<i>First, when we started the company, Marc and I agreed that the company’s General Counsel would always report directly to me. This is different than in many technology companies where the General Counsel reports to the Chief Financial Officer.</i><p>This needs to be in bold 72-point font. Corporate behaviour aligns with corporate structure, and if the General Counsel is subordinate to the Chief Financial Officer, complying with the law will inevitably be secondary to making money.<p>If you want to avoid jail time, you should either have General Counsel reporting to the CEO or General Counsel / Chief Legal Officer appointed by and reporting to the board.
What I take from this story is that the financial law is so complex and unapproachable one can not reliably navigate it without landing in jail, even being a seasoned professional. The author's council could have given him "yes" answer as easily as "no" answer - many other lawyers obviously did since 200 companies got "yes" answers from their councils. And he'd never known anything was wrong. Basically, one can become a criminal not only without knowing he's doing anything wrong, but even without a theoretical way of finding it out - unless you survey all the lawyers you can find, you can not know if a yes from your lawyer would land you in jail or not, and you have no chance of understanding the law even if you spend years studying it - ultimately, the only thing that matters is the word of the enforcers on how they understand it.<p>It's like living in the same apartment with alcoholic gorilla prone to random outbursts of violence. One day it eats too much of fermented fruit and you're toast. And you have no way of knowing when it happens. Maybe you'll get lucky and you'll be out that day. Maybe you won't.<p>If I had code that is that bad and unpredictable and nobody knew if it would work or not except by seeking an opinion of a soothsayer which nobody can validate until it's too late, and it would be prone to random catastrophic failures which nobody can predict or find out why they happened, even seasoned professionals, I'd say not even refactor it. Just bury it and start from the design up again and redo the whole thing. That's pretty much the financial code we have now, as far as I can see. Good thing I have to deal just with segfaults and buffer overruns...
or "How I Hired a White Collar Criminal And Avoided Jail"<p><i>"On May 31, 2007, the Commission charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint alleges that during this period certain of these executives, including Abrams, backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses."</i> -- <a href="http://www.sec.gov/litigation/litreleases/2009/lr20964.htm" rel="nofollow">http://www.sec.gov/litigation/litreleases/2009/lr20964.htm</a><p><i>"Federal prosecutors obtained an indictment against Abrams in 2008 for income tax evasion and aiding in the preparation of false tax returns."</i> -- <a href="http://www.reuters.com/article/2010/09/09/mercury-plea-idUSN0920738920100909" rel="nofollow">http://www.reuters.com/article/2010/09/09/mercury-plea-idUSN...</a><p>Calling these "mistakes" is highly disingenuous.
This looks one of those cases that could have gone like this:<p>"Someone proposed an idea that was perhaps technically legal, but obviously failed the sniff test of ethics and spirit of the law. I reminded her of what I repeatedly tell our staff at welcome/training meetings: At this company, we do what is right, for our employees, our customers, our investors, and the public. We don't mislead one to help another. We don't waste time splitting hairs about whether something smells bad or is totally rotten. If we're not proud enough of an action to want to see it on the cover of the New York Times, we just don't do it."
Just as it's hard to tell if someone's a good coder without yourself being a good coder, it's hard to tell if an attorney or financial expert is giving you good advice without seeking for yourself a basic understanding of the legal or financial issues. A good attorney or financial expert will help you understand the issues enough for yourself to see why their evaluation makes sense. It's not good enough to just completely outsource responsibility to someone else.<p>Always do and trust own analysis (with an attorney or expert you trust when needed) instead of falling for the lure of "it's fine with these other experts so it should be fine for us." That's a recipe for a herd mentality random walk through and across the gray areas of the matter.
