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Down In The Valley: Backdating Scandal Starts To Look Serious

"The simple things you see are all complicated
I look pretty young, but I'm just back-dated, yeah"
--from the song "Substitute" by The Who

I called my bookie today. OK, I'm not a gambler and don't have a bookie, but I found one to call, anyway. I had just had the greatest idea ever. Here’s how the conversation went down:

Bookie: "Yo. Whattaya want?"

Me: "Um, yes, I'd like to place a bet, please."

Bookie: "Whaddaya wanna bet on? I ain't got all day."

Me: "College football. It's my favorite sport!"

Bookie: "Whatever, sunshine. Just place ya bet."

Me: "OK, here it is ... I want to bet on Michigan to beat Notre Dame."

Bookie: (After a pause) "You mean Penn State. Michigan to beat Penn State. This weekend. Michigan’s a six-point favorite. You wanna piece of that action? How much you gonna put down?"

Me: "Uhhh, no. I want to bet on Michigan to beat Notre Dame. In South Bend. I think Notre Dame’s the favorite. The Irish have the No. 2 team in the country."

Bookie: (After a longer pause) "What are you, some sorta moron? Michigan won that game a month ago. Big. Kicked Notre Dame all up and down the field. You can't bet on a game that's already been played. Whatta you tryin' to pull here? Do I need to send some of my associates to your residence to discuss this?"

Me: "No, no, that's OK, thanks. No associates necessary. I was just hoping I could 'backdate' my bet and be guaranteed to win."

Bookie: "Backdate? Who do you think you are, some Silicon Valley executive? You backdate me, and I'll have my boys break both ya legs."

Me: "Uh, right. Never mind then. Thanks anyway ...."

OK, so maybe the metaphor isn't totally air-tight, but it appears that a bunch of Silicon Valley executives, most recently top brass at McAfee and CNET, are taking the fall -- no doubt onto big, soft, expensive pillows -- for "backdating" their stock options. (In the case of McAfee CEO George Samenuk, now suddenly "retired," the backdating news came out just as he was busy accusing Microsoft of fixing the security market. Guess he thought long and hard about that "retirement," huh? And CNET's deposed CEO will remain on the company's board of directors.)

What these execs did, apparently, was artificially set the date for their stock options to a day when the stock was at a low point so that they could turn right around and sell the options for profit, as this excellent article from the San Francisco Chronicle explains: "Options give holders the right to buy company stock at a predetermined 'strike' price, generally what the stock traded for on the day of the award. Backdating involves keying that strike price to an earlier date when the stock price was low, allowing holders to buy company stock more cheaply."

Right. A nice little trick, that. And here comes the best part:

"The practice violates the law if the backdating is not properly disclosed and accounted for in financial statements."

So, apparently, you can bet on a game after it's been played if you account properly for your guaranteed win (which, really, is incredible enough if you think about it). The problems at McAfee and CNET -- unearthed by internal investigations thus far, although the Justice Department could eventually intervene -- seem to revolve around the fact that neither company properly reported these shady deals. Both companies are now talking about restating financial records from at least the last several years, if not much longer. McAfee is talking about wiping out $100 million to $150 million in earnings. Cnet took a hit on the stock market yesterday based on this and other bad news, but McAfee stock actually went up.

And those two companies are far from being alone in the tub of backdating hot water. Apple has struggled with a scandal of its own, and Adobe is now on the list of potential violators as well. As the Chronicle article states, one bad-boy exec even hid out in Africa -- presumably with Whitey Bulger, although we wouldn't know -- before getting nabbed: "The CNET and McAfee executives join a growing list of corporate bigwigs who have lost their jobs over stock-option irregularities, including one who went on the lam in Africa to avoid criminal charges. That executive, Jacob 'Kobi' Alexander, former CEO of Comverse Technology Inc., was apprehended in Namibia last month and is awaiting extradition."

What on earth? Had this happened in one company, it would have been an interesting little dish of dirt. Apparently, though, backdating has been standard practice in a big chunk of the industry for a while, and a bunch of companies are now going to have to tell us that they didn't really rack up the earnings that they said they did and that their execs have at best been unscrupulous and at worst criminals.

And that's probably the most disturbing thing about this brouhaha -- that so many execs from so many big companies thought that they could get away with an almost certainly unethical and possibly illegal practice. Maybe my bookie friend needs to send some of his associates to the Valley.

What do you think about backdating? Does it disturb you that so many industry leaders have engaged in this practice? Would you do business that way? Rant or retort here or at lpender@rcpmag.com.

Posted by Lee Pender on 10/12/2006 at 1:19 PM


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