5 ms·

There's a big difference between going to your general counsel and asking "Is this legal?" and going to your accountants and saying "Find me a way to make this

There's a big difference between going to your general counsel and asking "Is this legal?" and going to your accountants and saying "Find me a way to make this legal enough." I think the options-backdating was an example of the latter.

smsm42 13y ago
In the case described in the story, I don't see any signs of the former. The CFO proposes certain practice, it is not obviously illegal (like not paying taxes or stealing office supplies from competitors at night), hundreds of companies do it, hundreds of lawyers approve it. If the CEO asks the council if it's OK and the council says yes, like hundreds others did, he goes to jail. If he's lucky and the council says no, he gets to write a book "how I almost went to jail but my super-smarts saved me". In both cases I don't see how this situation is good.
- dandelany 13y ago
  Sorry to be a nitpick, but just FYI in the case of legal advice, it's "counsel" not "council" :)
  - cperciva 13y ago
    Theoretically, your legal counsel might consist of a council of lawyers. ;-)
  - smsm42 13y ago
    You're right, I noticed it after I wrote it that I used the wrong word but was too lazy to fix it until it was too late :) Also, the "former" should be "latter" in the post. Too late to fix that too. But I think the meaning was clear anyway.
- RockyMcNuts 13y ago
  hmmh... a manager changing the date on a contract after the fact so it generates more money for him/her is actually pretty obviously a red flag. Kudos to Ben for doing the right thing. If the government couldn't prove beyond a reasonable doubt to a jury that it was wrong, she wouldn't have gone to jail. (Not saying innocent people never go to jail, but it's not like she was an indigent defendant, she had a lot of resources and incentives to fight if it was defensible)
  - x0054 13y ago
    That's not true at all. This is a federal system, and she probably plead guilty because her choices probably were plead guilty and get 3 months in jail or plead innocent, go to trial, and get 20 years. The federal system is beyond fucked up, and they are making it worse every year.
    - Spooky23 13y ago
      Exactly. Someone decided that this individual needed to be made into an example and go to jail for some nominal amount of time. Period. Go to trial, and they would find some statement made in hours of interrogation that wasn't 100% accurate, and convict her of lying to a Federal officer.
      - RockyMcNuts 13y ago
        This is the USA, don't talk to the authorities without a lawyer, and don't say anything if you can't say the truth. If she doesn't know that she has no business being a CFO.
  - einhverfr 13y ago
    If the contract is to create another contract effective at a specific date based on what makes more money for the employee, that raises no red flags in my mind from a legal perspective or an accounting principles perspective. Unfortunately those are not the only things at issue. One key thing involved is uniformity from an investor's perspective and I think that's where the idea runs off the rails.
- deong 13y ago
  I'm not sure that conclusion is warranted. Here's what we know: 1. Loads of companies were doing it. 2. When this company wanted to do it, their counsel said it was illegal, so they didn't. Given those facts, we can't say that the other 200 companies were simply flummoxed by a too-complex regulatory framework. They may just have well had their own meetings and said, "This looks fishy, but everyone else is doing it, and we get more money." Or maybe they did no due diligence at all, and just did it anyway. Once caught, obviously many people would claim an honest misunderstanding, whether or not there was one. Frankly, I'm skeptical of the whole, "the jail sentences were handed out arbitrarily" angle. It seems the opposite of arbitrary -- the person who instituted an illegal policy in multiple companies was punished. The law may be complex, but when you're making C-level salaries, I'm sorry but you're expected to figure out if you're committing a crime or not.
