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 Portfolio.com. 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.
Back Dating
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]
-
Posted in:
Back Dating
Backdating Deflating: William McGuire Gives Back $620 Million, Criminal Prosecution Unlikely
By Bess LevinAlthough 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]
Steve 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.
The 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]
-
Posted in:
Back Dating
Kobi Alexander Genuinely Cares About Namibia Because He Is Jewish
By Bess Levin
Kobi 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.
-
Posted in:
Back Dating
Backdating Is Back: The Materiality Question Arises And Gets Swatted Down
By John CarneyA 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]
Also: Apple posts higher profit on strong MacBook sales [Reuters]
-
Posted in:
Apple
Breaking: Apple Backdating Charges, A Settlement And The ‘Apple Rule’ Put To The Test
By John Carney
The force field that seems to have protected Steve Jobs from the harsh scrutiny that the press and regulators have applied to other executives allegedly involved in stock options backdating is being put to the test today. The Securities and Exchange Commission filed charges against two former Apple executives—former chief financial officer Fred Anderson and former general counsel Nancy Heinen. And one of them has reacted by pointing an accusatory finger at the man at the top of the Apple.
Each of the two formers have reacted very differently to the charges. Heinen has vowed to fight the backdating charges, joining the thin ranks of other corporate executives who have decided to fight the SEC rather than settle. Anderson is going the other way. The announcement of his settlement with the SEC was made right after the charges were filed. But Anderson didn’t just settle—he released a statement placing the blame for the backdating of stock options at Apple squarely on the shoulders of chief executive Steve Jobs.
The statement shreds one of Jobs strongest lines of defense—that he didn’t understand the accounting implications of changing the options grant dates. Anderson’s statement has Steve Jobs as the key actor at each of the critical points. It sounds as if the ‘Apple Rule’—the unwritten rule protecting high-profile, popular executives (but not unpopular executives or formers) that regulators, prosecutors and the press seem to follow on backdating—is about to take a pounding.
The stock is trading up on the news—perhaps under the impression that the Apple Rule will continue to protect Jobs—but the reactions from the press and online media have been swift and punishing.
ValleyWag predicts that Jobs may face charges, going so far as to announce that its editor has sold out his position.
“Disclosure. I just sold all my Apple stock, before writing this post. (The stock is soaring, but I can’t believe traders have properly digested the news.) Steve Jobs, the company’s hugely valuable chief executive, must now be squarely in the sights of securities regulators,” ValleyWag says.
Endgadget also smells blood in the waters of Cupertino, where Apple’s headquarters is located. “The tech exec superstar who’s largely gotten off clean despite Apple’s lingering backdated stock options scandal is now being publicly blamed for wrongdoings by former Apple CFO Fred Anderson,” Endgaget writes.
Perhaps the most surprising reaction comes from Business 2.0’s blog, which examines how Jobs and Anderson dealt with their backdated stock options and concludes that the difference proves that Anderson is financially much smarter than Jobs. Anderson reportedly made as much as $3.5 million on his backdated stock options—an amount he has now agreed to “disgorge” (read: fork-over) to the government—while Jobs exchanged his backdated stock options for restricted shares. Jobs trade means he missed out on a $3.6 billion gain.
Oddly enough, that financially unsound decision may be what keeps Jobs out of trouble on backdating. He can credibly claim that he did not profit from the backdated stock options since he never cashed them in. But prosecutors and regulators have already shown a willingness to bring charges in other cases where executives did not personally see profits from backdating, so this might not be enough to keep the Apple Rule intact.
SEC files charges against 2 former Apple officers over options [Associated Press in the International Herald Tribune]
Former Apple CFO settles with SEC [Reuters]
Former CFO blames Jobs for backdated options grant [San Jose Mercury News]
Ex-CFO says Jobs was warned of options dates [Market Watch]
Attorney for Fred Anderson Issues Statement Regarding Settlement of Claims with the SEC [Press Release via Business Wire]
Steve Jobs in regulators’ sights [ValleyWag]
Former Apple CFO publicly blames Jobs for stock options scandal [Endgadget]
Why Fred Anderson Is Smarter Than Steve Jobs [Business 2.0]
Earlier on DealBreaker: Backdating and Apple stories from the DealBreaker Archives.
As a way of saying thank you for the Pulitzer, the Journal has opened up its backdating archives. You can read all about the scandal, starting from the very first story published thirteen months ago. (Has it only been 13-months? It seems like we’ve been writing about backdating forever. Oh, right. That’s because DealBreaker started just eleven days later.)
