the executives sold their stock to. The injured party is the rest of the shareholders. I mean, this is stupidly simple math.
It was illegal when it was done. It was clear that it was illegal. It was (for the most part) hidden very much on purpose. It is very clear what was going on and why they thought they could get away with it.
If the SEC prosecutes all of these instances, than my faith in the market goes up, not down.
"If you want to improve, be content to be thought foolish and stupid." - Epictetus
Ever notice that, any more, any time any investigation into anything is started, someone comes out declaring it is a "Witch Hunt"? It seems to be the easy-out everyone tries to use when things start to get too hot. I swear I've heard it like 4 or 5 times in the past year or so, in public statements to the press by lawyers for defendents, and by other potentially biased parties such as this guy.
Also, the guy says that the purpose of the SEC is to build confidence, and he wonders how the investigation builds confidence? What a moronic question. That's like saying that the police "hurt the publics confidence" in the safety of their community by investigating crimes? I mean, wtf? We all know crimes are committed all the time. Having the police actually investigate, and then arrest people builds my confidence far more than a police department that tries to *pretend* no crime is actually happening.
Oh the poor, poor CEOs of public companies...will the suffering never end?
The facts pretty much speak for themselves. Anytime a public company is allowed to fudge, manipulate, obfiscate, distort or just plain lie about publicly required financial disclosures with impunity, they will. It's a numbers game and if it pays to screw people while enriching the big shareholders, then it becomes "a business decision". Wall Street has very little integrity. This is why the SEC and public interest groups (including shareholder rights suits) are important. They make the greedy bastards have to work harder to screw us. At some point, hopefully, it will become financially more profitable to just run a clean company.
I don't see one reason why any public company cannot document options transactions including dates and how they were calculated. Five years ago is still pretty recent and well within the seven years that you're supposed to keep most business records.
What would be more satisfying is to see those who do abuse the public trading system actually do hard time for this.
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.
Wait, let me get this straight-- by making sure everyone is playing fair, the SEC is destroying investor confidence? Where's this guy from? Bizarro world?
The theory of relativity doesn't work right in Arkansas.
"But I don't know who the injured party is here"
Well that should be obvious - it's the shareholders. If executives weren't fiddling the dates over share options to make more money, the shareholders would probably get more money in dividends, a higher stock price, shares in a company without a damaged reputation and possibly a company with more money too. All these should be incredibly obvious to someone who's spent more than 2 seconds thinking about it.
Video Game cheats, hints a
But I don't know who the injured party is here
Well, the shareholders are, that is, the owners of the company, if you had forgotten. Giving a stock option is fine, backdating it is plainly getting money out of the coffers of the company and into the hands of employees. That's also fine if the shareholders accept it, but they didn't.
About the witch hunt, it's based perhaps in the SEC being fed up with ever-more-ingenious schemes to divert money into the hands of the executives, said schemes devised by the executives themselves. Of course now there are not failing companies, like with Enron, because the economy is doing all right. But Enron crashed during a small recession. Let's see what the next recession bring. Then perhaps many of those back-datter companies will fail, the executives retire rich and the stockholders start asking questions, some of the to the SEC.
In a word, if they want to reward themselves, let them do it, but in an open way, that's all the shareholders and the SEC ask. And only fear of criminal prosecution will do it, because they'll certainly have no fear of money fines.
Rome taught me patience and assiduous application to detail. Virtues which temper the boldness of great, general views.
They are talking to an executive who joins a growing list of other executives who have raked in millions upon millions and are now scurrying like cockroaches when the light is shined on them. Meanwhile they tell the rank-and-file to keep their heads down 'cause their jobs just might go to India and market company stock to the public as though it were just another product.
I work for a small company and I can say that if I hid stuff from the owner the way these guys do I'd be out the door in no time.
It's high-time that shareholders were treated like the owners they are. If he "doesn't know who the injured party is" then he should talk to the shareholders of the companies that are having to restate earnings to account for their misdeeds.
~~~~~~~
"You are not remembered for doing what is expected of you." - Atul Chitnis
But I don't know who the injured party is here.
Come on, that's really disingenuous. To be clear, these investigations are not into backdating stock options for high-ranking execs, which is almost always a legal practice. The investigations deal with backdating stock options, and then not doing the required public reporting that the backdating occurred.
In many cases, this is like sliding a six or seven figure check under the door to these employees, and then refusing to account for it in your statements on executive compensation.
The injured parties are clearly shareholders, who are being lied to about the actual compensation levels for senior management. Shareholders have the right to know if execs are being compensated fairly for their performance, or if money that could be paid out in dividends is in fact sneaking its way back into the CEO's hookers-and-coke fund.
Since when do they need a purpose, exactly?
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?"
"I am the king of the Romans, and am superior to rules of grammar!"
-Sigismund, Holy Roman Emperor (1368-1437)
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.
We don't have a mechanism to make the executives responsible for the deception pay for it. Instead we force the shareholders, who've already been duped, to pay the penalty.
Mmmm.. Donuts
In a print edition of the Wall Street Journal, they had (think it was D1, but the cover of one of the inside sections) a fairly lengthy article yesterday, and another lengthy one on Saturday (the weekend edition), on how Sarbanes-Oxley and back-dated options are in fact serious problems and most of the CEOs and senior execs who were so upset at options expensing being a balance sheet cost for tech businesses later turned out to be the people using back-dated options to steal money from the shareowners of the company.