  - 001sky 13y ago
    Yes. Don't discount that #2 follows from #1.
  - smsm42 13y ago
    I'm not saying it was arbitrary from regulator's side. I am saying it would be arbitrary for you because you won't know if you're in the wrong or not. >>> but when you're making C-level salaries, I'm sorry but you're expected to figure out if you're committing a crime or not. I'm not sure how it has anything to do with the salary. I'm sure whichever lawyers OKed this practice - and I would find it very hard to believe hundreds of companies would just decide to wing it without asking a lawyer - I'm sure they were paid enough. They just thought it'd be OK, but they were wrong. How the salary helps to deal with that? Unless you're claiming the salary is just compensation for the possibility of being jailed for something you have no idea you were doing wrong. In which case I'd prefer a system with more transparent laws and lower CEO salaries.
    - deong 13y ago
      The "arbitrary" I was referring to was from the article -- a direct quote from Horowitz. I'm saying that if knowing things like the legal requirements for running a company isn't expected to be part of your job, then you should pay someone a hell of a lot less to do the job than most executives are paid. If you just want someone to wing it, give me a call -- I'll work for probably 10% of the salary. It's not that the salary is compensation for the possibility of going to jail. It's that compensation correlates with responsibility. If you hire a programmer for $250,000 a year, you damn well expect him or her to be better, more responsible, and more independent than one you're paying $50,000 a year. If not, then what are you paying 5x as much for? So if I hire a CFO at say, $3.5 million a year plus stock options and all the other perks (that's Google's CFO compensation at the moment), what am I paying for if I can't assume that they won't have bothered to figure out the accounting laws? Also, you're assuming that companies would be innocent, unknowing participants here. That's an assumption that, very often, turns out to be false when we have occasion to check. I don't think all those valley companies thought they were allowed to enter into those wage-dampening agreements, but they still did it. I don't think that was an honest mistake or misunderstanding of the law. I don't think Enron, Tyco, Global Crossing, AIG, and a million other examples thought they were shining beacons of moral virtue victimized by a complicated legal system either. People, and by extension corporations, will quite often break or at least flirt with breaking the law in exchange for money. You're asking me to just take your word for it -- sort of a "well obviously we didn't mean to do anything wrong" defense. It isn't obvious.
- jessedhillon 13y ago
  In the case described in the story, I don't see any signs of the former. Good thing we have more than just a blog post on the options backdating scandal, as it's a well-known scandal https://en.m.wikipedia.org/wiki/Options_backdating#Overview_of_options_backdating_scandals https://en.m.wikipedia.org/wiki/Options_backdating#Overview_... http://usatoday30.usatoday.com/money/companies/regulation/2007-05-31-option-backdating-finscandals http://usatoday30.usatoday.com/money/companies/regulation/20... Options backdating was a big fucking deal a few years ago. The CFO proposes certain practice, it is not obviously illegal (like not paying taxes or stealing office supplies from competitors at night) It's not obviously illegal to lie about the date on which you granted an employee his/her options?
grandalf 13y ago
For an early stage startup, options value doesn't really change much month to month, since it is typically only determined at funding events. In such a scenario, the price of option grants is purely strategic. But for a publicly traded company, backdating may change the financials presented to investors unless the math is done and the changed numbers are explicitly presented.

