In an interesting interview that appears on the BusinessWeek website, Network Appliance CEO Daniel Warmenhoven makes some provocative statements about the growing wave of Securities and Exchange Commission (SEC) investigations into stock-option backdating irregularities at technology companies, including many in Silicon Valley.
Warmenhoven essentially provides a statement of defense for the technology industry in general and the Valley in particular. Other technology CEOs doubtless make similar arguments privately, but Warmenhoven can make the case publicly because his company is not in danger of being taken down by the SEC. With a relatively pristine accounting ledger for the feds to inspect, Warmenhoven feels that he can say publicly what many will only say in confidence to their peers and colleagues.
Distilled to its core, Warmenhoven’s contention is that the SEC has gone too far with the breadth of its investigations. He believes, in fact, that the current investigative mandate of the commission verges on a witch hunt. Those are strong sentiments, but Warmenhoven makes a valiant bid of to back them up with corroborating arguments and supporting data.
He doesn’t always succeed in defending his executive brethren. Sometimes, his content and tone are suggestive of a profound sense of entitlement. At other times, though, he makes some observations that haven’t been made in a public forum, and that needed to be considered, if not accepted.
Interestingly, despite his assertions that the SEC is getting carried away with is prosecutorial fervor, Warmenhoven also believes that more companies will be found guilty of stock-option backdating transgressions and that more executives will go to jail for their involvement in them. At one point in the interview, he says:
It’s pretty clear that the SEC wouldn’t prosecute cases if they didn’t think there were egregious actions at the most senior management levels that were tantamount to fraud. I think they will bring many cases, and probably prevail on many of them.
In Warmenhoven’ s opinion, excluding instances of obvious fraud, three types of technology companies have been caught in the stock-option backdating dragnet: those that were aggressive in using options to recruit and retain employees; opportunists that took advantage of information in their possession that wasn’t available to the public; and those that made administrative mistakes. As far as segmenting the overall universe of irregularities into those three buckets, Warmenhoven says:
I’d bet there will be 10 cases of egregious behavior for every 1,000 cases of clerical mistakes.
Near the end of the article, he also says he is surprised that “companies like Yahoo!, Google, and eBay haven’t been mentioned” in the context of the expanding number of SEC probes. He says all of those companies were “really aggressive hirers at the time, but they haven’t shown up in the press.”
The SEC isn’t done with its investigations yet, though. There’s also a chance that any of those companies, if not all three, will be called to account.