Taking stock of finances

01 September 2006

A cynic would say that the only thing we learn from history is that we do not learn anything from history. Five years ago, as Enron filed for bankruptcy, the depths of conspiracy and fraud at the US energy company began to be uncovered.

A cynic would say that the only thing we learn from history is that we do not learn anything from history. Five years ago, as Enron filed for bankruptcy, the depths of conspiracy and fraud at the US energy company began to be uncovered. The effects from the financial scandals of Enron and then Tyco are still rumbling on. Andrew Fastow will be sentenced next month after being found guilty of 19 counts of conspiracy and fraud. Robert Lay, Enron’s then-CEO died of a heart attack in July, before sentencing.

Enron’s collapse was shocking because of its scale. Investors, employees and shareholders were deceived as executives hid debt, inflated profits and supported the stock price to overstate Enron’s value, before filing for bankruptcy. Enron executives received multimillion dollar fines, with Fastow alone being
fined $23million in May and facing five to 10 years in jail for each count.

A string of semiconductor companies are reviewing stock option practices, some with more arm twisting from the authorities than others.

In June, the board of directors and some officers at Xilinx faced legal action from shareholders, alleging they authorised or failed to stop the backdating of certain stock options. The company denies issuing false and misleading proxy statements in 2002 and 2003 announcing an adjustment of corporate governance in May.

The legacy of Enron is a greater awareness that has led to a flurry of companies reviewing governance and practices. The Securities and Exchange Commission (SEC) is investigating Broadcom after the company began an independent review of stock option grants in May. The SEC has also launched an informal enquiry on stock option practices and procedures at Linear Technology. The company is also facing two stockholder lawsuits for alleged improper backdating of stock options granted to the board of directors and executive officers between 1995 to 2002.

Semtech is also reviewing its stock option practices while facing a lawsuit from two stockholders relating to stock option practices and a subpoena from the New York district attorney to produce stock option documents.

An internal investigation into stock option granting dates has been launched at Power Integrations. The chairman and CFO have resigned and a committee to investigate company practices has been set up. Altera is also investigating stock option timings betweem 1996 to 2000 internally. The SEC has also become involved in Altera’s internal investigation.

Even, the choirboy of electronics, Apple, has launched an internal investigation into stock option irregularities for grants made between 1997 and 2001. Rambus and M-Systems have also started internal investigations concerning the granting of stock options.

Lawsuits are being filed by stockholders across the valley, perhaps increasing the awareness of companies of their accountability and responsibilities. Principally, Vitesse Semiconductor faces a class action suit from shareholders for faulty financial reporting. It is alleged that Vitesse issued false and
misleading financial statements during December 2001 and September 2005. CEO Lousi Tomasetta, CO Yatin Mody and executive vice president Eugene Hovanec were sacked after a brief period on ‘garden leave’.

A suit has also been filed against Maxim Integrated Products, some of its officers and directors. The company is adamant that the action is a reaction to various reports about semiconductor companies and that the lawsuit ‘is without merit’.

Analog Devices has received a subpoena from the New York District Attorney requesting records from 2000 to May 2006, relating to its stock option grants. The company claims that the options in question are those being investigated by the SEC, investigating options to employees, including officers and directors, in November 2000.

This level of investigations and actions could be seen as negative. However it could also prove to be positive. It was the ‘smoke and mirrors’ of financial manipulation that plunged Enron so deeply into financial trouble without any warning signs or alarms. Could the lesson that vigilance and transparency are vital for market confidence and stability have been learned? Only time will tell if the new attitude is an embrace of virtue or a fear of being caught, knowing ignorance will not be accepted as an excuse by peers and shareholders.

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