Convictions
Over the past week the final verdict came in for two of the cases I blogged about on April 15th.
First, former CEO of KB Home, Bruce Karatz, was convicted for concealing the company’s backdating scheme and faces up to 80 years in federal prison. Mr. Karatz was found guilty on four counts including making false statements on a quarterly report filed with the SEC and making false statements to the company’s outside accounting firm, but was acquitted of 16 other counts including three counts of securities fraud (the most serious charges against him). Mr. Karatz, in pleading non-guilty to all charges, had claimed that he was falsely targeted as part of the governments crack-down on illegal back-dating. With only four out of 20 charges resulting in a conviction, it looks like even the testimony against him from the former KB Homes HR Director, Gary Ray, wasn’t enough for the SEC to get the big win they were looking for on this one. (See this Rueters article.)
Alternatively, former Maxim Integrated Product’s CFO, Carl Jasper was found guilty on eight out of 11 counts against him. Mr. Jasper had claimed that the backdating scheme was above his pay grade (so to speak) and that former CEO, Jack Gifford, was an unstoppable force heading up the practice. (See this Business Journal article.)
Both Mr. Karatz and Mr. Jasper intend to challenge their convictions.
Options Prevail!
Almost exactly one year after rejecting a proposal to ban stock options to senior executive officers (See this Associated Press article.), Pfizer shareholders got a second opportunity to vote on a very similar proposal. Once again, the proposal to eliminate all future option grants to executive officers was overwhelmingly rejected.
This year, the proposal was being brought by activist shareholder Evelyn Y. Davis, who obviously favors restricted stock over options, blaming the recent fluctuations in the market on “shenanigans” stemming from the granting of stock options. Coincidentally, shareholders did vote to give themselves an advisory vote on executive compensation, adding Pfizer to the list of companies engaging in some type of “say on pay.” (See this Yahoo! Finance article.)
I was thinking about this vote when I saw our own Broc Romanek’s April 17th Advisor’s Blog entry on CompensationStandards.com. He brought it to my attention that the Council of Institutional Investors published a checklist of the “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Compensation”. On that list is a call for stock options to be linked to performance, an approach to granting options that Ms. Davis seems to have missed.
If you’re looking for the best information available on executive compensation, you’ll be excited to know that your registration for the 18th Annual NASPP Conference includes a special bonus access to the 7th Annual Executive Compensation Conference! If you aren’t already registered, don’t miss out on the $200 discount that we are offering through May 14th. Register today!
-Rachel
Tags: executive compensation, Jasper, Karatz, KB Homes, Maxim, Pfizer, Say-on-Pay, shareholder vote
When it rains, it pours. After months of ho hum news on options backdating, we see four colorful backdating cases come across our desks: the Comverse Technology storythat Barbara blogged about on Tuesday, Maxim Integrated Projects, Brocade Communications, and KB Homes.
Dead Men Tell No Tales
Former Maxim Integrated Solutions CFO, Carl Jasper, finds himself facing civil securities fraud charges that he deliberately attempted to mislead investors and knowingly signed off on false financial statements. His defense is not, like many, that he was unaware of the backdating. Rather, Jasper’s defense is that it was out of his control. He contends that former CEO, Jack Gifford, conducted more than a bit of arm-twisting in the orchestration of the whole backdating practice at Maxim. Instead of “I was not aware,” his defense is “it was out of my control.” What’s more, Mr. Gifford is regrettably unavailable to confirm or deny Jasper’s defense, as he passed away in 2009. (See this Law.com article.)
This story and the Comverse saga illustrate that if you’re being forced to go along with something you know is wrong, sometimes your best alternative is to just walk away. Otherwise, you could find yourself accountable for wrongdoing when the person who actually made the decision is either dead or remains a fugitive. Not a happy thought.
Déjà Vu
The first CEO to be convicted by a jury in the backdating crackdown was re-convicted on March 26th. A federal jury found former Brocade Communications CEO, Gregory Reyes, guilty of 9 out of 10 counts against him (finding him not guilty of only the charge of conspiracy). Although Reyes was originally convicted in 2007, the conviction was thrown out on the basis of prosecutorial misconduct. (See this Bloomburg article.)
Reyes’s defense has been that it was the finance executives who were in charge of complying with accounting rules and they failed to tell him that the backdating Reyes was a part of was illegal. The defense didn’t work the first time, and it didn’t work at the retrial. In fact, as a bit of irony, the crux of the overturning of the 2007 conviction was that the prosecutor stated that the finance department didn’t know about the backdating, Reyes did, while only calling the one person in the finance department willing to confirm. It’s a convoluted web of finger-pointing. Ultimately, I think the courts have grown weary of assertions that executives were unaware that their actions were illegal.
Never Look Back
Closing arguments are under way in the trial of former KB Home CEO, Bruce Karatz, who had been using the standby backdating “I had no knowledge of any wrongdoing” defense. Recently, however, the former KB Homes HR Director, Gary Ray, threw a wrench in the gears by testifying against Karatz. According to Ray, Karatz told him to “put the best interests of the company ahead of the truth” and cover up the instances of backdating. Even more colorful, Ray testified that Mr. Karatz told the company’s chief legal officer, “We don’t look back. We’ve never looked back. It’s not something we do in this company.” (See this LA Times article.)
The moral? I guess it goes both ways. First, we can see that adequate controls will (eventually) uncover fraudulent practices. On the other side of the coin, trying to keep the knowledge of illegal practices within the company isn’t the best safety net and, ultimately, isn’t in the best interest of the company nor the individuals involved.
Today is the Day!
Barbara keeps a great “To Do” list at the end of each of her blog entries, but I want to really highlight the early-bird discount deadline. It’s today! Register now to get in on the $300 discount for our 18th Annual NASPP Conference.
If you want a spectacular deal, complete the 2010 Domestic Stock Plan Design Survey for an additional 10% off registration.
-Rachel
Tags: backdating, Brocade, Comverse, Jasper, Karatz, KB Home, Maxim, options, Reyes