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Posted on 08/16/2006 6:30:22 PM PDT by Swordmaker
Network Appliance CEO Daniel Warmenhoven says the government's search for backdated options among tech companies is going too far
At the start of this year, word began to spread around Silicon Valley that the Securities & Exchange Commission was on the prowl for companies that improperly accounted for stock options grants during the Internet boom. For a while, executives whispered about which companies were most at risk. But now, many executives are surprised by the breadth of the government's probe, which has resulted in SEC investigations into 80 companies and criminal indictments against former executives at Brocade Communications (BRCD) and Comverse Technology (CMVT). In the latest development, on Aug. 14, Sanmina-SCI (SANM) and PMC-Sierra (PMCS) revealed potential problems related to their stock option grants.
Already, most tech companies have launched their own investigations of their books, to spot irregularities before the feds or the press does it for them. But many tech executives are now beginning to use the phrase "witch hunt" to describe the growing scandal. While few doubt there were cases of outright fraud that should be punished, they fear that the widening probe has now reached a counterproductive level. Rather than just catching scofflaws, well-meaning companies and executives are being wrongly impugned by the scandal, in their view.
(Excerpt) Read more at fixyourthinking.com ...
It may be a hassle, but if they did nothing wrong, what have they got to hide?
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Read the article.
Gee..I robbed a bank 5 years ago. What's with all this scrutiny now.
Backdating is a form of shareholder fraud. The SEC is
on track showing which companies exhibited probity and those that didn't.
Gee..I wish I could have been part of the cabals that snickered as they snookered their shareholders.
When I flew home from Iraq on R&R, it was a hassle going through the screening, and I sort of felt that maybe they should fast track the security screening for soldiers coming home from the war, but I still had to take my boots off and run them through the xray machine like everyone else. I knew I didn't have a bomb, but they didn't. In the end, I had my boots back on my feet and I caught my flight. No harm no foul.
Interesting. I almost went to work for these guys back in 2002. I'll have to check out what happened to see what I avoided.....
My thoughts exactly.
The story is old... but this is the first CEO who is responding to what is happening. Read this article.
Rethink it this way... Gee, I withdrew $1000 from MY bank account five years ago... and now the government says that there is a retroactive $500 withdrawal limit that was passed two years ago. What's with all this scrutiny now?
This was totally legal at the time. In fact, it still is.
What has changed now is that the Generally Accepted Accounting Principles (GAAP) were changed a couple of years ago to require companies to account for this in both expense and Capital accounts at the time of the option grant... instead of later, when and IF the option is exercised, as had been done for years. The problem is they made the change in GAAP retroactive for 5 years or so before they changed the rules. If this were a law, it would be unconstitutional as an ex post facto law.
"Gee..I wish I could have been part of the cabals that snickered as they snookered their shareholders."
Please tell me how giving an incentive option to an employee allowing him to buy a stock, not on the open market but rather from the company, at some vested future date in anyway adversely impacts the current stockholders?
And elsewhere in the news, a guy who smuggled dope through tunnels under the border with Mexico got picked up on his yacht or whatever. ;')
For a second there I thought you were talking about Congress.
When did Silicon Valley people get above the law?
Well, Congress is above the law. When they have to start complying with the same accounting laws as corporations, then I'll applaud.
This reminds me of the 2002 election season when Martha Stewart was made the scapegoat for the bad economy. Perhaps this is a new witch hunt in case the economy goes bad before November.
They did not "falsify" the accounting records. They used the Generally Accepted Accounting Principles (GAAP) as accepted at that time. The accounting records are only wrong because of a new rule that was promulgated years after the fact and then made retroactive.
Stock options are merely an agreement to sell a specified number of already authorized but unissued common stock at some future date (after a specific period of vesting) at a specific price. Sometimes the "strike price" is "at the money", meaning at the value of the common stock at market close on the day the stock is issued... but sometimes it is at a price HIGHER or LOWER than the current market. IF it is higher, then the recipient has received nothing of current value... but if it is lower, then he has been deemed to have received compensation equal to the current market minus the strike price.
For example if the current market is $10 per share, and the option is for $9, then the recipient has received a paper value of $1 per share. In the past, that $1 was unrealized and required no tax consequence because the options usually required a period of "vesting", i.e., the recipient could only EXERCISE the option 1, 2, or some years down the road. Usually there is a date set beyond which the option is void.
If the value of the stock were less than $9 during the option period... the option is valueless. If it is worth more, then the holder of the option may exercise his option and buy the stock from the company for $9 per share, regardless of the market price, and immediately resell at market. The company will put the $9 into its coffers and issue a share of the authorized stock... and increase its capitalization by $9. It will also report the exercise of the option. The exercisee will be required pay income taxes on the gain... when he or she sells the stock.
So long as the options (usually, it is a committee of outside board members, elected by the stockholders, who make the decision of who, when, and how many shares they could buy)given to employees and officers are reported to stockholders within one year (usually in the annual report), then nothing illegal took place.
Options (like stock warrants before them) were used by companies to find a way to compensate key employees without digging into cash assets, provide an incentive for management to increase the net worth of the company and thereby the value of the outstanding stock for stockholders, without incurring a current expense, and that would actually increase capital at some time in the future when the employee used his own money to buy the stock from the company. Options did all of that.. at essentially no cost to the company. It was a win-win for everybody concerned.
The problem arose when Congress decided that a taxable event occured at the granting of the option. The company would be required to set aside the authorized shares (make them not available) and charge an expense (employee compensation) for the value at that time. Prior to this, an option was just a piece of paper with no value to the company... then Congress made this retroactive for 5 years (IIRC) but it wasn't until this year that anyone agreed on how to properly account for it and changed the GAAP.
This is akin to you driving at 70 MPH down a road that is posted at 70 MPH Limit. Five years later the local town lowers the speed limit to 55 MPH... and then sends you a speeding ticket for exceeding the 55 MPH speed limit when you drove at 70 five years ago.
Headline: Fox calls hen house security, "unneeded and overwraught".
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