A 'Witch Hunt' in Silicon Valley 178
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.'"
methinks the lady doth protest too much$ (Score:2, Insightful)
Re:methinks the lady doth protest too much$ (Score:2)
I prefer an honest scumbag who knows what's wrong and does it anyhow to somebody like this. He has a too-convenient blindness to some basic concepts of capitalism.
Re:methinks the lady doth protest too much$ (Score:2)
Well... (Score:5, Insightful)
'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.
Re:Well... (Score:4, Funny)
Re:Well... (Score:2)
Re:Well... (Score:2)
much better treatment than the averages do.
And of course, he is just so right on the button
in pointing out that investor confidence is not
built unless the investors are allowed to keep
their heads in the sand.
And for the sarcasm impaired, sarcasm mode is now off.
Re:Well... (Score:2, Interesting)
When I last looked into this for retirement plans all anyone gave me an option was on what percentage I want in high risk and low risk. For Pete's sake! I want a bit more control than that. I want to tell my advisor "I do not wish to have any stock in *insert name of company with dubious practices here* please" and then it
Re:Well... (Score:2)
If are educated enough to know with a fine scapel exactly which companies you do/don't want to be investing in, you do not need an adisor. Open up an internet brokerage account and go nuts.
Also if you know which ones you DON"T want but don't know which ones you DO want, get a personal advisor to buy individual stocks for you and give him a black list of "do
Re:Well... (Score:2)
Re:Well... (Score:2)
Re:Well... (Score:2, Insightful)
How do you do wrong in the future?
Simple!
The headcount of the enterprise are given stock options at bargain rates. When the company tanks and headcount find themselves out on the street looking for a new job, the IRS swoops in and taxes the hell out of them on the bargain stock they purchased, which is now not worth the paper it's printed on.
Meanwhile, the oil companies are raking in huge profits, not hiring, not investing their huge returns and get every tax break from Washington. The lesson we i
Re:Well... (Score:2)
Like someone sayuing "This is a photograph of me from the past."
well duh.
Re:Well... (Score:2)
You get a systime out of dimension dump.
Who is the injured party? You and Me (Score:5, Informative)
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?
Re:Who is the injured party? You and Me (Score:2)
Summary: The injured party is the company, which in turns means the company's owner's -- its stockholders.
--Pat
Re:Who is the injured party? You and Me (Score:2)
Burnin's too good for 'em.
They should be torn into itsy-bitsy pieces.
And buried alive.
Re:Well... (Score:3, Interesting)
I think there are a few issues with this:
1. It wasn't clear that this was wrong at the time. The law isn't 100% clear-cut, and this was apparently a pretty common practice at one point.
2. The purpose of these deals was to acquire and retain key people who presumably added significant shareholder value. If the shareholders are the party that is "wronged" by these actions, but the stock price has gone nothing but up, who's the inj
Re:Well... (Score:2)
Re:Well... (Score:2)
Re:Well... (Score:2)
Leveling the playing field (Score:5, Insightful)
Re:Leveling the playing field (Score:2)
Is the SEC going to come after me? Problaby not, maybe what was done was allowed, but more than
Re:Leveling the playing field (Score:2)
Re:Leveling the playing field (Score:2)
Re:Leveling the playing field (Score:2)
Re:Leveling the playing field (Score:3, Informative)
Re:Leveling the playing field (Score:2)
Unless investors are those privileged few.
Re:Leveling the playing field (Score:3, Insightful)
Good example. Martha Stewart was not arrested for insider trading. There is no evidence to convict her (or even charge her) with insider trading.
She was convicted of lying to investigators while being investigated for insider trading, which is normally a trivial matter that is almost never prosecuted.
I suspect they chose a famous person to make an example of, to appear tough on white-collar crime. Or the spouse of the prosecutor really loves Martha Stewart and the prosecutor doesn't w
Re:Leveling the playing field (Score:2, Insightful)
She settled with the SEC. Her jail time has nothing to do with whatever stock shenannigans she was involved in.
She violated a rather iffy criminal law designed to make it possible to prosecute and convict mob bosses/illegal drug distributors who were otherwise unprosectuable, not even under RICO, because of a technicallity; there wasn't any evidence that they'd commited a crime.
So a new crime was created
Oh poor MBA! (Score:5, Insightful)
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.
Quite a few weeks go by without cronyism (Score:2)
[end right wing parody]
Confirmed! It is a witch hunt (Score:3, Interesting)
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 emp
Tax avoidance, the refuge of the scoundrel (Score:2)
And I thought you were going to probe how this handling of dates, shares and accounting was not immoral and/or iillegal.
Re:Oh poor MBA! (Score:2)
And I'm sure those all up in arms about wiretapping have nothing to worry about if they aren't t
Uh, the shareholders? (Score:5, Insightful)
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.
