COMMENT 3 – ON BROCADE CEO GREG REYES – JAIL AND FINE METED OUT BY FEDERAL JUDGE – WHAT NEXT IN BACKDATING OPTIONS INVESTIGATIONS?

We’ve commented here (see prior posts #1 and #2) on the plight of the former CEO of Brocade Communications Systems, Gregory Reyes, and his journey through the federal justice system.  He’s now the first CEO convicted by a jury of his peers for manipulating stock options.  On January 16, 2008 he was sentenced to 21 months in prison and a $15 million fine.  Not a good sign for other senior corporate managers in the crosshairs of the feds on this issue (backdating).

 

The prosecutors in Northern California had been looking for Mr. Reyes to serve almost three years, make payments of more than $40 million in fines and $90 million in restitution to the company. But US District Court Judge Charles Breyer looked somewhat favorably on the CEO’s contributions to society, including his philanthropy.  The Los Angeles Times story reported that Judge Breyer said:  “The case is about the failure of a CEO of a publicly-traded company to honestly disclose financial information.  It is about lying to his company.”  Harsh words – and a clear warning to certain folk in the corporate sector.  (Most white collar crimes of this sort are pursued in the San Francisco- and New York City-based federal prosecutors.  One high-wattage former prosecutor in this category was presidential candidate Rudy Giuliani.)

 

From the CEO’s statement to the court:  “I’m sorry.  There is much that I regret. If I could turn back the clock, I would.  There are many things I would do differently.”  (LA Times.)

 

Our feature section on the spreading stain of the options backdating scandals – Hot Topics:  CEO Cash Time Machine – Backdating Options” – has some narrative related to time-travel (via backdating options) by CEOs and boards (including a column or two by me).  In the coming months, as the backdating investigations continue, we may hear more of these types of comments from those in high places convicted by the federal courts.

 

The temptation was just too great for what appears to be a significant number of executives who time-traveled to create personal wealth.  Read the great new book by Robert A. G. Monks – “Corpocracy – How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine – and How to Get It Back.”  The book will help you understand the stock options temptations – and how a very useful management incentive (options) got out of whack.

 

(We’ll be doing a review of the book in this space.  It’s published by John Wiley & Sons, Inc., © 2007 by Mr. Monks.  ISBN 978-0-470-14509-8 in hardcover.)

COMMENTARY ON CHINA REVOKING EXPORT LICENSES OF 600+ TOY MAKERS

The other shoes are dropping in China…boom, boom, boom…the government of China in the form of the State Administration for Quality Supervision and Inspection and Quarantine (whew!) or AQSIQ has yanked the licenses of 600+ Chinese toy makers.  AQSIQ officials say they inspected 3,000+ toy makers (exporters) since August when the headlines broke in the USA and elsewhere over lead in toys and other defects.

 

 

The pressure on both China’s supply chain and their customers (end marketers such as Mattel) in the United States market.  Give China a good check-mark for its swift action.  The final results will be seen on the shelves of toy stores in the future – will tots’ toys be safer?  Let’s hope so.

 

 

The government in China has set new standards (based on designs and other factors) and will conduct safety checks going forward.  Good.  The promise:  “The overall quality of Chinese-made toys will be further improved and safety will be fully guaranteed.”  This will be a big promise to keep; China is the world’s largest toy maker and 20+ billion (“b”) toys were shipped in 2006.

 

 

And then there’s the food safety issue – remember the pet food contamination?  Some toxic compounds making their way into food destined for consumer tables?  The Chinese say the “QS” label will be applied to products coming from the almost 100,000 food makers and processors and bound for export markets.

 

 

On the horizon this year:  The world’s attention focused on China and the 2008 Summer Olympics.  No room for mis-steps here – many journalists and advocates are watching closely, including their focus on China’s human rights behavior.  So – the QS label will be on food that athletes and others involved in the Olympics consume.  (Visitors will also be looking for the label once word gets around.)

 

 

Give the government of China credit for recognizing the importance of being accountable and responsible to important constituencies in the ever-shrinking global village.  And credit for addressing issues more quickly now, as destination markets for their exports raise these issues.  Remember the slowness of the Chinese state’s reporting of flu cases?   The response on toys and food is a welcome sign of change.

 

 

Hank Boerner

 

Editor & Publisher

 

Accountability Central