Guess who is living here? That’s right. It’s Kobi.
We kind of imagined that Kobi Alexander’s hideout would look something like Luke Skywalker’s childhood home on Tatooine—all desert plains and little sand igloos. But that’s because we don’t know much about Namibia. As it turns out, he’s staying at a place that looks like a Georgia retirement community for wealthy folks. The blog for CNBC’s On The Money has about a dozen pictures of the place.
And while we’re on the topic of the fugitive poster-child for the backdating scandal, we might as well mention that Namibia it totally hot now. Not hot like Tatooine. Hot like, uhm, whatever’s totally hot now. Apparently, Kobi’s flight to Namibia has sparked a tourism surge to the country.
Back Dating
So Steve Jobs apologized for the stock options chicanery at Apple today, which the company admitted he knew about at the time. Weirdly, the coverage we’ve come across on this keeps focusing on the fact that Jobs did not “receive or otherwise benefit” from the backdated options. But we know from Comverse that this is a red-herring. Kobi didn’t get backdating options either. He just authorized them. And that landed him on Interpol’s most wanted list and eventually in a Namibian jail.
And it’s also not accurate. A chief executive doesn’t need to actually get backdated stocks to benefit from them. The benefit to the chief can be the ability to retain valuable employees at a lower cost than would otherwise be possible. That’s the theory behind the Kobi indictment, and it could become the theory behind a Steve Jobs indictment.
There is, however, a crucial difference. At Comverse, Kobi seemed to have set up his own private options granting committee. So far, it doesn’t seem that Steve was as directly involved in backdating at Apple.
Apple CEO Knew of Backdating [LA Times]
Calling Kobi Alexander a “flight risk” is a bit like calling a fish a “swimming risk.” The man is currently the poster-child for international fugitives. So it is more than a bit shocking that a judge in Namibia granted Kobi bail earlier today.
The US wants Kobi extradited on a 32-count indictment stemming from backdating charges at Comverse, including allegations that Kobi tried to bribe a colleague to take the fall for him.
Maybe Kobi knew what he was doing when he fled to Namibia.
EX-Comverse Chief Alexander Granted Bail in Namibia [Bloomberg]
It looks like one of our favorite games—Where In the World Is Kobi Alexander—is finally coming to an end. He’s been arrested in Namibia, according to the Wall Street Journal, where he is being held pending extradition to the US.
You remember Kobi, right? He’s Comverse founder who was charged by the U.S. Attorney’s office in Brooklyn with fraud charges stemming from backdating allegations. When he failed to show up for court the FBI declared him a fugitive. He later allegedly turned up in Sri Lanka—which is not, as we explained, a very good place to hide from the long arm of American law.
Namibia wasn’t such a bad choice for Alexander. When he fled there, Namibia didn’t have an extradition treaty with the U.S. But according to the Journal, after US authorities located Kobi there by tracking bank transactions “the Namibia government enacted a law to establish an extradition treaty with the US.”
So Kobi got his very own extradition law. Wonder whether they’ll call it “Kobi’s Law.”
Fugitive Alexander Is Located in Namibia [Wall Street Journal]
The tone of this Bloomberg story on how dozens of companies are finding that their options timing shenanigans are getting them in hot water with bondholders strikes us as a little bit one-sided. Here’s the lede, with emphasis added.
As soon as Vitesse Semiconductor Corp. said it was under investigation for securities law violations that may delay routine regulatory filings, the Camarillo, California, maker of computer chips also learned it was about to be held up for ransom in the bond market.
How Vitesse bonds and the debt of dozens of companies are being exploited by hedge funds, including Citadel Investment Group LLC, Whitebox Advisors LLC and Aristeia Capital LLC, is the story of fine print in prospectuses allowing creditors to demand immediate payment of principal when earnings reports are delayed.
At stake is as much as $36 billion of bonds that may be retired if the funds have their way, according to data compiled by Bloomberg. While no one expects that amount to be redeemed early, almost $200 million in premature payments may be made, says New York-based law firm Latham & Watkins LLP.
Briefly, here’s what seems to be happening. The companies are finding they cannot deliver financial statements on time due to questions about option timing. In a distant past they may have delivered the statements and then sought to restate them later rather than default on their bonds, but SOX requirements that the financials be certified by executives would put those executives on the line for the misstatements. So now its preferable to default than to file a timely if wrong statement.
Now this is no doubt annoying to the shareholders and managers of the companies involved. But the companies did sign on to the covenants agreeing that failure to file financial statements would amount to a default. And it’s not as if the Sarbanes Oxley requirements are new. If they wanted looser covenants, they could have sought to refinance.
Or they could have avoided playing around with the dates of their options grants.
Options Scam Lets Citadel, Hedge Funds Exploit Bonds [Bloomberg]
Update: Paul Kedrosky has a very different take.
