Some Execs (Fiddled And) Scored Big as (Rome Burned) Company Values Plunged

Editors Note:We have all been adversly affected by the Internet Dreamers and Ponzi Schemers. This story that appears in the Mercury News is beginning to shed light on the crooks who are responsible for our nations economic woes. Hang the bastards we say!

Story By Chris O'Brien and Jack Davis Mercury News

Dec. 08, 2002:Running companies that became almost worthless didn't stop dozens of Silicon Valley insiders from pocketing billions of dollars by selling their stock during the tech boom and bust.

The Mercury News examined the stock sales record of insiders at 40 companies in Silicon Valley that have lost virtually all their value since the stock market peaked in March 2000. The executives, board members and venture capitalists at these companies walked off with $3.41 billion, while their companies' total market value plunged 99.8 percent to a mere $229.5 million at the end of September.

It represented a remarkable transfer of wealth from the pockets of thousands of anonymous investors -- from day traders to pension funds -- into the wallets of executives and directors who turned out to be winners even when their companies became some of Silicon Valley's biggest losers.

Coming at a time of public discontent with corporate ethics, the disconnect between the performance of these companies and the executives' fantastic rewards is symptomatic of the problems that have ignited calls to reform executive compensation and corporate governance.

``The people who bought the stock they sold are the victims here,'' said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. ``This money was taken from investors who didn't have the same information as these insiders and lost their money.''

The Mercury News compiled a list of local companies whose stock price dropped at least 99.5 percent from March 2000, when the Nasdaq peaked, to Sept. 30, 2002. Those companies were then ranked by the amount of stock sold by insiders -- roughly 300 -- since the beginning of 1997.

This means the list leaves off some spectacular flameouts where executives weren't shy about selling stock. For instance, JDS Uniphase missed the cut, with a 97.1 percent drop, even though executives sold $1.17 billion in stock between May 1997 and November 2002, even as the optical components company was firing two-thirds of its employees. Also absent is software company Ariba, whose stock dropped 98.7 percent and where insiders sold $1.26 billion between October 1999 and November 2002.

The survey also excludes some of the valley's household names. Not included are John Chambers, who between August 1997 and February 2000 sold $296.2 million in Cisco stock; Larry Ellison, who in January 2001 sold $894.8 million in Oracle stock; and Scott McNealy, who from May 1997 to July 2002 sold $107.9 million in Sun Microsystems stock. These corporate giants generally are older and remain strong competitors even as their stock prices have tanked.

Supposed good bets

The 40 companies on the Mercury News list are primarily software, hardware and telecommunications companies -- the infrastructure providers that were supposed to be good bets rather than flighty dot-coms.

These companies are a seriously wounded bunch. While not true of every company, as a group, they have a variety of problems. Most had major restructurings that led to mass firings. Fifteen went bankrupt. Several more are running out of cash.

Almost half the companies face lawsuits from angry shareholders. Five of the Top 15 companies had to restate earnings, some from periods when insiders were selling stock. And a handful of the companies have been cited in investigations by Congress and the Securities and Exchange Commission into investment banks accused of manipulating IPOs.

Though option grants usually get the most attention, much of the stock sold by insiders at these companies were shares they gained from being founders or early-stage venture investors prior to IPOs. Once their standard 180-day lock-up periods ended, many of these insiders began selling their stock like there was no tomorrow.

For some of their companies, there isn't much of a tomorrow:

• John Little, founder and CEO of Portal Software, sold $127.5 million of stock in Portal, which is on the verge of being delisted by Nasdaq. Portal, which sells billing software, topped the Mercury News list with insiders selling $704 million in stock -- more than its total revenue since the May 1999 IPO.

• David Peterschmidt, CEO of Inktomi, sold $90.5 million of stock at the No. 2 company on the list. Inktomi, once a promising Internet search engine company, in November sold off a major division to raise cash it needs to survive.

