Wednesday, August 16, 2006

Misdated options SEC witch hunt?

Peter Burrows writing for BusinessWeek Online interviewed Network Appliance CEO Daniel Warmenhoven. This is a must read article for a shareholder attempting to understand the mind set of the Silicon Valley during the option "misdating" haydays. As follows are snippets from the interview - questions in red and responses in blue. The entire interview must be read to glimpse a full contextual view of the snips and other questions not included in this post. Fascinating, simply fascinating. . .

Hat tip to Jack Ciesielski of AAO Weblog. You may read his commentary linked here.

So backdating isn't illegal if it's fully disclosed to the public and properly accounted for. But an awful lot of tech companies are admitting now that they didn't properly disclose and account for them. Why was this so common?

This is going to sound weird, but what difference did it make [if the options expense was recorded on company's official financial records using generally accepted accounting principles, or GAAP]? It was going to be removed for the pro forma reports anyway, and that's all the investment community cared about. . .

So do you think we'll see lots of companies found guilty, and see executives go to jail?

I think so. It's pretty clear that the SEC wouldn't prosecute cases if they didn't think there were egregious actions at the most senior management levels that were tantamount to fraud. I think they will bring many cases, and probably prevail on many of them.

Many of the allegations in this scandal center on overaggressive use of options to hire and retain employees. To what extent can the trend be blamed not on corporate greed, but on the necessity to recruit talented employees in a very competitive market?

I never thought it was necessary to do those things to attract people. If someone we were trying to recruit said: 'I won't join unless you give me a discounted option', my answer was 'I don't think you belong here.' . . .

Are you resentful of the government's treatment of tech?

It's like this. Did you ever drive the speed limit on 280 (a highway in Silicon Valley where traffic typically moves along at 80 mph or more)? Of course not. Nobody does. Does that make you a bad person? That's what this feels like. It's like the police come to you in 2006 and say,"Hey, it turns out we have videotapes of everyone from 2000, and we have video of you speeding 18 times. Here are your tickets."

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