Column: What Options Scandal?

Letter From Silicon Valley

07.05.06, 6:00 AM ETBurlingame, Calif. -
Only the pushy succeed in Silicon Valley.

Only the people with a bullheaded belief that they're right persevere when others laugh at their ideas. Only people willing to push the envelope, to break the rules of civility, can nail a big sale to a skeptical customer. Or transform a concept into a company worth billions.

Most of the time, we celebrate this against-all-odds spirit of Silicon Valley. And periodically, we change our minds.

That's why Valleyites feel so beleaguered about the options controversy that's enveloping one public company after another, decimating stock prices as it spreads. Outsiders don't get it, they argue: If they want companies who push the limits in their companies, they're going to get companies who do the same thing with their balance sheets.

Most of the scandals center on options granted during and after the last tech boom, before a new set of rules regarding pricing, reporting and expensing were set in place. Look hard at how options pricing happened in those days, when the rules were fuzzy, and you'll conclude that executives--along with their legal and accounting advisers--did what they do in every part of their jobs. They pushed the envelope. What's not explicitly forbidden is permitted was the rule of the day.

A few weeks ago, senior partners at the San Francisco law firm Morrison & Foerster, which counts some of the Valley's top companies among its clients, invited a group of reporters for a lovely lunch and a friendly chat about stock options pricing. They put the problems into three categories: a very tiny number of truly nasty practices, such as altering documents; "technical housekeeping problems"--in other words, folks who were just too darn busy to bother filing their options paperwork on time; and companies trapped in the "gray" zone of previously ambiguous laws.

Corporate executives are supposed to create value for shareholders--and part of doing that means getting the smartest and most creative employees to stay at the company, the lawyers pointed out.

"You're supposed to provide strong 'handcuffs,' " not simply to enrich people but to keep them at work, said partner William Sherman, who has been involved with about 250 public offerings.

And executives were supposed to price options wisely, Sherman argued. "If you believe that a market analyst is going to put out a report--say, on the semiconductor industry's increasing book-to-bill ratio--isn't it smart to do options grants at a time when there will be less dilution to shareholders?" Translation: If management thinks the stock might rise on positive news about the sector, shouldn't they grant options quickly before the corporate stock rises? "There's nothing that says it's wrong," Sherman insisted.

The bottom line: If you reward people for pushing the envelope of technology, for working overtime to get that next sale, you shouldn't be surprised if they have similarly pushed the understanding of how to reward themselves and their colleagues.

Was it right? Not from the point of view of shareholders.

"Is this a criminal offense?" one of the reporters at the luncheon asked the Morrison & Foerster partners.

Eugene Illovsky, a partner and formerly an assistant U.S. attorney in the criminal division in the U.S. attorney's office in Sacramento, looked distinctly uncomfortable.

"Is it stealing?" the reporter persisted. "The money comes from the public market. The company isn't paying for it."

Illovsky paused. "We'll see creative prosecutors come up with interesting theories," he said.

Last week, Apple Computer acknowledged that it, too, is taking a look at the "irregularities" of its past options granting program. That put Apple, widely proclaimed as one of the most innovative, envelope-pushing companies in Silicon Valley, on a list with about 19 other Valley companies all now scrutinizing how they rewarded their best and brightest.

The only surprise is that the list is so short.

http://www.forbes.com/2006/07/01/options-technology-scandal_cz_ec_0705valleyletter_print.html

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