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NewsNotables – Issue 54

SEC Steps Up Backdating Pursuit

The Wall Street Journal, June 1, 2007
The Security and Exchange Commission sued Mercury Interactive Corp. and four of its former executives, alleging a litany of violations related to a long-running options backdating scheme, and signaling clearly that it would pursue companies in addition to individuals for backdating offenses.

The agencies complaint illustrates the many ways options backdating can contravene laws and regulations. The practice led to illicit profits for the former executives, deceived investors about the company’s financial performance, ran afoul of a shareholder approved plan explicitly forbidding a certain type of option and allowed them to cheat on their personal taxes by underreporting options related income.

Mercury settled the SEC’s charges without admitting or denying them. Mercury will pay a $28 million penalty. According to the SEC, the former executives regularly reached back in time weeks or months to select days when Mercury’s stock was trading at a favorably low point, then created phony board minutes and other documents to assert the grants had been made on those dates. The SEC uncovered an internal written email to top Mercury officials in 2000 stating that backdating “is illegal and causes a charge to earnings.”

Comment: You are all probably tired of reading about company executives backdating stock options, but it continues. I was in a position for many years to hand out stock options to top employees and never considered backdating stock options. To this day, I remain amazed at how wide-spread this practice was. I also admit to being a little naïve. It also continues to amaze me how you can settle “without admitting or denying” the charges and pay a $28 million penalty. This looks like an admission to me. It’s more than an admission, it’s downright fraud and should be prosecuted.

Wolfowitz Resigns From World Bank, Succumbing to Pressure After Girlfriend’s Big Pay Hike

The Seattle Times, May 17, 2007
World Bank President Paul Wolfowitz will resign at the end of June ending his long fight to survive pressure for his ouster over the generous compensation he arranged for his girlfriend. His departure ends a two-year run at the development bank that was marked by controversy from the start, given his previous role as a major architect of the Iraq War when he served as the No. 2 official at the Pentagon.

Wolfowitz was all but forced out by the finding of a special World Bank panel that determined he violated conflict-of-interest rules using his position as president to secure a generous compensation package for his girlfriend, dictating the terms of her compensation, including pay increases and promotions. The panel stated that the entire episode involving Wolfowitz’s handling of the pay package “underscores that there is a crisis in the leadership of the bank.”

The controversy was seen as a growing liability that threatened to tarnish the poverty-fighting institution’s reputation and hobble its ability to persuade countries around the world to contribute billions of dollars to provide financial assistance to poor nations.

Comment: The seven-board-member panel delivered a strongly worded report to Mr. Wolfowitz that he had ran afoul of ethics rules, which was very apparent in their findings. Violation of ethics rules was enough to call for his resignation, and it had compromised his ability to do his job effectively.

Wal-Mart Chief Bought Ring From Firm’s Vendor

The Wall Street Journal, May 30, 2007
Chief Executive Officer H. Lee Scott, who recently was accused by a fired marketing executive of accepting sweetheart deals from suppliers, purchased a diamond ring from a Wal-Mart vendor, according to that vendor’s officials. Mr. Scott purchased the ring for his wife from the Aaron Group, a wholesale supplier of jewelry to Wal-Mart according to Mr. Kempler, the president of the New York-based company. He said Mr. Scott did not receive preferential pricing.

Wal-Mart’s famously strict ethics code prohibits employees from receiving anything free from suppliers. The former marketing executive who was fired in December for allegedly violating Wal-Mart’s ethics rules, claimed in a federal court filing that Mr. Scott obtained “a number of yachts” and “a large pink diamond” at preferential prices.

Mr. Kempler claimed everything about the transaction was “above board.” A Wal-Mart spokeswoman said Mr. Scott “is subject to the same ethics policy as any other associate and has not violated either the spirit or the letter of Wal-Mart’s ethical standards.” She characterized the allegations as “old news.”

Comment: Mr. Scott shouldn’t have been doing business with any vendor, even if the deal was in accordance with Wal-Mart’s ethics rules. Someone at that level should avoid dealing with company vendors. It sends the absolute wrong signal to the rest of the organization, particularly one that prides itself on its relationship with vendors.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics

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