CA: Rich man, poor economy (The Insiders)

SJ Mercury News ^ | 12/8/02 | Chris O'Brien and Jack Davis

[NormsRevenge]

Running companies that became almost worthless didn't stop dozens of Silicon Valley insiders from pocketing billions of dollars by selling their stock during the tech boom and bust.

The Mercury News examined the stock sales record of insiders at 40 companies in Silicon Valley that have lost virtually all their value since the stock market peaked in March 2000. The executives, board members and venture capitalists at these companies walked off with $3.41 billion, while their companies' total market value plunged 99.8 percent to a mere $229.5 million at the end of September.

[NormsRevenge]

This ought to get yur blood pumpin'...

[Jack Black]

Ghost of Informix rises in accounting scandal indictment as CEO faces jail threat

CRM-FORUM.COM

Just when it seemed that the big accounting scandals were behind the IT industry, along comes a reminder of one of the originals with the long-anticipated indictment of Phil White, former CEO of once high-flying database and software vendor Informix.

White has been indicted on eight counts in connection with financial accounting fraud at Informix in the late 1990s. He is accused of signing bogus 1996 financial earnings statements, concealing improper transactions and acting to prevent the restatement of earnings. Court papers filed allege that overstating earnings at Informix was so rampant that company insiders referred to the end of the year as ``December the 45th.''

After company auditors and its board discovered the irregularities in 1997, White was fired and the company restated its 1996 earnings to show a loss of $73.6 million instead of $98 million in net income, prosecutors said. The company's stock plunged 50 per cent. White made $465,000 in salary and $3.2 million from stock sales in 1996, according to the indictment. The U.S. Securities and Exchange Commission also filed a civil lawsuit against White.

Informix’s database business - once a serious contender to Oracle - was later sold to IBM for $1 billion while the remaining Web services software is now sold through Ascential Software which was split off from Informix.

His attorney, Elliot R. Peters, said White was a victim of legislative fashion. "In today's climate it is politically popular to indict former CEOs," said White's attorney, Elliot Peters. "In this instance the government has wrongly charged a man who did nothing more than act as a responsible corporate leader. When Mr. White is ultimately cleared, we hope the public and the media will ask why an innocent man was forced to answer these baseless charges," Peters said.

The Informix scandal has been waiting to explode for years. An earlier SEC investigation concluded that Informix faked $295 million in revenue from 1994 through 1997 by back-dating contracts, booking income on unsold products and other violations of accounting rules. Informix settled the case in 2000 while in 1999, Informix and its former auditors, Ernst & Young, settled dozens of securities fraud lawsuits for $142 million.

Federal prosecutors two years ago indicted Walter Konigseder, Informix's former head of European sales, in connection with the fraud allegations, but German law prevents him being extradited to the USA.

White will make his first appearance in court Tuesday. If found guilty, White faces a maximum 10 years in prison for each of the eight counts alleged in the indictment.

[dighton]

Not pretty.

[NormsRevenge]

The Valley is flat-lining ... and stuff like this is why.

Note to the New SEC and Treasury Heads.. Please come to California and nail the whole lot of these bastards as a warmup act. Then we can all see how serious you are about the economy.

[NormsRevenge]

"Executives at every company contacted either did not return phone calls or declined to comment, in many cases citing pending litigation."

LOLOL

[KantianBurke]

wonder how many of them donated to the Rat party...

[RLK]

I'm getting to the point where I veiw coporation executives and managers as being far below schister lawyers in morals and trustworthyness. Competence doesn't even enter int ot picture.

[daviddennis]

I don't have the full information I would need to make a conclusive judgement, but I don't believe these people did anything wrong.

It was fairly well recognized that the Internet boom was likely to crash and burn at some point, since the profits weren't there. So if you were a savvy CEO or executive, would you not cash in enough of your shares to make sure your future was protected?

I know I would, if I was CEO. It's just the smart thing to do, and as long as my financials are honest, there's nothing wrong with selling shares.

Public warnings that the tech boom was going to collapse were all over the place before it happened. A friend of mine wanted me to help him invest in Internet stocks at the top of the boom. I researched it and told him everything was way too overvalued, so I didn't want to do it. And guess what? I was right.

Here's the heart of the matter: Many of them held on to more stock than they sold, to give them continued control over their companies, and because they genuinely believed in their future.

Graef Crystal, a leading compensation expert in Las Vegas, believes the problem has been overblown. He points out that while many executives sold their stock, many of them could have sold far more, which they elected to keep and which eventually became worthless.

``The fact that they left huge amounts of money on the table does not suggest they knew something was coming,'' Crystal said.

In other words, they were not betraying their company, but simply diversifying their assets.

Is that bad? And should that be illegal?

D

[Cicero]

Many of these people were probably as surprised and disappointed as their shareholders. And to forbid insiders to sell stock, as one fellow suggests in this article, would destroy the very motivation that makes entrepreneurs start new companies.

You start a company, you work like hell, you succeed, you sell some of the stock so you can realize some of the benefits of your work, and then the bottom falls out.

I hate to say it, but that's the way capitalism works. Creative destruction. A hundred companies fail, but one succeeds, and transforms the economy and the country. For a while there the boomer generation thought they had a permanent entitlement to a 15% or more return on their money every year, but that simply isn't possible.

The alternative is centralized control and planning, and over-regulation, so sick companies are kept alive and innovation is killed. That just doesn't work. In the end, people are much worse off. Just ask the Eastern Europeans or even the Japanese.