[Disclaimer: When John Carney was an attorney he often worked for banks and financial institutions which arranged bond issuances and most likely hold some of the bonds in question. He drafted and negotiated loan documents, including bond covenants, for clients. He worked at Latham & Watkins from 2004 to 2005.]
Back-dating, spring-loading, bullet-dodging. There are so many ways to run into trouble with timing options grants, the question arises—is it worth it to keep up the practice. At some point the costs of internal controls necessary to ensure nothing underhanded is occurring may exceed the benefit to the company of avoiding cash payouts. Earlier accounting changes already made options less attractive—now that they are receiving so much attention from regulators, law enforcement and the media, will options simply go into the dustbin of corporate history?
It’s hard to see how options have any remaining credibility as “motivating” devices for managers. To use them in a conscionable fashion requires firms to adopt complicated policies for dispensing them, ones that likely have a high cost to monitor and maintain. Spending dollars to maintain internal control effectiveness has been roundly condemned by many inside the American corporation, so it would be doubly incredible to expect them to invest in the controls necessary to ensure that option comp accounting is being done legitimately: after all, what made them attractive in the first place was that they were “money for nothing” with little visibility into their disbursement. Spend money to increase controls over what you’d prefer to keep a low profile? Seems rather contradictory.
This raises another question: are the benefits from all the attention we are giving to options timing practices, worth the cost of losing options altogether? What precisely is the benefit to either the public markets or to an individual corporation of preventing spring-loading?
Unloading On Spring-Loading [AAO Weblog]
Here at DealBreaker headquarters we have enjoyed playing the game of “Where In the World is Kobi Alexander.” Tipsters have written to say he is in Israel. Others have written to say that he left Israel for Switzerland, hoping to take advantage of the laws that protected Marc Rich for so many years. Now word comes from the Israeli newspaper Ma’ariv that Alexander may be hiding in the Sri Lankan fishing village of Nagomba Sri Lanka.
Apparently an Israeli private investigator was hired by a hedge fund to track down the fugitive former Comverse chief executive, and found him in Sri Lanka after Alexander made an internet phone call to relatives in Israel. A US spokesman in Tel Aviv has confirmed that the FBI is investigating whether Alexander is in Sri Lanka.
There are a few open questions in the story. First and foremost, which hedge fund hired the private investigator to track down Alexander. Second, can Alexander be extradited from Sri Lanka? Third, how did the private detective trace Alexander’s phone calls. Finally, what’s wrong at the FBI that it took a private investigator to track down one of America’s most wanted men?
FBI Checks Report on Comverse’s Ex-Chief Alexander [Bloomberg]
Where is accused backdating fraudster Kobi Alexander? Yesterday federal prosecutors charged the Comverse CEO and two other former Comverse executive with running an elaborate options dating scheme that included a “slush fund” of backdated options used to reward favored employees and recruit executives to the company. The two other executives turned themselves in but Alexander is considered a fugitive. A warrant for his arrest has been issued but he has yet to be apprehended.
So what’s going on? Where is Alexander? DealBreaker is hearing that Alexander has fled the country for a foreign safe-haven which he believes will not extradite him to face charges in the US. (So don’t bother looking for him in the UK.) Of course, this is totally unconfirmed rumor-mongering. Neither the US attorneys office nor Alexander’s attorneys could be reached for comment.
Federal prosecutor Peter McNulty announced the second criminal case against alleged backdaters, naming Comverse Technology Inc. former Chief Executive Officer Kobi Alexander and two other Comverse executives as accused backdaters.
A picture of the SEC-Justice theory of criminal backdating is starting to emerge. This case shares with the Brocade case a few elements. First, the feds seem to be targeting executives who went around their company’s compensation committee. Second, the feds are not shy about targeting executives who approved backdated stock options for others. That is to say, there doesn’t need to be a direct personal benefit to the executives granting the options for them to be criminal. McNulty today accused the Comverse execs of creating an options “slush fund” for favored employees.
By the way, have you seen the man pictured above? That’s Alexander, who has not surrendered to the authorities and is currently considered a fugitive.
Comverse Ex-Chief Alexander Charged in Options Case [Bloomberg]
Pixar is the latest company to come under scrutiny for options timing. In 2000, the animators awarded its creative director stock options dated on a day when its shares were within a dollar of its low for the year, according to reports. This comes just days after it was revealed that Apple, headed by Pixar founder Steve Jobs, may be forced to restate earnings due to options timing concerns. As the list expands, we’re starting to wonder: is there anyone, and especially anyone in Silicon Valley, who wasn’t getting creative with options timing?
Pixar awarded share options near 2000 low [Reuters]
The first criminal backdating case got under way yesterday with the arraignment of Greg Reyes, the former Brocade CEO charged by federal prosecutors with manipulating the timing of stock options granted to his employees. The judge set his bail at two million clams. That might seem pretty steep unless you recall that while he was CEO, Reyes sold Brocade stock worth an estimated $380 million.
More background on Reyes from the San Jose Mercury News here
Ex-Brocade CEO free on $2M bail [Reuters]
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