From the March 2007 issue of Boomer Market Advisor • Subscribe!

Boomers and the backdating scandal

Bob Enright -- It began with good intentions, but now its political

Boomer Market Advisor: Since you're located in San Francisco, we know you're well versed in stock options. Is the current scandal as serious as reported, or is it politically motivated as part of the larger shareholder democracy movement?
Bob Enright: Initially, there were legs to the scandal as improprieties raised red flags. But from the data, one could conclude that it has become politically motivated. The story has spread and now they're on a mission to put the screws to anybody that didn't do things according to the generally accepted accounting principals. I think the U.S. Attorney General's office was motivated to take action by this massive wealth creation -- in Silicon Valley in particular. From a technical point of view, [options backdating] was improper. But from the, "where the rubber meets the road" point of view, what it meant to Steve Jobs and Apple's pocketbook, it really appears that regulators are splitting hairs.

BMA: What affect has it had on your clients and your business?
BE: These are perfectly legitimate business people that have the highest degree of integrity. Unfortunately, they hitched their wagon to a company that is under attack. The manner in which it is resolved may help or hinder their personal financial plans. Either way, John Q. Public won't feel sorry for them. But our clients are patient and clinging to the belief that they didn't do anything wrong. They believe they'll be vindicated, and if their companies are profitable, the value will transcend to the share price.

BMA: Do you think they simply received bad legal advice from in-house counsel before they backdated the options?
BE: Absolutely. This was -- although nobody's stepped up to admit this -- bad advice from technical experts. You grow a little empathy for high-level executives when they get bad information. Look no further than the president of the United States to see what bad intelligence can do.

Bob Enright is a partner with Burton/Enright Group, a financial planning firm with offices in San Francisco and Walnut Creek, Calif.

Richard Jay Cohn -- It's a serious issue, and reform is needed

Boomer Market Advisor: Is this a serious scandal that could affect where, and how, advisors place client assets?
Richard Jay Cohn: I think it's a serious issue. Whether or not the scandal is going to continue really depends on how regulators beef up the standards and criteria for the issuance of stock options. As far as how it affects an advisor, we're a pretty skeptical bunch anyway and this, of course, just adds to it. Any taint of scandal, in my opinion, reflects on management and their capacity to navigate their company safely and conservatively. And as advisors, that's what we're looking for when placing client assets.

BMA: We hear so much about how recent regulation intended to protect shareholders does more harm than good in the long run. Do you think it will happen with this most recent scandal?
RJC: I think it's really important for the industry to self-regulate. I believe that tougher guidelines will be proposed, and if the corporate world adopts these guidelines, it will go a long way in avoiding tougher legislation. The act of legislation is always the last resort, but in this case it probably is going to happen.

BMA: Some argue this is nothing more than a procedural mistake in the accounting department. Why is it such a serious transgression?
RJC: I think stock options are really a good thing. They're meant to attract strong managers and strong boards to a company. You have to offer them something to get top talent. In a larger context, though, stock options align the executive's interests with that of the shareholders. If the starting price of the stock option is manipulated, that alignment goes right out the window. At that point, the whole reason for issuing them in the first place becomes worthless.

Richard Jay Cohn is a financial advisor, lawyer and asset manager in Mill Valley, Calif.

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