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Duh! But LOOK at how much wealth converged on so few people… what was the economic purpose of the bubble?


Begin forwarded message:

> ———- Forwarded message ———-
> Date: Mon, 09 Dec 2002 10:44:23 -0500
> From: Dave Farber
> To: ip
> Subject: [IP] VERY INTERESTING — Some execs scored big as company
> values
> plunged

> 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.”