This video–which we found thanks to Barry Ritholtz–is actually a good introduction to backdating, and good background on how the Journal discovered the story and pursued it. In many ways, it is superb journalism, and congratulations are due to the reporters who performed it. Rather than purely old-school investigative journalism—the kind that relies on leaks, anonymous sources and (possibly) manipulation by government agents—the Journal’s backdating coverage was a new style of investigative journalism. They took the work of academics and applied it to the real world of business and individual corporations and corporate leaders. As academics increasingly note the costs of Sarbanes-Oxley and the dangers of criminalizing agency-costs, there might be hope that this kind of investigating the arguments of academic reporting may help enlighten the public rather than add more confusion and ignorance.
And there is little doubt that a lot of the reporting on backdating was poorly reasoned and misleading. The worst of it came not from the Journal but from reporters and editorialists who tried to make up for what they lacked in original findings by adding more outrage and inferring even more criminality. There still are many out there who believe that backdating somehow proves that corporate is under-criminalized.
“Much reporting has made it sound like backdating was the equivalent of executives taking erasers and white-out to their paychecks to add a couple of zeroes — and public understanding still suffers from this bum steer. But all that backdating comes down to is a nonmaterial accounting irregularity (yes, readers, accounting rules should be obeyed!) involving a defective judgment about whether ‘in the money’ options needed to undergo expensing,” Holman Jenkins wrote in an article that all but indicted his own paper’s coverage.
Why did the backdating story get reported like this? The outcome was probably over-determined. Scandal sells papers whereas reports about nonmaterial accounting defects do not. It also wins prizes. But something more than that was in play, as well. And that something is a political agenda. It is clear from the video is that the Journal reporters see the backdating story as just a smaller part of the struggle for truth, justice and reducing executive compensation.
But don’t take our word for it. Listen to leading Wall Street Journal backdating reporter Charles Forelle.
“Besides the individual who may face jail sentences or SEC sanctions, there’s the broader issue of executive compensation being thrown into the limelight again,” Forelle says around the five minute mark in the video. “Companies are starting to show at least a glimmer of thinking more carefully and more intelligently about how they give options to CEOs since options are by far the instrument that’s caused the majority of the rise in CEO pay over the last couple decades.”
A Pulitzer for A Perfect Payday [Wall Street Journal]
Don’t say we didn’t warn you. After it’s relentless and breathless coverage of corporate stock option backdating, the Wall Street Journal has reaped the ultimate reward in journalism—a Pulitzer Prize.
We’ve been one of the unfortunately rare sources of criticism of the Journal’s coverage of backdating. (Larry Ribstein and the Journal’s own Holman Jenkins are also among the thin ranks of critics.) It always stuck us as unduly scandalized, uncritically assuming that it was all a day of executive greed and theivery and misleading about the nature backdating. But like the Spartans at Thermopylae, it seems we’ve been overcome.
It was obvious that the Journal’s editors were gunning big-time for the prize. They released a front-page story on backdating on the last day the nominating juries were meeting at Columbia. But there’s no denying the reporting has had a major impact on the public discussion, as well as on corporate America, where chiefs have been toppled, prosecuted and, in one case, forced to flee the country.
It all started with a very simple idea—get some reporters to start digging into the findings of a few Midwest academics who had observed that many stock options grant dates were improbable. They seemed to have fallen on a perfect day for granting options—when the stock price was at an annual low. The academics concluded that it was more likely that the grant dates had been manipulated. The Journal simply followed up on this conclusion by naming names of the probable manipulators. It was classic muck-raking journalism that has succeeded beyond the dreams of most muck-rakers—and, in the process, has thrown a lot of muck into the public’s eyes.
And yet. And yet. We find ourselves still able to hope that this might lead to something that would be even more valuable than the Pulitzer Prize: a reconsideration of the criminalization of corporate governance. With so many c-level executives now former executives, the stocks of so many companies besmirched by the taint of scandal, some of those formers paying heavy fines and possibly facing serious prison time, the public might start to wonder whether we’ve pushed the Rudy Giuliani model of treating corporations like criminal families too far. A rollback of our rogue regulators might still be in the cards.
We apologize for our unusual optimism today. But as the champagne corks pop over at the Journal’s headquarters in One World Financial Center, we’ll comfort ourselves with the notion that the fall-out from the Journal’s backdating reporting could ultimately result in Jeff Skilling seeing freedom sometime before the twenty-plus years he was sentenced to by a federal judge.
Journal Wins Pulitzers For Options Probe, China [Wall Street Journal]
- Use the Bloomberg command
NH BLG_DEALBREAKER <GO>
to access Dealbreaker