smsm42 13y ago

In the case described in the story, I don't see any signs of the former. The CFO proposes certain practice, it is not obviously illegal (like not paying taxes or stealing office supplies from competitors at night), hundreds of companies do it, hundreds of lawyers approve it. If the CEO asks the council if it's OK and the council says yes, like hundreds others did, he goes to jail. If he's lucky and the council says no, he gets to write a book "how I almost went to jail but my super-smarts saved me". In both cases I don't see how this situation is good.

dandelany 13y ago
Sorry to be a nitpick, but just FYI in the case of legal advice, it's "counsel" not "council" :)
- cperciva 13y ago
  Theoretically, your legal counsel might consist of a council of lawyers. ;-)
- smsm42 13y ago
  You're right, I noticed it after I wrote it that I used the wrong word but was too lazy to fix it until it was too late :) Also, the "former" should be "latter" in the post. Too late to fix that too. But I think the meaning was clear anyway.
RockyMcNuts 13y ago
hmmh... a manager changing the date on a contract after the fact so it generates more money for him/her is actually pretty obviously a red flag. Kudos to Ben for doing the right thing. If the government couldn't prove beyond a reasonable doubt to a jury that it was wrong, she wouldn't have gone to jail. (Not saying innocent people never go to jail, but it's not like she was an indigent defendant, she had a lot of resources and incentives to fight if it was defensible)
- x0054 13y ago
  That's not true at all. This is a federal system, and she probably plead guilty because her choices probably were plead guilty and get 3 months in jail or plead innocent, go to trial, and get 20 years. The federal system is beyond fucked up, and they are making it worse every year.
  - Spooky23 13y ago
    Exactly. Someone decided that this individual needed to be made into an example and go to jail for some nominal amount of time. Period. Go to trial, and they would find some statement made in hours of interrogation that wasn't 100% accurate, and convict her of lying to a Federal officer.
    - RockyMcNuts 13y ago
      This is the USA, don't talk to the authorities without a lawyer, and don't say anything if you can't say the truth. If she doesn't know that she has no business being a CFO.
- einhverfr 13y ago
  If the contract is to create another contract effective at a specific date based on what makes more money for the employee, that raises no red flags in my mind from a legal perspective or an accounting principles perspective. Unfortunately those are not the only things at issue. One key thing involved is uniformity from an investor's perspective and I think that's where the idea runs off the rails.
deong 13y ago
I'm not sure that conclusion is warranted. Here's what we know: 1. Loads of companies were doing it. 2. When this company wanted to do it, their counsel said it was illegal, so they didn't. Given those facts, we can't say that the other 200 companies were simply flummoxed by a too-complex regulatory framework. They may just have well had their own meetings and said, "This looks fishy, but everyone else is doing it, and we get more money." Or maybe they did no due diligence at all, and just did it anyway. Once caught, obviously many people would claim an honest misunderstanding, whether or not there was one. Frankly, I'm skeptical of the whole, "the jail sentences were handed out arbitrarily" angle. It seems the opposite of arbitrary -- the person who instituted an illegal policy in multiple companies was punished. The law may be complex, but when you're making C-level salaries, I'm sorry but you're expected to figure out if you're committing a crime or not.
- 001sky 13y ago
  Yes. Don't discount that #2 follows from #1.
- smsm42 13y ago
  I'm not saying it was arbitrary from regulator's side. I am saying it would be arbitrary for you because you won't know if you're in the wrong or not. >>> but when you're making C-level salaries, I'm sorry but you're expected to figure out if you're committing a crime or not. I'm not sure how it has anything to do with the salary. I'm sure whichever lawyers OKed this practice - and I would find it very hard to believe hundreds of companies would just decide to wing it without asking a lawyer - I'm sure they were paid enough. They just thought it'd be OK, but they were wrong. How the salary helps to deal with that? Unless you're claiming the salary is just compensation for the possibility of being jailed for something you have no idea you were doing wrong. In which case I'd prefer a system with more transparent laws and lower CEO salaries.
  - deong 13y ago
    The "arbitrary" I was referring to was from the article -- a direct quote from Horowitz. I'm saying that if knowing things like the legal requirements for running a company isn't expected to be part of your job, then you should pay someone a hell of a lot less to do the job than most executives are paid. If you just want someone to wing it, give me a call -- I'll work for probably 10% of the salary. It's not that the salary is compensation for the possibility of going to jail. It's that compensation correlates with responsibility. If you hire a programmer for $250,000 a year, you damn well expect him or her to be better, more responsible, and more independent than one you're paying $50,000 a year. If not, then what are you paying 5x as much for? So if I hire a CFO at say, $3.5 million a year plus stock options and all the other perks (that's Google's CFO compensation at the moment), what am I paying for if I can't assume that they won't have bothered to figure out the accounting laws? Also, you're assuming that companies would be innocent, unknowing participants here. That's an assumption that, very often, turns out to be false when we have occasion to check. I don't think all those valley companies thought they were allowed to enter into those wage-dampening agreements, but they still did it. I don't think that was an honest mistake or misunderstanding of the law. I don't think Enron, Tyco, Global Crossing, AIG, and a million other examples thought they were shining beacons of moral virtue victimized by a complicated legal system either. People, and by extension corporations, will quite often break or at least flirt with breaking the law in exchange for money. You're asking me to just take your word for it -- sort of a "well obviously we didn't mean to do anything wrong" defense. It isn't obvious.
jessedhillon 13y ago
In the case described in the story, I don't see any signs of the former. Good thing we have more than just a blog post on the options backdating scandal, as it's a well-known scandal https://en.m.wikipedia.org/wiki/Options_backdating#Overview_of_options_backdating_scandals https://en.m.wikipedia.org/wiki/Options_backdating#Overview_... http://usatoday30.usatoday.com/money/companies/regulation/2007-05-31-option-backdating-finscandals http://usatoday30.usatoday.com/money/companies/regulation/20... Options backdating was a big fucking deal a few years ago. The CFO proposes certain practice, it is not obviously illegal (like not paying taxes or stealing office supplies from competitors at night) It's not obviously illegal to lie about the date on which you granted an employee his/her options?

grandalf 13y ago

For an early stage startup, options value doesn't really change much month to month, since it is typically only determined at funding events. In such a scenario, the price of option grants is purely strategic. But for a publicly traded company, backdating may change the financials presented to investors unless the math is done and the changed numbers are explicitly presented.