Yes, but who will pay for it? (Score:5, Insightful)
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.
Re:Yes, but who will pay for it? Correct in part (Score:5, Informative)
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
Re:Yes, but who will pay for it? (Score:2)
As a result, I have concluded that the old ways are sometimes the best. My suggestion is that penalties should be for the board, rather than the investors - a week in the stocks* out the front of their office building, with a sign saying what they did wrong, and a basket of old fruit nearby. Of course, a mimimum fruit-throwing distance will need to be marked, but that's not a real problem.
It provides a disi
Re:Yes, but who will pay for it? (Score:2)
We don't have a mechanism to make the executives responsible for the deception pay for it
In the case of Enron we did. Fastow's in jail. Skilling's going to be in jail for a good long time (too bad they couldn't pin Baxter's death on him - that was no suicide).
Unfortunately, Justice was too slow to find Ken Lay before he escaped.
Then there's the alternate theory that the corpse was a drifter that looked like him, and the real Ken Lay is on a beach in French Polynesia somewhere, retiring with his billions -
Re:Uh, the shareholders? (Score:2)
Re:Uh, the shareholders? (Score:2)
Re:Uh, the shareholders? (Score:2)
Give me a break... (Score:5, Insightful)
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.
Re:Give me a break... (Score:2)
The directors then sold them on the market for the market price, and made a larger profit than they should have done on the sale.
Re:Give me a break... (Score:2)
The staff, I would say, stand to lose as much as (or, proportionally more than) the investment pool. Make no mistake, it's not like my options would be back-dated with the CFO's...
Re:Give me a break... (Score:3, Insightful)
I think he meant the investor confidence in the specific companies, not the market in general. If I hear that the SEC examined a company for this and found nothing my confidence in it is increased. This doesn't help him if his company is found in violation.
Every investigation is a "Witch Hunt" apparently (Score:4, Insightful)
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.
Boo Hoo (Score:3)
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.
Re:Boo Hoo (Score:2)
Valuing the options is pretty simple. You phone your stockbroker to get the current share price, or look it up online, and that is the price of the options.
What they are suggesting actually happened is that they looked at the history of the share price movements, picked when it was lowest, and backdated the documentation to that date.
Bizarro Silicon Valley (Score:4, Insightful)
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?
Re:Bizarro Silicon Valley (Score:2)
For instance: Redback Networks had been trading in the 23-24 range, and had been pushed down to the mid 18s by rumors started by a confused analyst. These had been debunked by other analysts and the stock was apparently starting to recover.
Then the regulators announced that they were looking at Re
Re:Bizarro Silicon Valley (Score:2)
Now does this look like the regulators had the interests of the stockholders in mind when they made an announcement that destroyed (hopefully only temporarily) somewhere between 25% and 42% of the value of their investment?
I can't determine the motives of the SEC here. But this is an example of dumb money losing out in the market. In particular, you can't "temporarily destroy" value and the people who sold out at the deflated price have just figured that out.MOD PARENT UP +1 Informative (Score:2)
While I don't agree with the parent poster's spin re: "the editors" he's right about his core point: this is an astroturfing campaign, and even (as he points out) has a tracking ID built into the link.
Mod him up +1 Informative since we can't mod stories "-5 Astroturf"
--MarkusQ
Re:bier_tcuti (Conspiracy) (Score:2)
pity party (Score:2)
[1] offer only avaliable to rich land-owning white males, thank you drive through.
injured party (Score:4, Interesting)
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.
Re:injured party (Score:2)
The victim was the investor, who was not getting accurate information about the options their companies were doling out. And in the case of backdating (in which shares are granted at prices below the market price on the day of the grant, guaranteeing the recipient paper profits), insiders were getting a better deal on shares than the company's public investors could get.
Who ? (Score:4, Interesting)
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.
Well Duh (Score:3)
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.
Laws need to be enforced (Score:2)
Corporations do whatever they can to make money, and we need to keep this in check by actually enforcing the laws that govern them. If there is to be leniency, well, that is why we have judges
Re:Laws need to be enforced (Score:2)
I do think this is more destabilizing because the rules associated with it aren't being made clear to the public. And given the fact that the laws are only now being "enforced", so far from the actual "illegal act". The Nebulous information
The Injured Party (Score:3, Insightful)
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.
I for one am in favor of the witch hunt... (Score:2)
Well, then why does the WSJournal disagree? (Score:5, Interesting)
So, you may call it a witch hunt. I'll call it going after employees who steal from me, thank you very much.
Are you kidding me? (Score:2)
Is this a serious question? Not only does the difference between strike price and grant price come from company profits but the options also increase the number of shares outstanding -- which further dilutes the profits per share. The SEC has addressed the disclosure of options but yet, companies still dole them out left and right. At the expense of the OTHER shareholders (ie: you and me)
I am astounded that this 'executive' asks such a stupid question.
