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Network Applicance's Warmenhoven: "Witch Hunt" in Silicon Valley

Here is an eye-opening interview between Business Week and Daniel Warmenhoven, who is chief executive of a major Silicon Valley company, Network Appliance.

In it, Warmenhoven says the SEC's investigations of companies for improper accounting and disclosure of stock-options grants has become a "Witch Hunt."

This whole scandal has become a concern for many innocent employees who got back-dated stock option grants from their companies even though they had nothing to do with the company's decision to do the back-dating, so we know Warmenhoven is speaking to friendly troups here.

Frankly, though, we're surprised that Warmenhoven wants us to just sweep it under the rug and forget about it. He says the SEC's role is to build investor confidence. Well, isn't this investigation designed to do just that?: To make sure companies abide by laws, and disclose what is required to be disclosed? What do other people think of the whole interview? We're confused by the logic in the second answer below. If the problem has gone away, then companies won't be found doing anything wrong, right? Let us know.

BW: What's your overall sense of the stock options scandal?

W: I think it's become a witch hunt.

I think the government is looking to find some egregious examples [of wrongdoing] and to publicly hang people for them. That's fine. But where does it stop? I'm not saying the past practices were all good. But I thought the SEC's role was to build investor confidence. What they're doing right now is destroying it, and I don't see the purpose.

They're penalizing today's shareholders for events that occurred five years ago. But who is this protecting, exactly? With Enron, every shareholder in the company lost money. The same with Qwest, and with MCI-Worldcom. But I don't know who the injured party is here.

BW: The victim was the investor, who was not getting accurate information about the options their companies were doling out. And in the case of backdating (in which shares are granted at prices below the market price on the day of the grant, guaranteeing the recipient paper profits), insiders were getting a better deal on shares than the company's public investors could get.

W: First of all, backdating options wasn't illegal. You just had to make sure you disclosed it and properly expensed them. And the laws have changed since [then]. Now, [because new regulations compel companies to expense all options, not just special cases like backdated "in the money"options], the basic fraud issue has by definition gone away. And let's not forget that most companies' options vest over four years, so most of the guys who got these grants in 1999 and 2000 never got a chance to cash out anyway (since most tech stocks are trading far below even the backdated prices).

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Dan is right in that the SEC and AGs are chasing the horse that left the barn (several years ago). The only ones that get penalised are those currently managing the companies (often not the ones involved in the crimes) and current shareholders (ditto).

However, as Dan also says, the SEC/AGs hands are forced and they don't have a choice. They can't remain silent or wish this would pass. They will catch some of the originals involved (e.g., Comverse, Mercury, etc.) There will be some collateral damage. Overall this will (sometimes) resemble a witch-hunt to those who kept their nose clean but if the larger lesson--don't do this again for the consequences are severe--is kept in mind, the cost is temporary and inconsequential in the larger picture and I'd even say, worth what it provides by way of improved transparency.

RoughJustice on August 15, 2006 3:18 PM
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Seems like you want it both ways. You're agreeing with Warmenhoven that this is a witch hunt, but you're also saying this SEC investigation is worth it. But Warmenhoven seems to be saying the whole problem has been made redundant, so not sure if this jibes.

Matt Marshall on August 15, 2006 6:47 PM
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Matt: to be concise, I agree with the gist of Dan's points as revealed in his interview. Most of those that were involved in these issues are gone and it is the new management/shareholders that are facing the music. So in a large sense, the horse left the barn a while ago (except in a few cases).

I go a bit further than Dan is in saying something like this may well be worth the cost as it will result in improved transparency and a sense of accountability and even fear amongst directors and executives. His comments in the interview indicate he sees only 10% of the cases egregious enough to merit SEC/AG action and the cost (to others uninvolved in these crimes) isn't worth the benefit as the problem is now a non-issue through new regulations re: disclosures.

RoughJustice on August 15, 2006 9:03 PM
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