So, you may call it a witch hunt. I'll call it going after employees who steal from me, thank you very much.
-- Tigger warning: This post may contain tiggers! --
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 same could be said for all the Sarbanes-Oxley (aka "SOX") crap. It's supposed to protect shareholders, but instead, it's costing companies millions of dollars. Where does all that money come from? Out of the bottom line. Who gets hurt? The shareholders.
... instead of just guessing what they're supposed to do, paying a 3rd-party auditor to come in and guess what they're supposed to do, and then finding out in the end that they spent millions and still did the wrong thing. :(
I'm not saying they should just cover their eyes and say "Second set of books? I don't see any second set of books.", but SOX sucks and needs to be reformed. Maybe next time around, they could actually spell out what they want, so companies might be able to comply
Saying the SEC is investigating any company, makes investors believe there's a problem, even if the SEC clears the company the small relief from that is nothing compared to the huge drop in stock prices and confidence lose. Who wants to buy a part of a company that might be hit with an SEC lawsuit?
The fact is the SEC has no proof of any wrong doing at any of these companies, yet at the same time they publicly will talk about investigating them, a step that is known as the first step before a serious legal action is taken. The company loses, the investors who didn't hear about this ahead of time loses, and the SEC either find something or walks away, creating a world of paranoia in the companies.
This would be fine except any company that is investigated and is doing everything completely on the level gets hammered in the market when the investigation is brought to light. Now instead of buying into a company you believe is a good company, you're going to look for a company that the SEC isn't going to investigate.
Over time it's hopeful that an SEC investigation isn't an immediate tail dive for a company but for the forseeable future most investors see it as a major problem.
What's even worse is that while the companies do get screwed when the SEC does find something even when the companies, who wins? The investors lose, the company itself loses, the SEC wins, the only other winner is other companies competing with the first company. Now should they have cheated? No. But at the same time should the only winner be a third party entity that had nothing to do with the original problem and wasn't harmed by the original problem, while the victim who is mostly ignorant of it in the first place still gets nothing?
I personally say the SEC should continue to investigate large scale crime, stop attacking every business with out an idea of any wrong doing or at the very least make sure not to damage every company they want to investigate just for the sake of being impartial.
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.
SEC: What makes you think she is a witch?
Stockholder: Well, She turned my stock into a newt!!
(pause)
SEC: a newt?
(long pause)
Stockholder: It got better...
Stockholders: BURN HER anyway! BURN! BURN! BURN HER!
That seems like an odd POV. The more that you uncover and eliminate bad practices, the more confidence we'll have in the system.
It seems to me the same as saying that you can bolster peoples faith in government by ignoring corruption...
Someone should dig in, reveal and eliminate any trace of wrong-doing in business. Who are you suggesting should do this if not the SEC, and how do you suggest we enable (whoever you pick) to do this job?
The tone of the posts under this topic confirms that this is indeed a which hunt.
First off, the amount of stocks set aside for options is typically already known well in advance and already priced into the price of the shares. If someone exercises an option they bought at 1-cent, and sells for $100 dollars that will have the same effect on the price of the stock as if they bought options at $99 and sold them for $100.
Second off, while executives benefit from options, the people who benefit the most are employees. People are so blinded with envy over a few boys-club executives, that they are shooting themselves more than they are shooting the 'good-ole-boys'.
Third off, artificially reducing the option price would take money away from the company, but typically this price is minimal and reflected in other compensation. If a hot-shot programmer got 100K in value from 50K of options + 50K of salary, or got 100K in value from 25K of options + 75K of salary. The company and the share holders are pretty much out the same expense either way. The former actually benefits the company more because it increases the companies cash on hand that it can use for other activities.
Fourth off, noone seems to understand what's driving this, and it's not greed, but taxes. Between sales, property, state, federal, social security, and medicare eating the majority of peoples pay - it is humanly impossible to have any independent savings or any decent retirement. Now people go thru all these crazy schemes to aviod taxes that are clearly unjust and like fools we start whining about these crazy schemes. Well bullshit.
Fith, stock options are not inflationary. Over the last 5 years the Fed has doubbled the amount of money in circulation. People who have held on to dollars, or are paid in dollars have been screwed and not by the companies. They get screwed because the value of their pay gets watered down, and they get screwed because as their pay adjusts for inflation they get pushed into higher tax brackets. So then when people counter by back-dating their options - we call them thieves?, well bullshit again.
Apple Fan: What's all this about accounting regularities? God, I hate Corporatism. Always out to screw the little guy. Artificially inflating their stock prices at the expense of the small investor. These people need to be run out of town on a rail! Put 'em in jail, by God!
(Normal Guy): Pssst! Apple was one of the worst offenders! Steve Jobs was right in the middle of it!
Apple Fan: Damn mainstream media! Always picking on Apple. Can't they just leave Apple alone and stop making crap up? Obviously it's just more of the same lies. Steve would NEVER do anything underhanded. No, those commercials were just trying to be funny. Besides, everyone lies in advertising, it's part of the game. Some Micro$ofty probably snuck in and changed Apple's records to get them in trouble...
Sometimes it's best to just let stupid people be stupid.