What the fuck ever! Witch hunt my ass... (Score:2)
Same goes for SOX! (Score:2, Insightful)
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 b
Re:Same goes for SOX! (Score:2)
Maybe if company executives had acted responsibly, maturely and honestly there would have been no need for SOX.
Who's the injured party? ME. (Score:2)
"The SEC is supposed to increase investor confidence" since when? And if they do they do it by ensuring compliance with the rules, by assuring that accounting practices are legal and fair.
To answer that idiot, the injured parties are the stockholders, the people who paid a bonus based on bogus dating of stock options. The injured people are the consumers who paid infl
Sidenote: HERE is what is jacked up about corps (Score:2)
Quote: "He said "I'm just tired of being a CFO," and he's as pure as the driven snow. He said, "I'm tired of going to conferences and spe
Most people aren't getting the problem. (Score:2, Insightful)
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
Re:Most people aren't getting the problem. (Score:2)
The only (new) people who lose are the fradulent executives and the panic sellers.
Re:Most people aren't getting the problem. (Score:2)
Right idea, but needs better targets (Score:2)
The SEC should be prosecuting Jim Allchin, Paul Allen, Steve Ballmer, BayStar Capital LP, Baystar Capital II, L.P., BayStar Capital Management, LLC, Boies Schiller & Flexner, The Canopy Group, Brent Christensen, Steven Derby, Bill Gates, Lawrence Goldfarb, Jeff Hunsaker, Steven M. Lamar
Re:Right idea, but needs better targets (Score:2)
numerous crimes centered ...The SCO Group, Inc (Score:2)
plain justice + deterrence. looks good to me (Score:2)
Theft (Score:2)
The injured party is the people you work for. Remember the stockholders? They are the people who actually own the company for which you work.
When you backdated the options and failed to report it (the key part here, backdating with proper accounting is usually legal), you stole that extra value from the other stockholders.
Just because you stole it 5+ years ago, and/or you only stole a little from each other stockholder,
Re:Theft (Score:2)
I seem to be unusual. I don't work for the shareholders.
Sure, they own the company. Sure, they benefit from any dividends the company issues. Sure, I may even be one.
However, they come pretty far down my priority list. I put them below the customers, my colleagues, myself. I even put them below people like the local communities affected by my company's operations, the governmental bodies we're involved with.
A lot of that can be argued back to business continuity, business benefit and thus long term sharehol
But, would you hire someone who stole from you? (Score:2)
However, my point is about theft, not about who is my highest priority. Just because I don't put someone in first priority, doesn't mean that I think it is OK to steal from them. Taken in the context of a
Granny Weatherwax is going (Score:2)
Only communists opposed the McCarthy hearings! (Score:2)
"But I don't know who the injured party is here." (Score:2)
stolen from valleywag but what the hell (Score:3, Funny)
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!
Strange POV (Score:3, Insightful)
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?
Crony-capitalism (Score:2)
from TFA (Score:2)
The CEO sounds like a rea
Witch hunt, eh? (Score:2)
Perfect opportunity for Graft.... (Score:2)
The ones with the most capital to influence politicians will be able to dominate the economy, and the whole thing will be cheered on by the masses who think they are somehow "sticking it to the man". (Even though "the man" wrote the laws, approved the laws,
Just waiting for this... (Score:4, Funny)
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...
Re:Just waiting for this... (Score:2)
Isn't backdating ok if done properly? (Score:2)
Any experts out there?
Witch Hunt? (Score:2)
This is how I read his tone:
I don't know why they keep hounding me. I robbed that bank five years ago and they're still drumming up old business trying to search me out. All they're doing is hurting my family and other innocent people. The money is already spent, it's not like they're going to get any of it back. Why don't they just leave well enough alone. It's like they're on a Which Hunt. Besides, I learned my lesson. The next time I won't empty the whole safe; I'll leave some for t
Hm. The more things change...? (Score:2)
Re:Purpose (Score:2)
Er... no. A burglar is tried because there's enough evidence that they may have broken the law. I'd like to think that 'innocent until proven guilty' still applies in this country.
Re:Purpose (Score:4, Insightful)
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?"
Re:Purpose (Score:2)
Only the guilty have anything to fear in the new world we're in.
Isn't it wonderful!
Re:Purpose (Score:2)
Have you not heard Goebbels? Repeat a lie enough times and it will become truth. He implied that the repeater knows its a lie, so you can't say that you're only making parody. The more that meme spreads, the more likely people are to be subconsciously used to it if it becomes close to truth. (And NO it's not true right now. We still have quite a few civil liberties.)
You want more civil liberties? Act like you have more than the law technically allows. Run protests without seeking a permi
Re:Purpose (Score:4, Informative)
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.