1. Backdating stock options per se is not what's the legal problem -- it's that failing to account correctly for the resulting compensation charges ("comp charges") can result in materially-false filings with the SEC.<p>2. It's a different problem as far as the internal politics are concerned. When a company properly records such comp charges in its financial statements, can depress a company's financial results and with it the stock price. Hence, there's an incentive to avoid recording such charges if at all possible.<p>3. Now consider the interest groups / constituencies and their incentives:<p>+ Employees, sometimes vociferously, want the lowest strike prices they can get for their stock options -- that can be especially true for executives who have big grants -- and they want the stock price to be as high as possible (hence they're not wild about recording comp charges).<p>+ Board members would like to keep employees happy, especially executives, and of course themselves and their fellow board members, if they can. Issuing options with an in-the-money strike price can often appear to be a cost-free way of promoting general happiness.<p>+ On the other hand, the constituencies that have a strong interest in strict legal compliance -- mainly the law and finance departments -- are often weaker politically than the ones who want the low strike price and the high stock price.<p>As a result, there can be a lot of subtle pressure on a CFO. Employees and even senior executives can say, "look, doing this in-the-money option grant, <i>without</i> recording a comp charge, is OK with our audit firm and with our outside counsel --- what's <i>your</i> problem? Why shouldn't we rely on them?"<p>(The unstated subtext being, <i>they're the experts, not you, and we like their answer better than yours.</i>)<p>Finally, let's not forget that outside accounting- and law firms are motivated to keep their clients happy, to be perceived as team players, and ultimately to get hired for repeat business. They definitely have incentives to tell clients what they want to hear if they can possibly do so. Stir in the fact that when these professionals can come up with "creative" ways to make their clients happy, they gain in reputation with other potential clients and with their professional peers.<p>All this means that the company's senior executives and its compensation and audit committees need to be willing and able to stand up to the pressures the other way. That's been made easier by the news reports of people going to jail and being permanently barred from serving as officers or directors of public companies.
Accounting compliance is serious business, for the simple reason that when irregularities cause a company to restate its books and tens of millions of dollars just vanish, it can be very difficult to tell the difference between honest mistake and purposeful manipulation.<p>That said, there is a bit more to the story than revealed in the article. From what I can tell, the criminal charges and jail time was for income tax evasion in connection with the backdating of stock options: <a href="http://www.law360.com/articles/229277/ex-mercury-cfo-gets-4-months-for-tax-evasion" rel="nofollow">http://www.law360.com/articles/229277/ex-mercury-cfo-gets-4-...</a>. Specifically, the process of her backdating her options resulted in her filing tax returns understating her income: <a href="http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams.guiltyplea.press.pdf" rel="nofollow">http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams....</a>.
I really enjoyed reading this story. Now imagine being in this situation if you don't have a Jordan: you've got this super reputable head of finance who implemented this great option granting process at another huge company (PwC in this case) that was approved by their accounting team, how do you figure out if the process is legit? Where do you find people like Jordan?
So the moral of the story is don't buy into accounting gimmicks that you don't /can't understand.<p>If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.<p>On another note:<p>Holy shit Terry is back with a new account.<p>I've missed you Terry!
Just curious. Suppose you did your due diligence, asked your general counsel, and they said, "It's within the law, go for it." Then, acting on their advice, you did the same thing this person did. Would you go to jail for the same amount of time in both cases?<p>E: Name removed to protect the accused, although it's thin protection indeed considering her name is disclosed elsewhere in this thread.
A relevant litigation release:<p><a href="http://www.sec.gov/litigation/litreleases/2009/lr20964.htm" rel="nofollow">http://www.sec.gov/litigation/litreleases/2009/lr20964.htm</a><p>And a description of the practice in question:<p><a href="http://en.wikipedia.org/wiki/Options_backdating" rel="nofollow">http://en.wikipedia.org/wiki/Options_backdating</a>
'Why I did not go to jail, but if I had, I would have served 1/20th of the sentence of some poor guy who got caught with 5 grams of crack.'<p><a href="http://www.pbs.org/wgbh/pages/frontline/shows/snitch/primer/" rel="nofollow">http://www.pbs.org/wgbh/pages/frontline/shows/snitch/primer/</a>
> Why I did not go to jail<p>Summary: I ran an accounting decision that worried me past my excellent lawyer.<p>This makes me wonder, as someone with little legal experience, how can we find lawyers who are truly great at what they do?
This might be a naive viewpoint, but I don't see how this could be viewed as legal. If I as a retail investor in equity or equity options in a company was approached by my broker and asked what day in the past I would like to use for my cost basis calculation, that would sound pretty fishy. Why should it be different for inside holders?
