Backdating Deflating: William McGuire Gives Back $620 Million, Criminal Prosecution Unlikely

Posted by John Carney, Dec 07, 2007, 4:42pm

Although it was billed as the latest financial crime of the century, backdating is turning out to have some very minor results. Few prosecutions, stalled or failed lawsuits and increasingly fading from its never prominent place in the ranks of public concerns. But this doesn’t mean the panic hasn’t had serious costs. Public companies have lost a number of top executives and a handful of the accused have been actually prosecuted as criminals
Yesterday we got the news that former UnitedHealth Group executive William McGuire had agreed to forfeit $620 million in compensation to settle backdating is giving back $620 million in compensation to settle backdating claims. It’s unlikely that he will face any criminal charges.

As Larry Ribstein points out today, this is in marked contrast to the fate of Brocade's former hr director, Stephanie Jensen, who never personally benefitted from backdating but who was found guilty of two criminal counts. “In one the chief executive and main beneficiary likely will walk away with hundreds of millions of dollars. In the other, an underling who didn't profit from the offenses likely will go to jail,” Ribstein points out.

The point isn’t that McGuire needs to serve jail time. Rather, the point Ribstein is making here is that the criminal process is wildly inappropriate for these kind of cases. It amounts, Ribstein writes, to a corporate crime lottery: the winners pay fines and the losers go to jail.

“These two cases are only the most recent examples of the lottery in action. Not much is gained from criminalizing this conduct over the many remedies, including the corporation's own right of recovery, available for any wrongs that occurred (mostly inadequate disclosure). But much is lost from the odor of injustice that wafts over these disparate results,” he writes.

The backdating lottery continues [Ideoblog]

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Comments

Posted by TheUnrepentantGunner, Dec 07, 2007 5:30PM

I am still in favor of shorter jail terms, but mix these white collar criminals in a Max Security jail Oz style.


And thats what the backdaters are, criminals. I mean really, backdating? Can't you just do some channel stuffing or something to get your numbers up in the short-term?

Most of us here are very fiscally conservative, but even if you took a poll of the fiscally conservative, i think 60% would agree at least some of these executives deserve jailtime.

If you generate hundreds of millions of illegal profits, and your only risk if you are caught is to return your gains plus maybe 10% in terms of a penalty, then there's little reason NOT to backdate..

There has to be at least the THREAT of going to jail or something more severe than just economic sanctions.

Lastly, speaking of taxes

http://www.becker-posner-blog.com/archives/2007/11/why_so_little_t.html

Posted by SCB, Dec 08, 2007 11:26AM

The only reason that backdating is a crime is that those of lesser means want to punish the wealthy because they themselves are not wealthy.

Corporations should be able to compensate their executives to the extent of their value to the firm, without having to cowtow to liberals who demand that the rich be punished. Communism failed. Get over it.

Posted by Rupert Pupkin, Dec 08, 2007 11:54AM

SCB, when you're talking about public corporations, capitalism works better with a certain degree of government regulation. A million shareholders spread out accross the country cannot control corporate managers; the SEC can. Without the SEC, our business climate would be much more like Russia's. It's not communism, but it's not a type of capitalism worth having. Ours is.

Posted by JustAnotherWhiteCollarCriminal, Dec 08, 2007 12:23PM

It is obvious from the Jensen and Reyes cases that backdating should never be criminalized. They had a practice at a company that was created by a CFO. The CEO and VP HR had never administered a stock option plan before- because the CEO had never been CEO of a public company and the VP HR was also new to stock options. Both were informed this procedure was appropriate and APB-25 (the accounting rule to expense) is so vague they believed it, plus the fact that everybody else was doing it, and no company, anywhere expensed in the money options. Both executive compensation plans AND ESPP plans backdate after all with no expensing required so why would these require expensing? The period in question was 2000 and 2001. The CFO in these cases who created the plan ended up turning states evidence and they convicted two innocent people.

Additionally the prosecutors openly lied to the court saying the CEO and VP HR hid a scheme of backdating from this same CFO who created the plan. This overt lying as officers of the court should be investigated in my opinion- these are the USAO SF office prosecutors in charge of backdating.

If anybody thinks justice was done here, or that this witch hunting and criminalizing of standard grey-area business practices that are ensnaring companies and innocent people is a GOOD THING for our capital markets and investors, you need your heads examined. In fact the recent rulings show there was NO LOSS to shareholders for this (of course not these are phantom non cash expenses) but you can sure believe there was major loss to any company involved in this that had to pay 100mm cash to lawyers due to indemnification plus the massive administrative overhead of being harassed by the SEC in these cases. Brocade ended up firing their founding CEO and now there is a new team in there - I'm not at all convinced that was a good thing.

Now that all of this has transpired, Steve Jobs must be charged criminally. There is no way around it, he is the most guilty CEO of all the backdaters with the exception of that guy that ran off to Namibia and that person who said in an email "I need a war counselor not someone who can recite page and verse" on backdating. Jobs' case has executives willing to testify he knew what was going on and was told expensing was REQUIRED! None of that existed in the Brocade case against their CEO. Plus the volume and expense in question for apple is the largest with a company wide grant. Unless Steve Jobs is convicted I can't see how the backdating zealots can support the SEC and their mission.

Posted by JustAnotherWhiteCollarCriminal, Dec 08, 2007 12:28PM

Robert Pupkin, I suggest you read the transcripts of these bogus criminal trials and decide for yourself if this is "a good thing" for capitalism. In the Jensen case the feds dropped all of her charges except the ones where you didn't need to prove intent to defraud, only that she "was doing something wrong". What a crock! How many grey areas are there in business when you are doing something wrong. By this standard all of Microsoft should be locked up. These freaks in the justice department need to get out and work for a living and try to add some value themselves instead of existing as this massive tax on business.

In the first trial there were a lot of questions from the prosecution to the defense witnesses (Venture capitalists) about how much personal wealth these people had. Don't tell me this isn't classism, what does that have to do with any crime committed, not a thing.

Posted by The Man from Waseca, Dec 08, 2007 6:00PM

Backdating is stealing from the shareholders. It's a crime. Send those criminals over, we have some room to spare.

Posted by JustAnotherWhiteCollarCriminal, Dec 08, 2007 9:05PM

Well Judge Breyer ruled yesterday nobody was harmed. So I guess it isn't stealing. Did YOU sell your apple stock when Jobs was implicated in this? Well did ya? Of course you didn't because these are non cash expenses nobody cares about. And thats the reality whether the jealous public wants to hear it or not.

Posted by Rupert Pupkin, Dec 08, 2007 10:01PM

JAWCC -- my post wasn't actually about backdating. It was just a response to an earlier post, that's all. Thanks - James

Posted by anon, Dec 09, 2007 8:34PM

Same crap happens with insider trading. some go to jail and some get a fine. go read up on two married couples from morgan stanley for an example.

Posted by inIT4the$, Dec 10, 2007 11:30AM

All you need to know is where the case is being prosecuted...Cal.

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