• K.B. Chandrasekhar, founder and former CEO of the former Exodus Communications, cashed out $135.1 million in stock at the Web hosting company before it went bankrupt. Chandrasekhar is now founder and CEO of Jamcracker. Exodus was bought out of bankruptcy by Cable & Wireless, which recently announced more layoffs at the hosting division.

• Dennis Barsema, former CEO of Redback Networks, sold $138.4 million in stock before he left in July 2000 after 2 1/2 years at the helm. Barsema later became CEO at Onetta, another networking start-up. He donated $20 million in stock to his alma mater, Northern Illinois University. Meanwhile, Redback announced another round of layoffs Nov. 14 and says it may have to raise more financing to stay afloat.

• Jerry Shaw-Yau Chang, former CEO of Clarent, sold a measly $16.5 million, though insiders at his telecom company dumped $355.8 million. Mired in accounting irregularities, the company has restated financial statements for 2000 and part of 2001, and been unable to report earnings for most of 2002.

• Thomas Jermoluk, former CEO of At Home, sold $50.3 million before the cable broadband giant filed for bankruptcy. The company, known as Excite@Home, once boasted a market value of $13 billion before vaporizing following squabbles with its main shareholder and partner, AT&T. Jermoluk is now a venture partner at Kleiner Perkins Caufield & Byers.

Executives at every company contacted either did not return phone calls or declined to comment, in many cases citing pending litigation. The one exception was Frederick D. Lawrence, former CEO of Adaptive Broadband, who agreed -- after speaking with his lawyer -- to discuss executive compensation though not the specifics of his company.

He pointed out that executive pay plans are publicly available and that most investors never bother to read them. And when insiders sell stock, they must also publicly disclose the sales in filings to the SEC.

``People really work hard in these industries,'' Lawrence said. ``They spend hours away from friends and family. Although that's not an excuse for any poor behavior.''

No surprise

However, Nell Minow, editor of the Corporate Library, a research center that focuses on corporate governance, said the heavy insider stock sales are no surprise. Minow is a leading critic of allowing insiders to sell their stock because it creates the temptation to push the envelope on things like accounting.

``They sell the stock and then they restate the earnings,'' Minow said. ``That brings it one step closer to being a Ponzi scheme.''

The increasing use of stock and options to compensate executives over the past decade grew out of a broader shareholder value movement. The idea was to align the interests of executives with the stockholders who, in theory, are more important than employees or managers.

But the practice has come under fire from critics who say stock grants have forced executives to become too focused on short-term results and doing whatever it takes to boost the stock price. That in turn can lead to everything from laying off employees after a bad quarter to feeling pressure to bend or break accounting rules to make the numbers.

``Their decisions are distorted,'' said Neelam Jain, assistant professor at Jones Graduate School of Management at Rice University. ``What the managers are trying to do is maximize their own profits and not the firm's profits.''

Graef Crystal, a leading compensation expert in Las Vegas, believes the problem has been overblown. He points out that while many executives sold their stock, many of them could have sold far more, which they elected to keep and which eventually became worthless.

Did they know?

``The fact that they left huge amounts of money on the table does not suggest they knew something was coming,'' Crystal said.

But the criticism of these insider stock sales continues to grow. That backlash increased in November, when the Conference Board released an annual survey of 2,841 companies in 14 industries that showed executive pay and perks continued to rise in 2001 even as the stock market and economy slumped.

At the same time executive compensation has exploded, bankruptcies have soared and publicly traded companies are facing record numbers of shareholder lawsuits. According to the Securities Class Action Clearinghouse at Stanford Law School, the number of shareholder suits rose from 213 in 2000 to 488 in 2001 -- despite a law passed in 1996 by Congress to discourage such litigation.

While many companies dismiss such litigation as a nuisance, observers say many corporate insiders still underestimate the anger of investors who lost big sums during the boom and bust and are still feeling burned.

``This is not a victimless crime,'' said Charlie Cray, director of Citizen Works' Campaign for Corporate Reform. ``The argument is that they're taking risks. But they're taking risks with other people's money.

``This is really a question of fairness.''