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Let’s say you’re a big shot at a publicly traded company with a market capitalisation of hundreds of millions or even billions of dollars. Picture yourself sitting in on the meeting where they talk about how many millions of options you should be awarded for leading your fine company through the marketplace, enriching shareholders, creating jobs and otherwise contributing to the good of society.
It’s early in 2000, and the technology boom is just starting to unwind but your stock is still up 400 per cent in the past 18 months. And when all the boardroom antics have played themselves out you’ve got a package of 20m options. With your stock trading in the $30s, we’re talking about a package worth more than half a billion dollars. You go out and tell your investors and the government about that package and they sign off on it. All’s well in the world.
Now fast forward to 2006, and your company and those options grants from years ago are under the spotlight. Newspaper reporters are shining a light on the fact that you forgot to tell investors one little thing about those options – that they weren’t issued on the date and given the strike price that you’d told investors about.
No, either you or some of your direct reports had decided that 20m free-market options weren’t enough. So at some point, the strike price and date of issuance on those options were changed to a lower price from a past date.
And that means the chances of those options being exercised were much higher than your shareholders had thought. Which, in turn, means their assumptions about those options’ dilutive impact to the existing shareholder base were made on false pretences. And that means that your shareholders’ understanding of the profitability potential of their individual shares was wrong. You had therefore – secretly – shifted risk from your options on to shareholders and shifted value from shareholders to your options.
The operative word there is “secretly” because if you’d chosen to play these games and told shareholders about it as you were doing so, there’d be nothing to worry about now.
Maybe your stock would have suffered because shareholders wouldn’t have liked it, but at least they could have acted on that knowledge. (Of course, doesn’t that last sentence underscore why you chose to hide these games to begin with?)
Now I don’t know about readers of this column, but in the small town of Ruidoso, New Mexico, where I was born and raised, we’d look at these facts and say investors had been lied to. Yes, lied to.
And moreover, we’d call that secret shifting of risk and value stealing. Yes, theft.
Somehow, the mainstream media – even those that have been digging into the past grants and breaking the stories – won’t use these words to describe what’s happened at all the companies in question. They seem content to use more obscure terms such as “options irregularity” and “options backdating” to describe this lying and stealing.
The companies whose executives did lie and steal through this secret backdating scam (another accurate word the mainstream press won’t use to describe this stuff), don’t want anyone to call a spade a spade. So they bully the media, the analysts at the brokerages and the politicians/bureaucrats, who are supposed to protect investors, into using those McGuffin terms “options irregularity” and “options backdating”.
Meanwhile, those very companies are scrambling to quantify the monetary value of that lying and stealing and to restate their numbers so shareholders can get a picture that’s closer to reality.
Broadcom, for example, has already quantified the restatement to the tune of about $1.5bn. “Irregularity” indeed.
Oh, and that 20m-option-receiving chief executive from earlier? Apple had the gall to add insult to injury by trying to convince me that since Steve Jobs cancelled all those options, this whole lying and stealing thing is no big deal. Of course, they don’t bother to point out that he only cancelled those options three years later (at about the same time I first started buying Apple myself on those false pretences) – after the stock had fallen some 90 per cent and those backdated options were practically worthless and were replaced with 5m shares of restricted stock.
I guess I should be happy that at least they didn’t mislead about that grant. But how much faith can I have in that now?
And that is the impact legalised lying and stealing from shareholders has – it undermines people’s faith in the market. I don’t ask much of our government, but the Securities and Exchange Commission, the Internal Revenue Service, the Justice Department and the rest of those bureaucracies that are supposed to prosecute lying and stealing need to get busy prosecuting those managements that lied and stole, even if they want to call it prosecuting those managements that backdated and issued irregular options.
Cody Willard is a hedge fund manager with CL Willard Capital. firstname.lastname@example.org