Alas, Ceradyne
What memo? The one that seems to have flown around corporate America back in the late '90s. The one that said, "It's OK to backdate options -- everyone else is doing it."
What's that, you say? There was no such memo? Maybe not, but I find it incredible that so many companies were fudging options grants in exactly the same way -- by cherry-picking previous grant dates with low corresponding stock prices, in order to juice options returns for those on the receiving end of the compensation.
Make no mistake, that's exactly what is going on at many of the companies that The Wall Street Journal has listed in a handy table. And unfortunately, it looks like that's exactly what happened at Ceradyne, too.
The ceramics specialist's much-delayed, just-released 10-Q (for the quarter ended this past June) has some pretty creepy conclusions. Among them:
- From 1997 to 2003, stock options grant dates were selected by CEO Joel Moskowitz and given "unanimous written consent" by the stock option committee, which consisted solely of Moskowitz and one other non-management director.
- Of the 23 grant dates in that period, "in all but one case, the unanimous written consents were not prepared, approved or executed by the Company's Stock Option Committee until a later date."
- Moskowitz "followed a consistent practice of seeking low grant prices."
In other words, he was backdating the options to make them more valuable than they would otherwise have been.
If the misbehavior here is familiar, so are the excuses. Moskowitz, according to the filing, "was unaware of the accounting implications of the method he used." Furthermore, management says ".[T]he Special Committee and the Board of Directors have concluded that, while the Company applied an option price date selection practice that resulted in the use of incorrect accounting measurement dates for options granted . the accounting error resulting from the use of incorrect measurement dates were not the product of any deliberate or intentional misconduct by the Company or its executive, staff or Board of directors."
I don't believe that for two seconds. I didn't believe it from Apple
Fools, I find it impossible to believe that these CEOs don't know the accounting implications of using hindsight to grant in-the-money stock-based compensation, then pretending it didn't happen. How is it that I know the implications? I'm no CEO or accountant, just a lowly investor. Yet again and again, we hear of options accounting "errors" and "irregularities," or simple admissions that earnings will need to be restated. The hall of shame in that Wall Street Journal table now includes some 120 companies, including the likes of McAfee
Ceradyne's remedies for the situation include a $3.4 million pre-tax charge to earnings taken in the second quarter of 2006, and the amendment of prices granted to executives and board members to reflect the actual price on the actual grant date.
It pains me to say this, because I'm a Ceradyne shareholder. I've been a fan of the company, and have enjoyed speaking with management. But management blew it here. Big time.
Shareholders deserve better. At least Jobs delivered a mealy-mouthed public apology. Ceradyne's management hasn't even offered that.
For this shareholder, the growing realization that everyone was doing it is no excuse. In monetary terms, this may seem like a little bit of mischief, but how much more deception should I expect? And when?
In order to decide whether to buy a company, and how much to pay, it's imperative that I trust management to tell the truth, all the time, even about the little things. I no longer trust the folks steering Ceradyne.
For related Foolishness:
CNET is a Motley Fool Rule Breakers pick, while McAfee was a former Stock Advisor selection.
At the time of publication, Seth Jayson had shares of Ceradyne but no positions in any other firm mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here
