Back Dating

Backdating, Part II: This Time It’s Charitable Donations!

We’re on record as skeptics of the great backdating scandal of 2006. But just because you think something was unduly scandalized by an over-eager financial press and over-zealous regulators doesn’t mean it didn’t happen. And there is clear evidence that backdating occurred. In fact, in some sectors—we’re looking at you Silicon Alley tech—it seems to have been a quite common practice.
Now one of the finance professors whose 1997 research helped scholars and reporters at the Wall Street Journal uncover the option-backdating scandal may have discovered another form of backdating, Zubin Jelveh reports on It seems that some 20% of chief executives who donate stock to family foundations have suspiciously well-timed the gifts. They make the donations prior to declines in their company’s stock, which suggests that they are either front-running bad news by donating based on insider information or are marking their donations to dates before the announcement of bad news. The former looks like something like insider trading and the latter like backdating.

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The Backdating ‘Scandal’ Is Dealt Another Blow

The backdating panic of last year appears to have largely deflated. The one big conviction from the much-ballyhooed scandal was Greg Reyes, the former head of Brocade. He was tried and convicted in August on charges of conspiracy and fraud in connection to backdating stock options at his company.
But that conviction now looks doubtful. In today’s New York Times, Andrew Ross Sorkin reveals that one of the prosecutions principal witnesses has said that her testimony was untrue.
The Wall Street Journal, which won a Pulitzer Prize for setting off the backdating panic with its breathless, front-page coverage, has oddly enough not found room for this story anywhere on it’s vast website. Is the Journal’s news team not as enthusiastic about backdating? Or do they not hand out Pulitzer’s for writing about how a scandal fades?
Trial Witness Said to Cast Doubt on Part of Testimony [New York Times]

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]

Backdating Deflating

We caught a lot of flak from the self-styled guardians of corporate governance for our repeated insistence that the Great Backdating Scandal of 2006 was overwrought. The financial press treated backdating as if it was a new form of embezzling even though it was, typically, nothing more than a quite common workaround of complex accounting and tax rules that made granting “in the money” options more costly, at least on paper, than “at the money” options. Our sober take on backdating was seen as an endorsement of corporate fraud by our critics.
So what ever happened to the Great Backdating Scandal? It looks like it has largely fizzled. The Securities and Exchange Commission has ended several investigations without filing formal charges, the Wall Street Journal reported yesterday. And despite the fact that scores of companies engaged in backdating, no one expects any more a handful of additional serious civil or criminal cases to emerge from this affair.
Which is not to say that the backdating scandal has been costless. More than 80 companies have had to restate their financials and dozens of executives were dismissed at the height of the affair. Companies and executives have spent millions of dollars and untold hours complying with investigations and fending off possible cases.
[More on the deflating backdating panic after the jump.]

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  • 20 Sep 2007 at 5:02 PM
  • Apple

Justin Long, However, Is Definitely Going To Prison

apple.jpgSteve Jobs has been subpoenaed by the SEC to be deposed in a backdating case against Apple’s former general counsel, Nancy Heinen. Though the news sent shares of the fruit down 1 percent, with a $140.31 close (-0.33%), investors should rest assured that while Heinen may fry, this doesn’t mean jack for the company or Steve.* Why? Because, in SJ’s words, “Fuck you, that’s why, I’m Steve Jobs. Death to the right click. Buy an iPod. Or don’t. I could really care less either way. It’s your funeral.”
Jobs subpoenaed over Apple stock scandal [The Guardian]
*Who backdating specialist Al Gore cleared of any wrongdoing earlier in the year.

Backdating Trial: Trouble for the Prosecution?

insider_trading graphic.jpgThe prosecution for stock options backdating related charges against former Brocade chief executive Gregory Reyes rested its case last Wednesday. But instead of spending the weekend preparing for the case the defense lawyers were scheduled to begin making on today, they wound up preparing an 18 page summary of their evidence that Reyes willfully ignored accounting standards and violated securities laws.
On Friday Judge Charles Breyer instructed the prosecution to deliver a written response to a defense motion to dismiss the case for lack of evidence. Although these motions are quite standard in criminal cases, the judge’s order for a written reply focused on the mens rea appears to indicate that he is at least taking seriously the defense contention that the prosecution has failed to present evidence that showing that Reyes understood the accounting rules that backdating violated.
The case is the first criminal case to go to trial following last year’s spate of revelations that many companies had backdated stock options. In many ways it is a test case of the government’s theory that backdating was a way to deceive shareholders in violation of securities laws. The defense in the case has argued that backdating was simply a tool for recruiting and retaining talented employees, and therefore may have actually benefitted the company and its shareholders.
Law professor Larry Ribstein, writing at Ideoblog, points out that whatever the judge decides here will shape future backdating cases. “Note that, if it is the case that Reyes can be prosecuted without proof that he knew the options were improperly reported, Steve Jobs better start suiting up (or whatever his equivalent is) for trial,” Ribstein writes. “On the other hand, if the Brocade case goes down, government criminal prosecution of backdating is in deep doodoo. We will then be left with civil cases focusing on bad disclosure — precisely where I have always thought we should be.”
The judge did not immediately rule on the defenses motion or the prosecutions reply. The defense case began today.
Judge Considers Dismissing Brocade Backdating Case [Wall Street Journal]
The Winds Shift in the Brocade Backdating Trial [LawBlog]
The Brocade trial gets interesting [Ideoblog]
Defense’s motion to dismiss [via WSJ]
Prosecution reply [via WSJ]

tzedakah-box.GIFKobi Alexander’s extradition hearing in Namibia is happening today (might’ve already happened, not sure with the time difference). The biggest charge in his 35-count federal indictment is money laundering. But he may not be going downtown for his little fraud dealings. Why? Since he fled to his African hideaway last October, Alexander’s been building affordable housing units, setting up scholarships for gifted students, and generally doing good humanitarian-type stuff*. The kind of stuff that might perhaps save one from those damn U.S. white-collar criminal courts. Someone had to say it.
And apparently we’re not the only cynical assholes to think this might be the case. CNBC’s Senior African Extradition Hearing Correspondent and Windhoek Bureau Chief, Scott Cohn, wondered aloud yesterday, “Of all the places in the world that need help with education, why Namibia? Could it be because in this young country—just 17 years old—money laundering, per se, is not a crime?”
According to Alexander’s attorney, absolutely not. Kobi’s not trying to buy off Namibia. As “an Israeli citizen,” Richard Metcalfe said yesterday, “Alexander is continuing the esteemed Jewish tradition of t’zedakah– good works, charity, empowering those less fortunate.”
Update: Hearing postponed to June 25.
Reporter’s Diary: ‘Kobi’ Alexander’s Namibia [CNBC]
*with what not a few people believe is shareholder money.

insider_trading graphic.jpgA key question in the great brouhaha over backdating—dating stock option grants on days when the stock was at a historic low rather than the date they were actually granted—has always been whether or not it matters to shareholders. Was backdating a trivial accounting matter that potentially increased compensation for those receiving the backdated options but had no serious effect on a company’s bottom line? Or did it represent something more serious that investors should have known about?
On Friday, a federal judge overseeing the trial of a former executive accused of fraud stemming from backdating declared that backdating was “material” to investors. But the way he arrived at this result has some legal scholars scratching their heads.
[We get scratchy after the jump]

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