Stock Options Scandal Rocks McAfee

narramissic writes "ITworld is reporting that in the wake of a stock-options investigation, executive shake-up is under way at security software vendor McAfee, including the firing of the company's president. From the article: 'McAfee announced Wednesday that it has terminated the employment of its president, Kevin Weiss. The company's Chief Executive Officer and Chairman George Samenuk is retiring from those roles and the board of directors has appointed Dale Fuller as interim CEO.'"

Comments

I'm sensing a pattern here.

[B3ryllium]

I'm sensing a pattern here of rampant abuse-of-privilege in the tech industry powerhouses here. HP, McAfee ... who knows what other companies have some stinkers in the board?

This might go a long way to explaining why the user constantly gets shafted with their purchases :) And what's with all that pre-installed software? Does anyone actually make use of that junk?

Re:I'm sensing a pattern here.

[jellomizer]

Well it is an issue of years of abuse. And lately there is a crackdown on such abuses. I will expect more in the future as the feds get around to invistigating other companies.

Re:I'm sensing a pattern here.

[Silver Sloth]

I don't see why you limit it to the tech industries. Almost by definition the qualities needed to rise to the top include an ability to 'bend the rules' to achieve results. It's like finding out that a politician is a power hungry bastard; what did you expect. After all, if it weren't like that we wouldn't need all those industry watchdogs.

Re:I'm sensing a pattern here.

[Aceticon]

Well, recently it came to the attention the authorities that a number of companies where granting stock options and (either immediatly or later) backdating them to a date when the stock price was low (ie, it was as if the options had been granted at a date when the stock price was lower, and thus the exercise price on the option was said low price from the chosen date).

This is illegal.

So the authorities started investigating and lo-and-behold, quite a number of tech companies had been backdating their options or commmiting other types of irregularities with their options.

<RANT>
Surprise, surprise - guess that during the last market bust a lot of managers on technology companies where patting each other on their backs and saying to each other "Its not your fault that the share price is going down, it's an industry wide problem and you should still be rewarded for all your hard work". I'm sure they conveniently forgot the fat bonuses they got when the stock prices were going up, even though that was not due to the success of the company but instead due to the bull market.

Now they got caught. I'm sure the favorite excuses are:
- Everybody else was doing it.
- It would be impossible to retain our best people without doing it.
</RANT>

Re:I'm sensing a pattern here.

[koehn]

Well, recently it came to the attention the authorities that a number of companies where granting stock options and (either immediatly or later) backdating them to a date when the stock price was low (ie, it was as if the options had been granted at a date when the stock price was lower, and thus the exercise price on the option was said low price from the chosen date).

This is illegal.

No, it's not. It's only illegal if you fail to disclose the backdated grants to your shareholders. If you disclose it correctly, it's legal under current SEC regulations.

A little-known fact...

[jense]

These gentlemen were caught by McAfee's internal-use-only feature, "Option Blocker."

remember the 90s bubble

[night_flyer]

it popped because of this... WorldCom, Enron, and all the others were playing with stocks, thanks to rules implemented in the 90s.

Instead of earning a regular wage (and getting taxed for it), they were given stocks which encouraged the holders to do what they could to cook the books...

The Crux of the Matter

[Billosaur]

McAfee set up a special committee of independent directors to look into the company's practices of stock-option granting. The committee was assisted by independent counsel and forensic accountants. Based on the committee's findings, McAfee now expects to have to restate financial results over a 10-year period to record pre-tax non-cash charges of between US$100 million and $150 million for stock-based compensation.

Which is where the problem lies in any company that hands out stock options. The trick of "back dating" options so CEOs can cash in on higher returns, coupled with a CEO's knowledge of events in the company, give them unprecedented power to make money off the company's stock while simultaneously causing the company to slide toward oblivion. No one can claim McAfee has exactly been tearing up the anti-virus market of late. Now, having to restate earnings, the stock is threatened with a nose-dive and the other investors are left holding the bag while the defrocked CEOs and Presidents get to walk away with large sums of cash.

Not quite a board problem

[BeeBeard]

...some stinkers in the board?

You couldn't be sensing a pattern because this isn't a problem with the board. If you read the article you'll find that the problems aren't in the board of directors. They're with executive level management appointed by the board (in this case, the President). If there had been a problem with the board, it would have been extremely strange. In public companies, board meetings literally are gatherings of shareholders who vote their shares on certain issues and also appoint or fire officers. Though it is almost always a Bad Idea [tm], with smaller companies some people can have dual roles as board members and as company managers. In the article, it says that George Samenuk was in just such a situation as the company's CEO and Chairman (kind of a big deal because both are important positions). But the stock-issue problems didn't involve him, he resigned because they occurred while he held those positions.

The problem is not that a board of directors was up to no good, it was that an officer of the company--President Kevin Weiss--was acting unilaterally and breaking all kinds of SEC rules by granting questionable stock options in the company.

Yet another scandal...

[jaypifer]

...but can someone explain why the stock price is going up based upon this news? MFE

Sometimes bad news really is bad news.

Update your signature files

[saboola]

Be sure to update your CEO.dat file on a daily basis, as new CEO's are released into the wild daily.

hrm..

[Intangion]

you think its a good idea to short them right now?

All you need to know

[mapmaker]

The company's Chief Executive Officer and Chairman George Samenuk...

When the CEO and the Chairman of the Board are the same person, you can pretty safely assume that management is running amok. The Board of Directors exists solely to make sure management isn't putting its own interests ahead of shareholders'. When management is the BoD that setup doesn't work so well.

Re:All you need to know

[seanadams.com]

When management is the BoD that setup doesn't work so well.

It's not quite that black and white. If you have competent management, it is GOOD to have them on the BOD (plus a few, perhaps a majority, of disinterested members for checks and balances). Otherwise the BOD doesn't know what the fuck they're supposed to be doing, which is quite often the case. For example, in a private company it is not unusual for the founder to also be CEO and Chariman. Keep in mind, shareholders ELECT the board and as long as your charter gives them reasonable voting rights it should not be able to get too far out of hand. Ideally shareholders should elect a few people who are "in the know", plus a few principal shareholders who are NOT employees, plus a few industry experts who are compensated only for the time in serving on the BOD.

Also board members, be they management or not, have a fiduciary responsibility to shareholders, so if the CEO does something against shareholders interests he is liable. And not just to the tune of whatever personal benefit he may have gained, but jointly for the full damages attributed to malice/fraud on the part of the BOD.

Re:This didn't used to be illegal (sort of)

[durdur]

Right, it was never legal.

Sarbannes-Oxley requires company officers to personally vouch for the accuracy of financial statements. This has caused companies to put in much more stringent internal controls so that they can ensure accurate reporting. But this doesn't mean filing inaccurate reports was allowed, previously. Nor was back-dating option grants.

--Jon

Not Only That!

[vjmurphy]

"McAfee announced Wednesday that it has terminated the employment of its president, Kevin Weiss."

Not only that, but I hear he was also running Norton Antivirus on his company PC.

What other scams are out there?

[rabun_bike]

This scam took a statistician to find and prove and that was only because stock option grants to executives are publically published at the end of each fiscal year prior to the SOX law. Now they have to be reported in a matter of just a couple of days which is why all this BS ended in 2003. IMHO, the only way this could be so wide spread and adopted it must have been touted by accounting consultants, financial consultants, and executive placement firms.

What concerns me even more is that this is surely just one of many widely used scams by executive to steal money from the company and shareholders. Obviously this scam had to be replaced with another money maker for executives once the SOX law was passed in 2002. We live in a weird era where executives have complete control over these companies and corporate raiding is the norm.