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NewsNotables – Issue 55

“Rahodeb”: Whole Foods Hot, Wild Oats Not

The Wall Street Journal, July 12, 2007
In January 2005, someone using the name “Rahodeb” went online to a Yahoo stock market forum and posted this opinion: “No company would want to buy Wild Oats Market Inc.,” a natural foods grocer at its price then of about $8 a share. “Would Whole Foods buy OATS?” Rahodeb asked. “Almost surely not at current prices. What would they gain? OATS locations are too small.” Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5 a share. Later, Rahodeb wrote that Wild Oats management “clearly doesn’t know what it is doing … OATS has no value and no future.”

Such banter is typical on Internet message boards, but this writers’ identity was very unusual. Rahodeb was an online pseudonym of John Mackey, co-founder and CEO of Whole Foods Market Inc. Remarkably (?), in February 2007, his company agreed to buy Wild Oats for $565 million, or $18.50 a share, substantially more than the $8 or $5 mentioned in his Internet posting.

Mr. Mackey’s online alter ego came to light in a document made public by the Federal Trade Commission in a lawsuit seeking to block the Wild Oats takeover on antitrust grounds. The FTC sued to block the deal, saying it would reduce competition. Its suit quotes the CEO as telling board members the takeover would reduce competition, avoid nasty price wars and reduce the risk that a bid from a conventional grocer would create a competitor to Whole Foods.

Comment: I found a Rahodeb posting of April 19, 2005, very interesting. “Whole Foods is undervalued and OATS very much overvalued. There is no value in OATS, its run is near the end, stock could be flat to negative for years, the fundamentals need to catch up, bad company, risky investment.”

For an executive to use a pseudonym to praise his company and stock price isn’t per se illegal. It’s clear he was trying to influence the stock prices of both companies and if anything is inaccurate or selectively disclosed he would certainly be in violation with the law. At a minimum, it’s bizarre, ill advised and, I believe, unethical.

Online Studies’ Deceit of Online Studies Ethical Questions

The Seattle Times, July 23, 2007
An email appeared to be a routine correspondence between two friends. “Check this out!” it read, then listed a Web address. But the note was fake, part of an online ruse called phishing that has become a scammer’s favorite way to get sensitive information from unsuspecting computer users. The catch was that the scammers were Indiana University researchers.

Hundreds of unsuspecting people were used as “passive participants” for an experiment to study who gets duped by phishing. Indiana researchers say the best way to understand online security is to act like the bad guys.

The University has conducted several experiments in the last two years. One study learned mothers’ maiden names and another found that 72 percent of students tested fell for an email seeking usernames and passwords.

An anti-phishing group at Carnegie Mellon said controlled laboratory studies can be just as useful. The school has developed an online tool accessible only from its labs to lead participants through scenarios based on actual phishing attempts. The experiment seeks to determine which methods work the best at deceiving users.

Federal laws governing university research allow scientists to use deceptive means if the risk participants face is minimal and no greater than what they would face in real life.

Comment: The methods at Indiana and other universities raise ethical questions for researchers: Does one have to steal to understand stealing? Should study participants know they are being used or attacked as part of a study? Can controlled phishing ever mimic real life?

Critics See Some Good From Sarbanes-Oxley

The Wall Street Journal, July 30, 2007
Invitrogen Corp. spent about $2.5 million and 10,000 hours last year reviewing its inventory-counting procedures, computer-system access, and other internal controls. The checks, required by Sarbanes-Oxley found small gaps in documentation but no hint of accounting fraud. The biotechnology company officials think the costs are excessive. But they say Sarbanes-Oxley helped to spur other changes that made Invitrogen a better run business.

Several changes at Invitrogen are: Directors meet more often without executives present, multiple ombudsmen field employee complaints, ethics training is more rigorous, and CEO Greg Lucier requires his lieutenants to take more responsibility for their results.

Sarbanes-Oxley, now five years old, passed by Congress in the wake of scandals at Enron, Worldcom and others, has proved costlier than executives would have liked. By the end of this year, U.S. public companies will have spent more than $26 billion to comply, estimates AMR Research. Even critics acknowledge the law has done some good. “There is without question greater accountability in the boardroom,” says an official of the Business Roundtable, a Washington group representing big company CEOs. More boards resolve potential problems “before they fester and explode,” concurs John Olson, a senior partner at Gibson, Dunn & Crutcher.

Comment: The controversy of substantial time and cost vs. value received will long be debated by company executives, shareholders, and the SEC. It probably fits into the 80/20 rule, where 20 percent of the additional procedures provide 80 percent of the benefits. Continued refinement to produce real value and eliminate unnecessary procedures will make everyone a winner.

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

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