Update on the stock-options backdating scandal: One executive is definitely going to prison, another may be headed there (subject to appeal), and the snare seems to be closing around the founders of a big chip maker.
Carole Argo, the former president, COO, and CFO of SafeNet, has pleaded guilty to securities fraud and was recently sentenced to six months in prison and fined $1 million. In her plea, Argo admitted to backdating millions of dollars’ worth of employee stock-option grants. Backdating itself — changing the dates when options are granted and exercised, specifically timing the dates to take advantage of perturbations in a company’s stock price — isn’t illegal, but hiding such moves from the SEC and the company’s shareholders is a violation of federal securities laws. A tearful Argo said at her sentencing, “My apologies to everyone who was harmed by this.” She’ll be going to the same federal prison camp in West Virginia where Martha Stewart did her time.
Gregory Reyes, the former president and CEO of Brocade Communications Systems, last month was sentenced to 21 months in federal prison and fined a hefty $15 million. He remains free while his conviction is being appealed. Reyes was convicted last summer on 10 felony counts of conspiracy and securities fraud. US District Court Judge Charles Breyer (younger brother of Stephen Breyer, Associate Justice of the US Supreme Court) went lighter on Reyes — a part owner of the San Jose Sharks hockey team — than prosecutors requested. Judge Breyer said at the sentencing, “Corporate fraud is not a victimless crime. If widespread, it can affect the overall economy, employment, and, as we’ve seen with Enron, people’s life savings.”
Sentencing is scheduled for March 12 for Stephanie Jensen, Brocade’s former VP of human resources, who was convicted in December of two federal felony charges of falsifying corporate records.
Finally, former Broadcom HR VP Nancy Tullos pleaded guilty last month to one count of obstructing justice. That plea deal wasn’t the big news; Tullos had agreed to the plea eight weeks earlier. What was news was that federal prosecutors were required in open court to identify Henry Nicholas III and Henry Samueli, the co-founders of Broadcom, as “unindicted potential co-conspirators” in the stock backdating case against Broadcom. Previously, prosecutors had referred to the pair in court filings as “Executive A” and “Executive B.” Nicholas resigned as president and CEO in early 2003, and retired from Broadcom’s board later that year. Samueli, who owns the Anaheim Ducks franchise of the NHL, still serves as Broadcom’s chairman and CTO; he has received notification from the staff of the SEC that he may face civil charges related to options backdating.
Not a pretty picture of American business. These prosecutions and sentences should dissuade any US executive contemplating stock-option fraud or other shenanigans, however.
Comments
Cali Dorsch Says:
February 14th, 2008 at 1:30 pm
Poor woman. I would never want to be sent to Camp Cupcake!
Mark4 Says:
February 24th, 2008 at 11:14 pm
I have read your comments on these backdating matters before and you don’t seem to understand the issues. Every employee stock option plan that ever existed was deemed fraudulent by the feds, because workers who start work at any company with a stock plan are always given the low of the quarter when they start work, even if they start the last day of the quarter. Thats how these plans were set up according to accounting firms. these executives who are being forced to plead guilty in abusive plea bargaining are only doing it to get out of a situation but literally NOBODY thinks there was a real crime committed here who is close to the matter. Every accounting document has backdating and forward dating within an open quarter, so why wouldn’t stock options. Have you ever been a participant in a an employee stock option plan anywhere? You should know this, writing a web based business blog. Since no company including Microsoft, Home Depot, anybody ever granted employee stock options on every work day of the year (this would be 260 potential grant dates, unmanageable)- choosing ONE DAY to give everybody who started in that quarter was common practice. Everybody who works in tech knows these prosecutions are BS.
Mark4 Says:
February 24th, 2008 at 11:18 pm
Oh and I forgot to mention that all backdated (or lowdated within an open quarter) options were fully disclosed at all companies with a black scholes multiple which was a requirement for any at-the-money options. This multiple was not required for in-the-money, (which is apparently what these should have been, according to the feds). So, the backdated options were actually OVER COUNTED, due to the excessive black scholes multiple. People that are deliberately committing fraud do not put accurate accounting of stock options in footnotes with overagressive valuations, they would just leave these off completely. Again, obvious to real business people. When we start convicting people of CRIMES for taking advice of accounting firms we have a serious problem for all businesspeople.
Jeff Dorsch Says:
February 25th, 2008 at 11:11 am
Interesting opinion, Mark4. Please let me know when a federal appellate court ever buys your line.
Mark4 Says:
February 28th, 2008 at 3:53 pm
Typical response from the uneducated masses, how about addressing something I said? Have you EVER, EVER worked for a company that had an employee stock option plan, EVER? If you did, or you know somebody that did, take their offer letter and the day they started work, and compare the grant date and strike price. The chances of it exactly matching are one in 90. No employee stock option plan ever, granted options on every day of the year. ALL employee plans grant once a quarter or once a month. At the same time, NO company ever expensed options on the balance sheet prior to SOX. Please, if you know of a company that did so, by all means inform me of what it was. THerefore, EVERY company that EVER had a an employee stock option plan in the 90s was fraudulent and EVERY CEO should be locked up, according to your “analysis”, is that correct? This would include Gates, Welch, etc. is that your position? You do realize that when the feds determined that the executive plans (where the real issues are, executives overcompensating themselves) were completely legal- they switched to a widespread accounting misunderstanding with EMPLOYEE PLANS that had no benefit to the executives involved, no? Do you think that if Gates and Welch were going to commit a FELONY they would do it with no benefit to themselves? Make sense?
Face it, you are a business writer and you have adopted the same hysterical attitude as these juries. Yes these guys are rich, but other than that, no crimes occurred here. Every executive involved in this knows no crimes occurred. All of these options were disclosed in the footnotes with black scholes where they belonged. The accounting firms told the CFOs to choose the low of the quarter because it was an open quarter. That is a fact. Since all dates within an open quarter are flexible, these should have been. Since there was no benefit to the executives involved, and since all options were disclosed, it was thought this was legal.
People that feel ripped off by this exercise should sell all stock of companies with employee option plans. That is all tech and some consumer companies like Home Depot. Commodities and value stocks typically don’t have stock plans, you are ok with those.
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