Eyes on the Wise

A million to one shot, doc!
Surely you remember the Seinfeld gag that hinges on the line that proctologists, prior to breaking out the extraction forceps, are always said to hear from their embarrassed patients: "It was an accident. It was a million to one shot, Doc. Million to one!"

Oddly enough, some business commentators out there would like us to believe a similar excuse regarding the ever-widening stock-option backdating scandal that has ensnared the likes of Apple (Nasdaq: AAPL  ) , Broadcom (Nasdaq: BRCM  ) , CA (NYSE: CA  ) , Marvell (Nasdaq: MRVL  ) , Openwave (Nasdaq: OPWV  ) , and Take-Two Interactive (Nasdaq: TTWO  ) . (Handy scorecard here.) Remember, the charge is that some companies intentionally backdated options to correspond with dates at which their stocks were trading at monthly or yearly lows, in order to guarantee gains for those receiving the options, and that the bookkeeping didn't reflect the granting of these in-the-money stubs as expenses.

Despite mathematical studies showing that the odds of some companies hitting these stock-price lows at random would require luck on the order of one in billions, I've been surprised to see pundits getting soft on the practice, or at least, as in a recent Economist article, wondering whether timing the release of favorable or unfavorable news in order to juice the grants (rather than timing the grants themselves) is really such a bad thing.

Of course it is, and if you think execs drew the line at simply falsifying grant dates to print themselves millions in funny money, think again. Last week, the SEC filed a lawsuit that shows just how scuzzy things can get.

The SEC leveled fraud charges at Jacob Alexander, David Kreinberg, and William Sorin, three former senior executives from Comverse Technology (Nasdaq: CMVT  ) , for an alleged decade-long backdating scheme. Not only did they allegedly cherry-pick dates to lock in guaranteed gains, they also allegedly used fictitious employee names to create a slush fund of backdated options to recruit personnel at a later date.

What are the odds that we won't see even more inventive backdating schemes as the dust continues to stir up and settle in boardrooms and courtrooms across the country? I'd say, it's a million to one shot, Doc.

Ken Lay's gifts from beyond the grave
Now that Ken Lay has gone to that big gas refinery in the sky, federal prosecutors have decided to ask that his pal and surviving Enron fraudster, Jeff Skilling, pay Lay's share of the $183 million in fines that they intended to extract from the pair.

If the Feds get their way, it would up the original tab for Skilling's sins by some $43.5 million. I'm not sure that makes sense. Don't get me wrong: I think Skilling's lower than snake spit. But if the Feds are trying to get back everything he and Lay took out of Enron through their fraud, they need to take it from the two of them, or the surviving estate. (And hey, if Skilling's got $183 million to cough up, I say take it and the $43.5 million from Lay's estate.)

As I see it, there's no reason Skilling should have to pay up for his partner's take in the heist. Similarly, there's no reason Lay's heirs ought to get a free ride on Kenny's ill-gotten fortune -- if any remains -- simply because the guy who stole the money didn't have the good fortune to hang around long enough to see if his appeals would flop.

The problem is, the courts don't see it that way. In fact, a recent appeals court ruling in the Fifth Circuit emphasizes the fact that Lay and his estate will slip right off the hook. It reads, "It is well established in this circuit that the death of a criminal defendant pending an appeal of his or her case abates, abinitio, the entire criminal proceeding. That is, the appeal does not just disappear, and the case is not merely dismissed. Instead, everything associated with the case is extinguished, leaving the defendant "as if he had never been indicted or convicted."

If that's good news for Lay's heirs, it might be better news for Skilling. Sure, the Feds now want to stick him with the entire tab, but if "everything associated with the case is extinguished," that might mean that evidence from the case that hung him out to dry might be "extinguished" along with it. As legal experts noted last month, Skilling's lawyers will certainly be pushing into this new territory to see whether it doesn't hold the key for freeing Jeff from the consequences of his actions.

If that comes to pass, and Lay's death absolves Skilling, those who steal with the pen better watch their backs. With a case on appeal and a clean slate just a corpse or two away, the unintended consequences might be gruesome indeed.

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At the time of publication,Seth Jaysonhad no positions in any company mentioned here. View his stock holdings and Fool profilehere.Fool rules arehere.


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