VERY INTERESTING -- Some execs scored big as company values plunged

[Dave Farber <dave () farber net>]

Some execs scored big as company values plunged
By Chris O'Brien and Jack Davis
Mercury News

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.''
------------------------------------------------------------------------
Contact Chris O'Brien at cobrien () sjmercury com or (415) 477-2504. Contact
Jack Davis at jdavis () sjmercury com or (408) 271-3788.


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