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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.'"
'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.
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.
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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?