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Silicon Valley “Witch Hunts”?

by Administrator on August 15, 2006

NetApp boss Warmenhoven was interviewed in Business Week today, where he referred to current SEC investigations of numerous Silly-con Valley companies as a witch hunt. NetApp is pure as driven snow, of course. So, Warmenhoven felt comfortable about airing his views publicly.

He noted that backdating options to encourage new hires to join a company wasn’t (and isn’t) illegal provided the proper accounting is performed. But a lot of companies didn’t put the costs of backdating in the books, which is illegal and fraudulent. Queried on this point, Warmenhoven said something interesting: Who cares? Auditors weren’t paying any attention, so it wasn’t a priority. Close enough (accounting) was close enough. Everybody speeds on Highway 280.

I’m not sure that any executive with any political smarts would be airing such casual views today. It seems to reinforce the view that none of these c-level guys are to be trusted anymore — from Bush with his missing WMAs to ENRON and its phony shell companies. Basing actions on the philosophy that “what nobody knows won’t hurt us” has always been a slippery slope that can infect an entire organization: from finance to product development to marketing (which makes a science of it).

He concedes that the SEC must have some pretty good cases or it wouldn’t be making so much noise about the investigation. Interestingly, he points fingers at some of his biggest clients — Yahoo!, Google and eBay — as appropriate targets for investigations, noting that, for now, they have avoided the SEC’s attention. That must make him very popular. I wonder what his account reps were saying under their breath after they read the piece.

Frankly, I like to see the SEC doing its job — which is not only to “build investor confidence” as Warmenhoven suggests. The statement is a half truth about the charter of the organization. According to Wikipedia — with my additions in bold text for emphasis,

The SEC was established by the Congress in 1934 as an independent, non-partisan, quasi-judicial regulatory agency following years of depression caused by the Great Crash of 1929. The main charter of the SEC was to enforce newly enacted federal securities laws in order to restore and uphold public confidence in the capital markets. [1] [SO, DAN, THIS IS THE SOURCE OF YOUR COMMENT. THE SEC WAS FORMED TO REDRESS THE LIMITATIONS OF BLUE SKY LAWS THAT SET THE STAGE FOR CORPORATE CORRUPTION AND WRONG DOING THAT USHERED IN THE GREAT DEPRESSION. TO THE EXTENT THAT THE SEC WAS TASKED TO RESTORE INVESTOR CONFIDENCE, IT WAS TO DO SO BY PUNISHING COMPANIES THAT DID NOT CONFORM TO THE LAW. READ ON.]

Currently, SEC is responsible for administering seven major laws that governs the securities industry. They are: Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Trust Indenture Act of 1939, Investment Company Act of 1940, Investment Advisers Act of 1940 and, most recently, Sarbanes-Oxley Act of 2002.

The enforcement authority given by Congress allows the SEC to bring civil enforcement against individuals or companies found to have committed accounting fraud, provided false information, engaged in insider trading or violations of other provision of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for severe offenses.

To achieve its mandate, the SEC requires that public companies submit [ACCURATE] quarterly and annual reports, as well as other periodic reports. As part of the annual reporting requirement, the company’s top management [INCLUDING YOU AND OTHER SILICON VALLEY EXECS, DAN] must provide a narrative account in addition to the numbers called the “management discussion and analysis” which provides an overview of the previous year of operations and how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. The SEC has an online database called “EDGAR,” from which investors can access this information – this helps to attempt to obtain a level-playing field for all investors.

[ACCURATE] Quarterly and annual reports from public companies are crucial for investors to make sound decisions when investing in the capital markets. Unlike banking, investment in the capital markets is not guaranteed by the federal government. The potential for big gains needs to be weighed against equally likely losses. Mandated disclosure of financial and other information gives private individuals as well as large institutions the same basic facts about public companies they invest in, increasing public scrutiny while reducing insider trading and fraud.

SEC makes reports available to the public via the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system online. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help SEC track down non-conforming companies.

I wanted to reprint the entire Wiki text here, but you can read it for yourself. The only fault I find with the SEC is that it isn’t digging deeply enough. How many acquisitions and divestitures of corporate business units in the Valley have been thinly veiled efforts of company execs to score some quick bread on their shares? What happened to certain NetApp executive wallets with recent divestitures?

And where is the accurate accounting for sales bookings in the storage industry? Why are channels bitching about OEMs booking so many phony orders to make quarterly earnings reports look better?

If anything, despite Warmenhoven’s sob story about his former CFO giving up his job because it wasn’t “fun” anymore, I don’t think the SEC is going far enough.

{ 2 comments… read them below or add one }

EnquireVIII August 16, 2006 at 12:06 pm

Maybe we better keep an eye on the Republican controlled congress or they will be changing some of the SEC laws at 2359 hours (11:59 P.M.) some night to exempt such regulations.

They pass more favorable laws to special interest groups at that time of the evening.

Administrator August 17, 2006 at 9:29 am

Not sure if its just a Republican thing anymore. Seems like everyone has a hand in a lobbyist’s pocket.

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