Back Dating

Wall Street Journal On Short List for Pulitzer

Pulitzer Prize.jpgThe Wall Street Journal‘s backdating reporting is short-listed for a Pulitzer Prize, Editor & Publisher magazine’s website revealed this afternoon. Less than one day after the Pulitzer juries completed three days of judging at Columbia University, E&P has published what it describes as “a likely list of eight of the 14 journalism finalist groups.” Among those groups is the Pulitzer for “Public Service” journalism, with the Wall Street Journal named as a finalist for its work on the backdating story.
The Journal broke the backdating story wide-open last year when it followed up on the work of academics whose studies had shown that hundreds of companies had granted stock options dated on days when the price of their stock was hitting historic lows. The likelihood of this being a coincidence, the academics, concluded was extremely unlikely. Far more likely was that companies had gone back and dated—or backdated—the grants to match the dates when shares hit lows, making the grants potentially more valuable to recipients than if they had been granted on dates when the share price was higher. When the Journal began naming the names of companies who had likely engaged in backdating, public scandal ensued.
Of course, there have been serious questions raised about whether the front-page scandalizing, perp-walk style coverage has helped or distorted the public understanding of backdating, and whether the Journal and others were over-hyping the scandal. But the Pulitzer juries have spoken. And it looks like the Journal is climbing its way toward the prize. Whether it climbed a mountain or molehill, well, the jury is still out on that one.

FLASH: Here We Go Again — Pulitzer Finalists Leaked!
[Editor & Publisher]

What Do You Mean Backdating Doesn’t Matter?

executivesbackdatingoptions.JPGWel, we didn’t quite say that backdating doesn’t matter. The point we’ve raised here (and that’s been raised over and over again by Larry Ribstein) is not about whether backdating matters in some sense of universal, metaphysical justice. That sort of thing is in the eye of the beholder. Or the Creator. Or…well, you get the point.
The question we want to ask is: does backdating matter to investors and analysts? In the primary and most important sense, the answer is clearly “no.” And the reason is simple: because investors and analysts do not usually take stock options expenses in account when assessing the value of the company. There are all sorts of reasons why this is true—that the officially recognized, SEC-approved accounting method is backward looking and inexact, for instance—but there’s little argument about whether it is true.
Holman Jenkins illustrated this nicely in yesterday’s column:

Look at Yahoo’s latest earnings release, which flags several versions of income and cash flow that leave out stock compensation charges. Says Yahoo: “Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense, and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation enhances the ability of management and investors to understand the impact of stock-based compensation expense on our operating income.”
Look at any news account of company earnings in which options cost is a significant factor: “Sysco Profit Falls On Stock-option Expense, Fuel Costs,” reported a Dow Jones Newswires headline last year. “Excluding stock-option expense, earnings would have been 34 cents a share,” said the story’s third sentence.

The legal eagles have a word for things that don’t matter to investors or stock analysts—“immaterial.” And when it comes to the prosecution of crimes such as stock fraud—the hammer which the authorities have been using to beat alleged backdaters—this does matter because immaterial errors or omissions in a companies financial disclosures don’t typically amount to criminal acts.
In another sense, however, backdating does matter to investors and analysts. The zeal of muckraking journalists and status seeking prosecutors has made it matter very much, in large part because both groups have chosen to ignore the more important question of materiality in favor of criminalizing and scandalizing. And that has brought down more than a few good otherwise fine executives who might still be leading their companies if not for this kind of irresponsible journalism and law-enforecment.

Up From The Backdating Scandal?

insider_trading graphic.jpgIn today’s Wall Street Journal, Holman Jenkins continues to wage war against his own paper’s page one editors. We’ll save for tomorrow any discussion of two important points that Holman raises—the immateriality of stock options backdating and the mostly likely reason it occurred—and instead give you the good news: it looks like the war against the war against backdating is making progress. To put it differently, at least some newspapers seem ready to back off the lynch mob mentality that initially gripped the business media when the Journal went public with its allegations.

With care and precision, the San Jose Mercury News characterizes the scandal: “Stock options were designed as a form of incentive-based compensation; backdating to a lower price is legal only if it is properly disclosed and accounted for by the company.”
Says the New York Times: “Backdating options is not necessarily illegal, but the practice can raise serious accounting, disclosure and tax issues.”
These are refreshing correctives to presumptions that continue to linger in certain media accounts — that backdating necessarily implies excessive or “stolen” compensation; that backdating violates the “rationale” for using stock options to attract, retain and incentivize employees.
Why such canards persist in the coverage is itself a bit of a mystery, but editors have their reasons. A more important question now is whether prosecutors will be able to scale their efforts to the actual nature of the wrong rather than the inflated version in some media reports. This question may be the hinge on which justice turns.