[NormsRevenge]

I appreciate your input and point of view re: the heart of the matter.

. I , too, would like to have more information before I thoroughly jumped all over these CEOs and officers. Altho I have already spikemarked 'em for easy later reference ;-). Compensation is a touchy issue.

Yes, we do have legal rights to exercise options, it is part of the way business operates, and as long as all the paperwork is in order and not injurious to the corporation and shareholders. It is katie-bar-the-door so to speak in feast times and litigious when times are not so good.

Maybe for me, it is the excessive amounts involved. In the old days, the ratio of pay between worker bee and corporate bees was much closer then it is today.

The base issue is one of what is fair compensation? The internet boom blew the old range all to heck.

If you can get a copy of today's Mercury News, do so. It has a lot more information contained in it then is shown online. I haven't read thru the whole thing yet...I'll pas on what I can.

I been watching the Cowboys whup up on the 9ers. Im hoping the Vikes can stall the Packers tonite.

[cryptical]

Im hoping the Vikes can stall the Packers tonite.

I taught my nephew a phrase that will serve him well as a budding Vikings fan (he's 10).

It's a rebuilding year.

[daviddennis]

I think we could both agree that the article was written in an inflammatory way that involved significant omissions of fact.

The phenomenon of bidding up investments beyond all sanity is centuries old. I believe the first recorded incident was Holland's TulipMania, where people were trading their houses for individual bulbs, because they felt the bulbs would continue to appreciate forever.

I understand that this is personal because it's probably your money, among other people's. And I can't blame you for taking losses personally, but that doesn't mean the executives involved necessarily did anything wrong.

There seems to be an interesting slant in the news that blames everything in the known universe on fraud. For example, the disasterous collapse of WorldCom seems to be credited to fraud. In reality, WorldCom overpaid for a lot of assets. They borrowed money on those assets at the time. Now that the Internet boom is gone, and people aren't signing up for broadband Internet access in massive numbers, the assets are worth pennies on the dollar. That's a crash due to overoptimism, not fraud.

They did cook the books for a while to try and make things look OK for as long as possible, but all that did was to delay the collapse by a few months and make it more spectacular. Actual blame for the collapse should properly go to bad investment decisions, not fraud.

This is very similar in nature to what's going on with the California power crisis. Governor Davis is saying that the state overpaid due to tricks and fraudulent transactions. There were some tricks, and some fraudulent transactions, and the people involved are (quite rightly) being punished. But those tricks amounted to one or two percent of the total price increases at most. Eliminating them would have not helped the broader picture at all.

In short, we should be careful about scapegoating perfectly good companies and reasonable people. Save your wrath for genuine incompetence and deliberatly poor behaviour.

Remember, sending the burden to corporations lightens that of Gray Davis - and as you know, he's one person who richly deserves blame for the recent disasters.

D

[NormsRevenge]

Agreed on the inflammatory content.. it is the Merc after all.

I hear what you are saying and admit I was a bit overly sensitive when I initially posted it. There are a lot of positives in how things work currently and there are a lot of good companies out there that may get it for no reason.

This wealth creation enterprise business thing is a wonder to behold. This is a price we pay for having the world's premiere economic dynamo.

Questions of fairness and circumstance and such should not prevent the market from functioning without fetters as much as possible.

This article is the first in a 3 parter that the Merc will be running.

[Robert357]

There seems to be an interesting slant in the news that blames everything in the known universe on fraud. ...a crash due to overoptimism, not fraud.

...blame for the collapse should properly go to bad investment decisions, not fraud.

This is very similar in nature to what's going on with the California power crisis. Governor Davis is saying that the state overpaid due to tricks and fraudulent transactions. There were some tricks, and some fraudulent transactions, and the people involved are (quite rightly) being punished. But those tricks amounted to one or two percent of the total price increases at most.

In short, we should be careful about scapegoating perfectly good companies and reasonable people. Save your wrath for genuine incompetence and deliberatly poor behaviour.

Very well said. There were crooks out their at Enron, Aurthor Anderson, Cal ISO, Cal PX, etc. Lets hope that the real crooks all spend plenty of jail time and that the government cracks down on white collar crime.

But there was also lots of painic (stupid!) buying, like the high priced California DWR power contracts that Davis said were great, then said they were evil, then renegotated and claimed he saved the state lots of money, then said were evil, then is trying to force new contract terms on the generation companies.

I remember A. Greenspan being critisized roundly for saying that investors were making mistakes bidding up the price of stocks too high. People should have listened much more carefully. He was right. You would expect him to be right. It was something people didn't want to hear so they ignored it and now blame the "insiders."

[mvpel]

I can tell you that the ex-CEO of Metricom, one of the companies mentioned in the article, bought thousands of shares at $85 per share, according to the SEC-mandated insider trading disclosures. I lost $400,000 worth of equity in the course of Metricom's collapse, I can only begin to imagine what he lost.

This article is just another example of the ridiculous socialist, Marxist bent of the Mercury News. Company executives are already extensively restricted in their trading of company stock by the SEC regulations. What does the Merc want, a total ban?

This article is unmitigated class-warfare idiocy, worthy only of Pravda, not an American newspaper.

[Joe Hadenuf]

Sounds just like Enron.....

[Saundra Duffy]

Bastards!

[tubebender]

Why can't someone sue all those stock holders outside the company who sold their stock driving the price in the dirt.../sarcasm

[NormsRevenge]

Good Luck in court :-)

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