We Are Not Always Happy When CEOs are Sentenced…


We don’t think anyone likes to see someone else go to jail for “white collar” crimes. “There but for grace…go I…” we might be thinking when we read about these cases.


Violent criminals, yes. Fraudsters who malicously and cunningly trick elderly folks into giving up their savings, yes, most likely. But jail for corporate executives…well, there’s often a lot of sympathy for someone “who strayed” rather than deliberately defrauded. That’s why the emerging [criminal] options backdating cases are so complex, and tend to draw criticism from supporters of the accused / convicted. As in this editorial from Silicon Valley. (Sending a 6-inch pile of supporting letters to the court, for example.)


Given the enormous wealth-building success of the Valley, with go-get-’em entrepreneurs teaming with savvy venture capitalists to build empires (Google, Intel, Apple, Cisco…et al) and reward shareholders, many folks benefitted from the unique stew of Silicon Valley brains-capital-can-do spirit-technical skills. Many employees of start-ups have become wealthy — that’s good.


But we remember back in the early 1990s when we talked about the importance of “governance” and “accountability” with Valley folks, including some of immense fame and money, there was a real skepticism about the surrounding issues. “Corporate Governance?” Something to blow off. “Corporate Accountability?” Only to build wealth.


My board, one CEO told us, are close friends and trusted alliles who know what we need — we don’t need “share-renters” to tell us what to do…


And as various committees of Congress would look at CEO pay and options, the committee members were first ignored and then bought off (healthy campaign contributions swayed most office-holders that the Valley Boys were right on comp issues). So the problems went away…for a time.


Because of the sea of options that Silicon Valley seemsto float on, there was bound to be trouble on the coastline…and so there was. Backdating options to favor the option-holder is an illegal activity if the acts are not disclosed or are covered up. Is this really a criminal practice? The law says so. Is it a breach of fiduciary duty? Famed investor Warren Buffett once thought so — he asked when all the option approvals were floating out of board rooms, if this is practice is not an expense to the taxpayers, a hit on their holdings, then what is it? (Paraphrasing Mr. B.) These options are not created out of the air, he said, with no impact on shareholder value. The impact is real — the shareholders lose money.


And so we come to the difficult decisions Federal Judge Charles Breyer must make regarding the sentencing of one of the Valley’s most upstanding and successful citizens, Greg Reyes of Brocade Communications.


The SEC is reported to be looking at 100+ potential cases of options backdating. The Wall Street Journal has a much longer list. The California-based “Audit Integrity” team has identified the practices that are symptoms of the disfunction surrounding board-backdating and projects that up to 600 companies that may have engaged in the process. (See details of Audit Integrity here)



This case if probably the first of a parade of similar federal court actions, depending on the Department of Justice’s appetite for CEO and even board prosecutions (the SEC recommends, the DoJ pursues the accused). Stay Tuned — it could be that the California sentencing sets the pace for other jurisdictions. (Note: The Northern California- and New York City-based US attorneys prosecute most of these types of cases.)


Hank Boerner


Editor & Publisher


Accountability Central



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