We wonder if by “certain media accounts” Holman could be referring to these guys?
The Backdating Molehill [Wall Street Journal]

9/11 Was Caused By Backdating!

Sure that’s not quite what he writers at the Wall Street Journal are saying in today’s front-page story. But it’s still, you know, kind of the point. The writers are trying to piggy-back their story—backdating—on the moral gravity of a far more serious story—the terrorists attacks of September 11, 2001. Why else lead with something this heavy-handed?

Amid the stock-market swoon that followed the Sept. 11, 2001, terrorist attacks, dozens of companies granted stock options to top executives or other employees. Now, some of those companies are saying the grants were in fact made weeks later — and backdated.

It’s not like we hadn’t read this story before.
There’s something a bit disgusting about this. It reminds us of the time we overheard our friend proposition women on the New Year’s Eve following the attack with the line “If you don’t go home with me, the terrorists win.” Except he didn’t say “go home with me.” He said “f— me.”
But, of course, the willingness of women to sleep with that guy had no connection at all to terrorism. Similarly, Larry Ribstein writes, “The fact that the backdaters picked a date that has been depressed by tragedy has nothing whatsoever to do with what the backdaters did or didn’t do wrong.”
Yelling “9/11” in an argument is usually a sure sign you’ve already lost it. It’s a desperate, pathetic move. So maybe there is something hopeful about the resort to it on the front page of the Journal. Maybe it means that the official backdating storyline is becoming less plausible. To quote that Ribstein fella again: “So the 9/11 story comes just when journalists needed some fire-fanning to ensure that backdating stays a story about evil executives rather than retreating into the murk of just another story about bad accounting.”
Exactly. There are, after all, still Pulitzer’s to be awarded. Better not let this story die now!
Companies Say Backdating Used In Days After 9/11 [Wall Street Journal]
Backdating and 9/11 muckraking

executivesbackdatingoptions.JPGYesterday federal prosecutors announced the indictment of Kent Roberts, McAfee’s former general counsel, for backdating related charges. Today’s Wall Street Journal points out that former McAfee CEO George Samenuk knew about some date gamesmanship with one of his stock options grant, as well. So why wasn’t he indicted?
Larry Ribstein—who coined the “Apple Rule”—wonders if there isn’t some invisible federal law enforcement rule protecting sitting corporate chief’s from getting indicted so long as they don’t actually have backdating ink-stains on their hands.

The bottom line seems to be that the Apple Rule protects an executive who lets an underling do the messy backdating, even if the executive knows about it. While Samenuk isn’t a popular well-known executive like Jobs, we need to have an “indirect Apple rule” for executives whose indictment would set an unpleasant precedent for an executive who is protected by the “direct Apple rule.”
In the end I expect that the biggest mess left by the backdating “scandal” will be a widespread perception of unfairness in the criminal justice system.

But clearly the “indirect Apple Rule” isn’t quite as strong as the “direct Apple rule”–Samenuk was forced to resign last year when backdating at McAfee came to light.
SEC Details McAfee Plan For Options [$$] [Wall Street Journal] [Ideoblog]

McAfee.jpgThe former general counsel of McAffee yesterday became the eleventh person charged with criminal offenses related to stock-options backdating. The feds have said they are examining some 140 companies for backdating but its not hard to see why McAffee’s former general counsel ended up high on its lists for criminal indictments.
First, McAffee was an early and somewhat easy target for the feds because the company has had to restated its financial results five times in the past five years. The company faced securities fraud charges in connection with an alleged scheme to overstate revenue from 1998 to 2000. It settled with the authorities by agreeing to pay a $50 million civil penalty, but neither admitted nor denied any wrong-doing. It’s former controller, however, pleaded guilty to one count of securities fraud.
Kent Roberts, the indicted former general counsel, allegedly manipulated his own stock options grant date, as well as that of his chief executive. He then allegedly turned around and fired the controller for manipulating stock options grant dates. Nasty. His indictment has been expected for at least two weeks now.
Roberts seemed to have tripped the self-dealing alert that we’ve seen in other backdating indictments, and engaged in some corporate backstabbing that makes him hardly a sympathetic character. Here are the details on the indictment from the Wall Street Journal:

