Thursday, January 22, 2009

Flaherty’s advisory council includes someone about to be fined $100 million, in Canada’s largest ever securities fine

Given the choice between inventing the Blackberry and being involved in back dating stock options and never inventing the Blackberry in the first place, I would choose the latter. Obviously Canada’s Finance Minister and latter day advocate for a Single National Securities Regulator thinks otherwise and has a laissez-faire attitude to landmark securities violations. Evidently Jim Flaherty thinks that the good associated with Mike Lazaridis’ invention of the Blackberry outweighs Mike Lazaridis’ involvement in the back dating of employee stock options in Lazaridis’ capacity as Co-CEO of RIM. That’s speaks volumes about Jim Flaherty and the direction of his moral compass.

The backdating of stock options is nothing more than a form of shareholder and taxpayer theft. Backdating stock options is a scheme designed to falsely convey economic value from shareholders to employees who are granted stock options with exercise prices that are below share trading prices in effect on the day the stock options are granted. Think of it as "instant money", stolen from shareholders. Backdating stock options to a prior point in time when the stock price was at a lower level, achieves this nefarious end. Taxpayers are being ripped off as well, since employee stock options are taxed at half the rate of income from employment that they truly represent. The artificial gains that are achieved from back dating stock options is a blatant and manipulative means to manufacture employment income that is taxed at half the rate that would otherwise be paid. As such, both shareholders and taxpayers are being ripped off.

Think of back dating of stock options by RIM executives as a similar exercise to Mark Carney falsifying his analysis of tax leakage of income trusts, by leaving out the taxes paid by the 38% of income trusts held in RRSPs. Once scheme of appropriating wealth is as nefarious and dishonest as the other, in which the ends seem to justify the means, in the mind of the perpetrator.

Meanwhile Jim Flaherty appointed Mike Lazaridis to his economic advisory council on December 19, 2008.

Mile Lazaridis’ involvement in this stock option backdating exercise would have been known to Jim Flaherty at the time Flaherty made this appointment. I don’t think US Treasury Secretaries who knowingly did not remit their full payment of taxes should be appointed to office and nor do I think CEO’s who were involved in stock option backdating exercises that attract landmark penalties (that are still pending and which, strangely, are being “negotiated” with government agencies) should be advising the Finance Minister on economic issues. This is an unhealthy alignment/misalignment of interests. But we are talking about Jim Flaherty, after all, the magnet for all lobbyists with a scheme to pitch.

Securities watchdog pursues record fine for RIM execs
Regulator seeks up to $100-million in stock option controversy

Globe and Mail
January 22, 2009

The Ontario Securities Commission is seeking a record penalty — one that could be as high as $100-million — from the top two executives of Research In Motion Ltd. [RIM-T] to pay for their role in a stock option accounting controversy dating back to 1996.

According to people familiar with settlement discussions, the OSC's staff is in advanced discussions with lawyers representing RIM's co-chief executive officers, Jim Balsillie and Mike Lazaridis. The OSC's investigation began in 2006 and sources said the regulator began negotiating a potential settlement last fall.

It is understood that the OSC has pushed for Mr. Balsillie to pay the bulk of any penalty and relinquish his seat on RIM's board of directors for a period of time. Although one person familiar with the talks said the parties are nearing a potential agreement, nothing has been finalized, including how much each executive may have to pay.

Reached last night at his home, Mr. Balsillie declined to comment on what he described as "rumours." Neither Mr. Lazaridis nor his lawyer could be reached. A spokeswoman for the OSC said: "We can't comment on enforcement cases."
A source said last night that the OSC is pushing Research in Motion co-CEO Jim Balsillie to step down from the board, at least temporarily.

In 2007, a special committee of RIM's board investigated the back-dating issue, and determined the company had backdated more than 40 per cent of stock options granted to employees since 1996. It also concluded that 12 of the 16 option grants made to Mr. Balsillie and Mr. Lazaridis between 1996 and 2006, to acquire a total of two million shares, were priced using an incorrect date.

The committee estimated the value of benefit to the two men was about $1.6-million (U.S.) each, gains that they have already repaid, along with full legal costs, to the company.

Before the release of the report, RIM notified the U.S. Securities and Exchange Commission and the OSC that it had uncovered evidence of backdating.

If a full $100-million penalty were approved, it would rank as the largest penalty paid by individuals to the OSC. The largest individual payment ever made to the OSC came from former Laidlaw Inc. chief executive officer Michael DeGroote, who agreed to pay $23-million in 1993 to settle allegations of illegal insider trading.

Mr. Balsillie and Mr. Lazaridis have been hailed as technology and business visionaries for revolutionizing wireless communications with the introduction of RIM's BlackBerry in 1999. The popular BlackBerry transformed the company into one of Canada's biggest global success stories.

The RIM board review occurred at a time when U.S. regulators were unveiling a flurry of investigations of major U.S. companies for stock option backdating. Many companies announced voluntary reviews of their past option practices as the SEC signalled it would treat companies more favourably if they came forward voluntarily.

The U.S. Securities and Exchange Commission investigated more than 100 companies over allegations of stock options backdating, including Apple Inc. It reached several backdating settlements, the largest coming in 2007 with a $468-million payment from former executives of United Health Group Inc.

Stock options give company employees the right to buy shares at a set price — typically the price at the end of the trading session on the date a grant is made. Backdating happens when companies set the grant date retroactively to align with a stock's low point, creating an instant paper gain.

According to the RIM special committee report, all option grants, except those to the company's co-CEOs, were made by or under the authority of Mr. Balsillie "including grants that have been found to have been accounted for incorrectly."

The company subsequently restated its financial statements back to 1999, recording a $248-million (U.S.) after-tax expense related to improper accounting over a variety of option granting issues.

The initial report, issued in March, 2007, also included a statement that the special committee "did not find intentional misconduct on the part of any director, officer or employee responsible for the administration of the company's stock option grant program."

At the time the special committee report was released, RIM said all employees and executives agreed to repay any benefit they received from options that were incorrectly priced. Mr. Balsillie and Mr. Lazaridis additionally agreed to pay $5-million (Canadian) each to defray the company's costs of its investigation and financial restatement.

The two men later agreed to pay an additional $2.5-million (Canadian) each to the company to compensate it for its investigation costs as part of a settlement RIM reached in a class-action lawsuit brought by Canadian shareholders over the option backdating. The settlement included no admission of wrongdoing.

RIM also announced in March, 2007, that Mr. Balsillie would step down as RIM's chairman, but remain co-CEO and a director on the board. Two long-serving directors also agreed to resign and two new directors were appointed: Royal Bank of Canada chief operating officer Barbara Stymiest and IBM Canada chief executive officer John Wetmore.


Dr Mike said...

They are negotiating with Lazaridis??

What is there to negotiate??

If that was any of us peasants they would want the bucks plus interest--no negotiation other than the color of grey in the cell.


Dr Mike Popovich

Anonymous said...

What BS. Fines should be levied, not negotiated. What crap. Do you get to negotiate your speeding tickets with the traffic cop.

Flaherty believes in a single securities regulator, as much as he believes in securities regulation.

What a hypocrite bandit.....sorry, pirate. Hypocrite pirate.