How Not To End Up In Jail

Saw today that two top executives of something called Affiliated Computer Services in Dallas lost their jobs over stock option backdating.  The CEO left earlier this year.   

I assume that most people know how stock options work but perhaps not,  so here goes.  The company picks a day that they will record the offering and execs get the option to buy the stock at that price some time in the foreseeable future.  So if XYZ stock is $10 today and today is the offering day, then some time in the future the exec has the 'option' to buy the stock at $10.  If the stock is $30 in three years then he/she will exercise.  If the stock is below $10 the exec will not.  Unless the exec is really stupid. 

So what did these guys do?  They looked backwards and picked the date.  Here's how it was reported in the paper--"According to the newspaper's analysis, ACS stock options issued to Rich between 1995 and 2002 bore dates on which ACS's stock either had just fallen sharply or was about to rise.  Rich told the newspaper at the time the dating was "blind luck," but the Journal calculated the odds of hitting consecutive lows over several years at about 3 billion to 1."

The paper here is the Wall Street Journal.  These guys are not stupid.  If they come after you, watch out. 

So looks like these guys got caught with their hands in the cookie jar.  They are not alone.  58 senior executives and directors at 31 companies have lost their jobs over backdating of options.

Never really bothered me.  I was never in on pricing the options.  I was told--here are your shares, here is the price, come back and see me in three years.  Most were under water.  Made a pretty good bunch on some but made my money the old fashioned way--I saved it. 

I don't really worry about the guys at the top making the dumb decisions.  I always worried if something I did could come back and haunt me.  Because at the lower, mid and junior senior (?) levels, you are not the decision maker.  But what if you are asked to do something illegal?  The bad thing is most people don't know if something at that level is illegal.

If your boss asks you to stick up the 7-11 on your way to work, you can probably figure out that it is probably illegal to do so.  But what about a wire transfer to Colombia?  Or changing the way you account for contracts?  Don't laugh--they nailed a guy at Haliburton for doing so even though I am pretty sure he did so on orders and the new way was probably ok under GAAP.  What about doing what your boss says to do?  What about not paying taxes?  I have done all these things and perhaps could have lost my job or gone to jail for it.  Were they illegal or unethical?  Maybe.  You don't know till after you are  caught.

So if you think that something you are doing is borderline, think up a defense.  I didn't pay payroll taxes at one company because we didn't have enough money to pay the payroll.  If we had paid the taxes, the employees checks would have bounced.  But I sure made up for not paying.  Then left the company when the stupid owner did it again. 

When in doubt go the policy manual.  If somebody says transfer $10 billion dollars to Colombia, check the policy and if the policy says ok, do it.  And make a copy of the policy.

Most decisions in business are not black or white.  The world is gray.  So if you have doubts, figure it out for yourself and think up a rationale.  This is a case where you look out for Number 1 because nobody else will.

Comments

[Jessie]

I am amazed at the stuff people try to get away with. Funny that I read this today though; our company just put out and provided classes on this topic (that and the good old insider trading). Having a strict and readable policy on all activities with company stock is a must, regardless of the industry. But I agree, in the end it is just common sense on the part of the individual...think before you act.