According to a seven-count indictment returned by a federal grand jury in San Francisco, Mr. Roberts in late 2000 became dismayed that an option grant made to him earlier that year was “underwater” — that is, its exercise price of $29.62 was higher than the stock’s price at the time. An option can only be cashed out for profit if the exercise price is below the open-market price of the stock.
According to the indictment, Mr. Roberts directed the company’s then-controller, Terry W. Davis, to change the grant’s record so it appeared to have been granted April 14, 2000, a day the stock fell to $19.75. That immediately made his grant more valuable, though he never later cashed out any of the options for a profit.
Mr. Roberts got Mr. Davis pushed out of his job, the indictment says. In 2002, Mr. Roberts headed an internal probe of irregularities at McAfee, which was then known as Network Associates Inc. Upon learning that Mr. Davis, who wasn’t identified by name in the indictment, had among other things lowered the exercise price on some other options, Mr. Roberts recommended that he be removed from his finance-department position, the indictment said. It added that Mr. Roberts didn’t tell internal auditors or the SEC that Mr. Davis had manipulated Mr. Roberts’s own grant.

It’s notable that the prosecutors seem to have concluded that the self-dealing trigger was pulled when Robert’s manipulated his own grant even though he never cashed out the backdated options. This is important because the “no gain from backdating” has become a major line of defense for some corporate executives, including Apple chief Steve Jobs. So the question remains: will the feds indict Jobs or will the “Apple Rule” continue to protect him? (More on the “Apple Rule” from the man who coined the term here)
McAfee’s Ex-Counsel Is Charged With Options Fraud [$$] [Wall Street Journal]
McAfee Ex-GC Indictment [pdf file via WSJ Law Blog]

kobialexander1.jpgWe’ve been doing a lot of writing about backdating lately but what about the poster-child for criminal backdating fugitives, Kobi Alexander? The founder of Comverse vanished after US authorities sought to arrest him on charges related to backdating, securities fraud and bribery. He later turned up in Namibia, where he was arrested by authorities and awaits an extradition hearing in April.
Over the weekend, Bloomberg reported that Alexander has started a low-income home construction business in Namibia.

His Namibian company, Kobi Alexander Enterprises, has already developed two projects in the coastal city of Walvis Bay involving the construction of 200 houses for low-income residents, the company said in an advertisement yesterday in The Namibian, a local newspaper.
“Mr. Kobi Alexander, its founder, brings with him a wealth of business acumen,” the advertisement said. “He is the founder of Comverse Technology, the world’s leading supplier of enhanced services for telecommunications companies.”

We can only imagine how that “business acumen” line strikes the US prosecutors who have done their best to paint Alexander as the worst sort of corporate criminal.

U.S. Fugitive Starts Over in Namibia
[Bloomberg in NYT]

  • 23 Feb 2007 at 1:13 PM
  • Apple


Steve Jobs.jpgToday those sadomasochists over at take a look at a something so perverse, so unspeakable, that we don’t even want to say it but have to because only a few of you DB readers—Holman Jenkins—have the ability to read our minds: a world in which Steve Jobs is not the CEO of Apple. Sends shivers down your spine, doesn’t it? While most people on the Street (Wall and dot com) believe that Mock Turtle neck won’t be going anywhere any time soon because of the rock-solid (and uncomfortably existential) argument that “Steve Jobs is Steve Jobs,” in spite of a few run ins of his own with Carney’s FAVORITE THING TO TALK ABOUT EVER!!!, “snowballing prosecutions for corporate backdating prompt the [sick and twisted] question of how the company would fare if Jobs were no longer in charge.” Here’s what they came up with:

1. If Jobs were to be charged with securities fraud…the stock would take a 25% hit. Apple shares closed Thursday trading at $89.51, gaining 31 cents. The stock has remained somewhat range-bound in the past three months.
2. Investors would have an initial emotional reaction if Jobs were to leave, but “stocks ultimately move around their fundamental value,” he says. “If Jobs leaves, it’s not necessary that Apple falls apart. The perception might be that.”
3. COO Tim Cook would play a more vital role in the company.

Here are a few other things we think might happen if Apple lost Jobs:

Read more »