Stay away from mirroring PWC policies unless all your executive officers have a degree in commerce, finance, and law. Because you'll need all three to get out of the fraud charges you'll be slapped with.<p>The reader is invited to do some research into what companies PWC has done accounting for.
What boils my blood is this woman going to jail for doing something that was accepted practice and approved by PwC, where seemingly no criminal intent existed.<p>Laws that are that opaque, where interpretation and enforcement can change at the whim of regulators and their bosses, are not morally justifiable. IIRC Steve Jobs did the same thing at Apple and they (predictably) got a slap on the wrist.<p>When this was going on I was running a small public co. and our counsel (outside but on BOD) was dead-set against any options dating shenanigans, despite what others were doing, so I guess I agree with OP's main point -- that having the right reporting structure can save your ass.
"In my reference checking, at least a dozen investors told me that they made far more money when the numbers disappointed than when the company outperformed, because they trusted Michelle when she said that things were not worse than they appeared and bought on the dips."<p>anybody sees any wrong here? Beside private hush-hush, there seems to be the same pattern - like with backdating of options - of optimizing interests of some selected "closer than arm reach" group at the expense of general shareholder population of that company.
That was an <i>excellent</i> article. One of the best that I have read recently about company management. Of course to get the full impact you need to do a lot of reading between the lines, but Ben does us the favor of leaving some broad hints. This really does have the flavor of a manager skillfully navigating the business through shark-infested waters, and IMHO, that is exactly the job of senior management. Including CTOs. While a CTO may not have direct responsibility for legal and accounting issues, they need to be fully aware of what their colleagues are up to, because, as Ben pointed out, another executive might be subverting the law in pursuit of some number. If that is happening and the CTO does not notice it and call their colleagues on that type of behavior then the CTO is complicit and will at minimum get fired, and could even go to jail.<p>Taking public money in any form, comes with obligations to play fair, and however much you may disagree with the laws or the people who made those laws, they are the current standard for whether or not someone is playing fair.
I found more info on the CFO here:
<a href="http://www.sec.gov/litigation/litreleases/2009/lr20964.htm" rel="nofollow">http://www.sec.gov/litigation/litreleases/2009/lr20964.htm</a><p>>Abrams [the CFO in Ben's article] Also to be Barred from Serving as an Officer and Director of a Public Company<p>I wonder what people who get caught up in these sort of things do afterwards?
The weirdest thing here is that, mistakes or not, these law violations gives someone jail time.<p>Come on! At most, it caused monetary damages. The proper way to make it right is to apply monetary penalties (eg. fines). What's the reasoning behind locking up someone for that? It is not like the general public is being physically harmed, so 'Michelle' should not have to be physically restricted.<p>Besides, depending on the amount, a fine can set someone back for way more than 3 months. The cost-benefic analysis will make her thing twice next time.
TL;DR: author sought legal advice before doing something he thought was illegal. Turned out to be illegal. Didn't get in trouble because he didn't do it.
Much of the reasoning behind not prosecuting wall street (post MBS meltdown) has been the lack of malicious intent.<p>But here, we see SV hanged for "mistakes". Wtf?
"Once the SEC decided that most technology company stock option procedures were not as desired, the jail sentences were handed out arbitrarily."<p>really?
Unrelated to the story, there is a dead comment on this thread.<p>It looks like it was written by a racist bot? What? Why is somebody paying money to do this?
"Michelle had no intention of breaking any laws and no idea that she’d broken any laws. [...] Once the SEC decided that most technology company stock option procedures were not as desired, the jail sentences were handed out arbitrarily. "<p>I find this quite disturbing. Especially the second part.
>The whole thing was a case of the old saying: “When the paddy wagon pulls up to the house of ill repute, it doesn’t matter what you are doing. Everybody goes to jail.”<p>I've never heard this saying, and Google comes up with nothing. Maybe this is a paraphrase of one of those raps Ben likes?
For the curious...<p><a href="http://www.bizjournals.com/sanjose/stories/2006/07/03/daily17.html" rel="nofollow">http://www.bizjournals.com/sanjose/stories/2006/07/03/daily1...</a>