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.

Blue Cross of California finds a sly way to profit

What better way to make a profit than to not spend money while collecting money from your customers? Apparently that thought occurred to Blue Cross of California, according to an investigation by the California Department of Managed Health Care

DMHC officials on Thursday informed Blue Cross of their intent to file an accusation against the company and issue a $1 million fine in the case. Under California law, health insurers must prove that members intentionally misrepresented their medical histories on policy applications to cancel policies. State investigators reviewed 90 cases from 2004 to 2006 in which Blue Cross canceled individual health insurance policies and found the company had violated the law in each case. According to state investigators, Blue Cross used computer programs and maintained a department to review the policies of members with chronic illnesses and women who became pregnant to consider cancellation. Blue Cross cancels about 1,000 policies annually in California. WellPoint, the parent company of Blue Cross, cited "factual errors" in the investigation and said the "vast majority" of policies canceled by the company are proper.

Credit card companies squirming before Congress

Another tangible benefit of Congress being in Democratic hands: the Senate Homeland Security and Governmental Affairs' investigative subcommittee spent part of today making the heads of three huge credit card companies squirm with stories and questions about how they operate.

For some reason, they "operate" in a way that makes most consumers squirm and poor. It's nice to see the tables turned if only for a little, public, while. From an AP story in the Raleigh News & Observer:

Executives of three major banks defended their credit card practices as responsible and responsive to consumers' needs in testimony at the hearing of the Senate Homeland Security and Governmental Affairs' investigative subcommittee. Those from Citigroup Inc. and Chase Bank USA said their companies were eliminating some practices - including the one that hit Wesley Wannemacher of Lima, Ohio, with over-limit fees on his Chase card account 47 times although he went over his credit limit only three times.

The interest charges and fees on Wannemacher's account more than tripled his debt despite his having made payments averaging $1,000 a year over six years, noted Sen. Carl Levin, D-Mich., the subcommittee's chairman.
...
Wannemacher used a new Chase card in 2001 and 2002 to pay for expenses mostly related to his wedding. He had $3,200 in purchases, interest charges of $4,900, 47 over-limit charges totaling $1,500, late fees of $1,100, for total charges of $10,700 as of February. He paid $6,300, leaving a $4,400 balance - which Chase agreed to waive after he contacted the subcommittee staff.

"Debt seems to invoke a feeling of hopelessness unlike any other problem I've encountered," Wannemacher testified at the hearing. "When a debtor calls you on the phone and you make a minimum payment, you know that you've made no real progress and that in a month, they will be calling again."

Sen. Norm Coleman of Minnesota, the panel's senior Republican, said high interest rates on credit cards, "hefty fees and crippling penalties impede more and more hard-working families from pursuing their American dream."

The problem is worsened by the "impenetrable" language of credit card disclosures provided to consumers, he said.

While the credit card practices in question are legal, Levin is threatening possible legislation to outlaw them as a spur to the banking industry for voluntary changes.

Senate Banking Committee Chairman Christopher Dodd and other Democratic senators challenged credit card executives at a hearing in January over rising late fees and other penalties and marketing practices they portrayed as predatory. Dodd, D-Conn., said he was putting the industry on notice that if it doesn't improve practices on its own, legislation may be warranted.
...
Citigroup, the nation's largest financial institution, announced last week that it was eliminating the practice of so-called universal default - raising interest rates for card customers because of their failure to pay other creditors on time. In addition, Citigroup said it would eliminate some types of interest rate increases that have been criticized.

Isn't it odd how the Republicans, loudly proclaiming their "family values," managed to ignore this credit card insanity, and the Democrats, reviled by conservatives for their lack of family values, are actually trying to make it a little bit easier for families to survive economically?

Guess it's the difference between viewing "family values" as an abstract philosophical and political issue related to maintaining the place of nuclear family units in the social structure of the world, and viewing "family values" as those real world values that help real world families survive in the real world, regardless of their nuclearity (if it ain't a word, it should be).
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Those great business ethics on display again

Wall Street Journal and CNBC types love to pretend that private sector ethics are far better than government ethics. If you've been alive and conscious over the last decade, you know that isn't true (they're equally corrupt, and generally run by the same kinds of folks).

Two more examples just hit the fan:

1. Huge insider trading ring broken up:

It started in 2001 with two old friends meeting at the Oyster Bar in the basement of Grand Central Terminal in Manhattan, discussing a $25,000 debt.

It ended yesterday with federal authorities saying that they had exposed one of the most far-reaching insider trading schemes on Wall Street in decades, involving four investment banks and a web of hedge funds, day traders, lawyers and even a few supervisors, who upon discovering evidence of insider trading, blackmailed the traders to keep quiet about it.

Thirteen people were accused yesterday of taking part in the trading ring, including a former Morgan Stanley compliance official, a senior UBS research executive, three employees from Bear Stearns and a Bank of America employee.

Linda C. Thomsen, chief of enforcement at the Securities and Exchange Commission, described the scheme as one of the most “pervasive Wall Street insider trading rings since the days of Ivan Boesky and Dennis Levine.”

Nine of the defendants have been arrested, and four have pleaded guilty to charges ranging from securities fraud, conspiracy to commit securities fraud and bribery. The investigation, conducted by the S.E.C., the Federal Bureau of Investigation, and the office of the United States attorney in Manhattan, has been under way for more than a year and is continuing.

The schemes described by federal authorities were unusual for their breadth and the seniority of the executives involved.

The tactics, however, were all too familiar: Wall Street executives tipping hedge fund traders about potential upgrades or downgrades of stocks, information sure to move a stock’s price; leaking information about pending mergers and acquisitions, and taking kickbacks to get access to hot deals. In the middle, authorities say, was a hedge fund manager looking for an edge.

2. Largest subprime mortgage lender under fed investigation:

Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday.

The company also warned that a delay in filing its financials may put vital financing into jeopardy.

The troubles at New Century are the latest sign of the deterioration in subprime lending — until recently the fastest-growing segment of the mortgage business. The market has been struggling to contain the fallout from rising default rates and weakening home prices. Late last year, some smaller lenders started going out of business and last month several bigger companies, including New Century, started reporting problems.

Another large lender, the Fremont General Corporation, said yesterday that it planned to sell its subprime mortgage business after reaching an agreement with the Federal Deposit Insurance Corporation to restrict its activities in that area. As part of the agreement, Fremont will be able to continue taking deposits.

The investigations into New Century, which is based in Irvine, Calif., and wrote $33.9 billion in mortgages last year, started after the company said on Feb. 7 that it would restate earnings for three quarters, which sparked a huge sell-off in its shares. Yesterday, it said its problems had prevented it from filing its annual report, which was to be released Thursday. The board is conducting an investigation of the accounting problems.

Neither one rises to the level of Enron or Global Crossing fraud, but, come on, business ethics in America in the 21st century? An absolute oxymoron.