Anatomy of an obfuscation--Biomet, Inc.

If your corporation had committed serious financial fraud on its shareholders, for a full eleven years, and you had to make a public announcement of that fact, what would you do?

I can tell you what Biomet, Inc. did. It issued an incredibly dense press release, as stiffly and redundantly worded as it could manage, and tucked the details of the fraud way down deep into the body of the release--a full 776 words deep.

Like far too many other corporations over the last decade or so, the company played "dating games" with its stock options, pretty much guaranteeing that its executives would make the maximum amount of money when they exercised those options. Of course, the shares that the execs bought cheap could have been sold at full market value, so the corporation and its owners were the primary victims of this chicanery.

And the press release does, eventually, tell you what happened:

• the Company's administration of its various stock option plans disregarded the terms of those option plans



• most of the options issued during the 11-year period from 1996 through 2006 were not priced at the fair market value on the date of their respective grants;



• there was opportunistic misdating and mispricing of options in order to take advantage of lower exercise prices;



• the Company failed to maintain adequate books and records concerning its stock option grants;



• there were inadequate internal controls over the issuance and accounting for stock option grants;



• the relevant accounting and legal rules regarding option plans and their administration were not followed;



• Biomet failed to adequately staff and devote appropriate resources to the administration of its stock option plans; and



• as a result of these deficiencies, Biomet's public filings with regard to stock options were inaccurate.

Now Biomet damn well knew that this is what the public wanted to know. So how did they manage to stick 776 other words in front of the nuts & bolts? Like any college student short on words for a paper due in the morning, they padded it. Padded the hell out of it.

First they gave a lengthy statement of personnel changes (gee, I wonder what prompted those?), complete with pablum quotes from the changing personnel.

Then they gave a stultifying "Review of Historical Stock Option Granting Practices." And I mean stultifying. Here's an example:

On March 30, 2007, Biomet announced an updated report from the Special Committee presented by counsel to the Special Committee and the independent accountants retained by counsel to the Special Committee. Based upon an analysis of this updated report and relevant accounting literature, including Staff Accounting Bulletin No. 99, the Audit Committee determined on March 30, 2007 that the Company should amend its Annual Report on Form 10-K for the fiscal year ended May 31, 2006 and Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 to reflect the restatement of the consolidated financial statements and related disclosures reflected therein. In light of the Special Committee's preliminary report discussed below, the Company's previously issued financial statements and any related reports of its independent registered public accounting firm should not be relied upon. The Company believes, based upon the Special Committee's preliminary report, that the impact of the restatement will not be quantitatively material to any prior period financial statements.

Very few non-lawyers could make it through that without drifting off into a reverie about open spaces, the ocean, etc.

So exactly what do you call a company that commits linguistic fraud in the course of admitting that it committed financial fraud?

And by the way, you'll be happy to know that:

..all current members of the Board agreed that, with respect to misdated or mispriced stock option awards to the current directors on or after January 1, 1996 which had not yet been exercised, the exercise price of such unexercised stock option awards would be increased to the fair market value of the Company's common shares on the measurement date applicable to such award. In addition, the current members of the Board agreed that, with respect to misdated or mispriced stock option awards to the current directors on or after January 1, 1996 which had previously been exercised, such directors would at a future date remit to the Company an amount equal to the excess, if any, of the fair market value of the Company's common shares on the measurement date for such award over the exercise price of such award.

As the old saying said: the best place to hide something is in plain sight.