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.

The Wonderful World of Fox Presents: The Beauty of the CEO

Notwithstanding the fact that U.S. corporate profits fell in the 4th Quarter of 2006, or that many financial experts view that fall as the beginning of a broader economic downturn, our beloved Fox News happily reports the results of a corporate survey by Watson Wyatt Worldwide Inc:

CEO Salaries, Bonuses Rise in 2006 on Strong Profits

The survey results read something like an old Disney fantasy for the rich and famous:

The CEOs saw annual bonuses increase 13 percent and the value of their equity-based compensation holdings grow nearly 50 percent last year, according to a study by financial management consultants Watson Wyatt Worldwide Inc.
...
The analysis is based on proxy statements of 92 large companies whose CEOs remained in their positions in 2005 and 2006.

Median annual bonuses for chief executives increased to $2.2 million last year. At the same companies, the median growth in earnings per share was 14 percent.

The median value of CEOs' equity compensation, which includes in-the-money stock options and restricted stock awards, increased to $30.2 million last year.

Base salaries grew 4 percent to a median $1.1 million, according to the study.

Remember that the next time you're sitting at the kitchen table at 3am. trying to figure out whether eating or medical care is a higher priority given your inadequate income. And while you sit there in the middle of the night with shivers and dread, also contemplate this statement from a Market Watch piece on the falling 4th Quarter profits:

While profits are up 130% since the recession ended, industrial capacity in the United States has grown 4%, investments in equipment and software are up 22%, and employment is up 5%.

Sounds fair to me. After all, you could look at this as meaning "everything is up." Right? Huh?

Corproate stock option scandals may bear legal fruit

The corporate stock option scandal continues to grow. Hundreds of companies have been accused of issuing stock options to execs and backdating them to a time when the stock price was lower than it is at the time they actually were issued. Automatically, the options are valuable--the execs can't lose.

And there's another form of option fraud brewing on the back burner for the moment: "spring loading" options," which means deliberately issuing the options to the execs a day or two before the company announces some real good news that makes the stock price go up. Again, the execs can't lose.

But there was a very important legal ruling made in a Delaware Chancery Court recently, that may signal the start of a real legal remedy for stockholders of the companies that played these games.

DIRECTORS of US companies involved in the options backdating scandal could be vulnerable to lawsuits and damages claims from disgruntled shareholders following two decisions by an influential Delaware court.

The recent rulings by the Chancery Court of Delaware, the state where most US companies are registered, are likely to make it easier for investors to press forward with cases alleging that directors' approval of backdated stock options breached their fiduciary duty towards shareholders.

The options scandal already has engulfed 200 companies and several executives, including former Monster Worldwide general counsel Myron Olesnyckyj, who pleaded guilty to securities fraud and conspiracy in federal court in New York on Thursday.

In a Delaware case involving Californian chip maker Maxim Integrated Products, Judge William Chandler ruled that former chairman and chief executive John Gifford and six past directors must face a "derivative lawsuit" filed by shareholders.
...
In a separate case, against Tyson Foods, the court raised the possibility that directors who received "spring-loaded" grants - options awarded just before positive news announcements - could face damages claims.

Judge Chandler's decision to allow the Maxim derivative lawsuit to go forward puts additional pressure on directors at other companies where options backdating occurred.

The best news is that the Chancellor indicated that "spring loading" is also illegal. Up to now, the SEC has shown absolutely no desire to even investigate spring loading, and, according to Floyd Norris in a piece for the NY Times titled Option Lies May Be Costly For Directors on Feb. 16, one SEC commissioner has "suggested" that spring loading is "just fine with him."

What really burns my butt here is that "cut labor costs" has long been a mantra in business, on Wall Street, and in Business schools across the country. CEO careers have been made on reducing a company's work force to a fraction of what it used to be.

But the last I looked, corporate executive salaries were also a form of labor costs, even though they get hidden from view by burying them in overhead, rather than assigning them to a direct cost of producing the company's product. So cut--cut--cut when it's the people who actually produce something, but fraud--fraud--fraud to reward the people who....do the cut--cut--cutting.

Slime. Absolute slime. And kudos to Chancellor Chandler for his wisdom and courage in making the ruling that has undoubtedly scared the bejesus out of thousands of CEOs and Directors.