(COMTEX)Chummy CEOs now part of Silicon Valley's backdating club
SAN FRANCISCO, Nov 12, 2006 (The Canadian Press via COMTEX) --
Silicon Valley business leaders have long served on each other's boards,
giving bright minds a way to share their collective wisdom and fostering a
climate of corporate clubbiness that prizes personal networks as much as
computer networks.
But what happens when bad ideas seep into chummy boardrooms?
An answer may be emerging as federal prosecutors and regulators dig deeper
into a stock options scandal that has already forced dozens of companies
across the country to wipe out more than US$5 billion in combined profits.
At least 28 of the northern California companies nursing stock options
headaches share a common director with one other company wrestling a similar
problem, according to a recent analysis that blames the close relationships
for spreading the accounting shenanigans like a nasty virus.
"The theory behind social networks would seem to suggest very strongly
indeed that these interconnected boards have something do with stock option
(manipulation)," said Paul Hodgson, who co-authored the study for the
Corporate Library, a shareholder watchdog group.
Most of the trouble revolves around the "backdating" of employee stock
options without properly accounting for the manoeuvre - a deception that can
boost profits and lower taxes.
Backdating refers to options that are issued retroactively to coincide with
low points in a company's share price to increase the recipient's potential
windfall.
The practice isn't necessarily illegal as long as the backdated stock
options are properly recorded on the company books. If the accounting for the
rewards is bungled, it can exaggerate corporate profits and improperly lower
taxes.
Even more earnings could evaporate in the months ahead because not all the
companies with potential stock option trouble have calculated the financial
damage.
More than 160 companies nationwide have disclosed their stock option
practices are under internal review or being investigated by the government.
At least 51 of those companies, including the 28 in northern California,
shared common directors, according to the Corporate Library.
So far, there's no concrete evidence to tie Silicon Valley's stock option
chicanery to the circle of directors who sat on common boards. But the
Securities and Exchange Commission is examining the role directors played in
the scandal.
"It wouldn't be a surprise if knowledge like this got passed along among
executives and had a cascading effect through the community," said James
Post, a Boston University professor specializing in corporate governance and
business ethics. "Just as networks pass along good ideas, they can play a
critical role in passing along bad ideas too."
Regulators already have signalled they are considering a civil suit against
three directors at Mercury Interactive Corp., one of the first Silicon Valley
companies to acknowledge stock options manipulation. The three directors -
chairman Giora Yaron, Igal Kohavi and Yair Shamir - have maintained they did
nothing wrong and remained on Mercury's board until the company's recent
US$4.5 billion sale to Hewlett-Packard Co.
None of these three belonged to the boards of other companies embroiled in
the scandal. But another former Mercury board member, Ken Klein, now runs
Wind River Systems Inc., a Silicon Valley company that is conducting its own
investigation into its stock options bookkeeping.
Two more valley companies, Mountain View-based VeriSign Inc. and Juniper
Networks Inc., each had four directors who sat on the boards of other
companies trying to clean up a stock option mess.
The list of overlapping directors include the CEOs of the companies,
VeriSign's Stratton Sclavos and Juniper's Scott Kriens.
Sclavos joined Juniper's board in May 2000 and Kriens reciprocated by
joining VeriSign's board eight months later.
And VeriSign has other directors with ties to more than one company in the
scandal, including Roger Moore of Western Digital Corp., and Gregory Reyes,
the former CEO of San Jose-based Brocade Communications System Inc. Reyes
became the first prominent Silicon Valley leader to face criminal charges in
the options imbroglio.
Reyes, who has pleaded not guilty, resigned from VeriSign's board two weeks
after his July indictment on securities fraud and other charges. He
voluntarily resigned from VeriSign's board so he could devote more time to
his defence in the Brocade case, said Richard Marmaro, Reyes' lawyer. "He was
not forced off," Marmaro said. "It was simply time for him to move on."
Sclavos' business ties with Reyes extend beyond their tenure on VeriSign's
board. The two are part of a partnership that bought a piece of the National
Hockey League's San Jose Sharks in 2002, shortly after Reyes joined
VeriSign's board.
VeriSign, which is also a target of SEC and U.S. Department of Justice
investigations, didn't respond to requests to interview Sclavos.
Besides belonging to the VeriSign and Juniper boards, Sclavos also is a
director at Intuit Inc., which last month disclosed the SEC had closed its
investigation into the Mountain View-based company's stock option practices
without taking punitive action.
Juniper's other boardroom links to the scandal are provided by Frank
Marshall, a longtime director at Santa Clara-based PMC Sierra Inc., and
Kenneth Levy, a co-founder of KLA Tencor Corp. Levy, 64, retired as KLA's
chairman last month with a less valuable stock option package after the San
Jose-based company revealed its mishandling of options would cost up to $400
million to fix.
Citing the inquiries into its stock option accounting, Juniper turned down a
request to interview Kriens, who became the company's CEO a decade ago.
The fallout from stock option backdating has caused Juniper and VeriSign to
miss government-mandated deadlines for filing their quarterly financial
statements - lapses that threaten to oust them from the Nasdaq Stock Market.
Several shareholders also have filed lawsuits against Brocade, Juniper and
VeriSign, alleging that the backdating of stock options duped investors.
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