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They Fought the Law, the Law Won


For this bubble, it seems Silicon Valley will have a sheriff and a deputy, too. It’s about damn time.
The U.S. government – finally! – means business when it comes to how Silicon Valley conducts its affairs. For Bubble 2.0 the valley is going to have to join the real world, you know the one with real, regulator oversight, non-partisan legal advice and objective accounting? That real world, the one in which the rest of American businesses are located.
That’s the message blaring out from Saturday’s New York Times and Friday’s Wall Street Journal which carried news that the U.S. Attorney for the Northern District of California, one Kevin V. Ryan, is conducting an investigation and has managed to – gasp! – get indictments against Brocade Communications for back-dating the stock options it gave employees.
The reaction from folks who’ve been working and living in and around tech businesses for the past 10 years? “Oh, so NOW you’re interested?” Man….talk about your barn doors and horses…..
Ryan, a local boy, was appointed to his job in 2002. Educated at St. Ignatius – the alma mater of some of the city’s sharper (but strictly masculine) legal and political minds – he’s worked in Alameda County and was appointed to his current job from the state’s Superior Court. He announced his indictments with another Californian, Former Congressman Christopher Cox, the chairman of the Securities and Exchange Commission. In other words: They’re interested. Real interested. Oh, and they know their way around.
Ryan knows state politics – he was a Pete Wilson appointee to the bench – and Cox, former member of the House Commerce Committee, is no P&L neophyte. He’s also forgotten more about that tax code than half the lawyers in Palo Alto have ever learned. And, oh yeah, even though Cox works in Washington, he doesn’t think of California “out there.” Having lived and represented the state – from Newport Beach – for years, he thinks we’re part of the Lower 48 unlike the rest of the East Coast.
In other words, there won’t be any of this fancy “new economy” mumbo jumbo with Cox and Ryan around. Nah. These guys are the law. The smart law.
You can hear the caterwauling, can’t you?
With 80 (or more) companies facing some kind of SEC or Department of Justice inquiry on how they treated their employee stock options, Silicon Valley’s execs are sure to make the claims they always make. It’s a really fancy version of “but we’re special.” The first objection? This is the work of a politically ambitious prosecutor!
Probably. But guess what? It doesn’t matter. He’s got the job. You don’t. And, oh, don’t rush to get all partisan here. Cox and Ryan are Republicans and they’re going after Republicans. Verisign’s Stratton Sclavos and Lawyer to the Stars – All the Stars, Larry Sonsini ain’t Democrats. Which is telling. Ryan and Cox are smart enough to play fair when it comes to where they’re looking. It’ll make their cases stronger and – both being good lawyers – they know it.
That’s not to say there isn’t a political element to all this. Embarrassing the Democrats is probably somewhere on the agenda, not too far down. The state’s political leadership, save Gov. Arnold Schwarzenegger, were all in office during the Bubble 1.0 and they used Silicon Valley’s ambitions like an ATM: punch in a few code words, get a lot of checks. The Clinton Administration’s SEC took a big long, comfy nap for much of Bubble 1.0, worried more about boosting economic growth than keeping an eye on what was going on off – way off – Wall Street.
That’s one reason why the valley’s persecuted millionaires, get to make somewhat outrageous complaints about those who might regulate them. They don’t understand – it’s the market! You can’t control the market! This is my favorite excuse; I only wish Adam Smith and his “hidden hand” were this popular in how the valley actually conducted its affairs. The “it’s the market” excuse was used from about 1997 to 2001 to explain why IPO shares issued to executives – the “Friends of Frank” plan was the most notorious – weren’t gifts; they were just “tips” that happened to be really, really lucrative. No, you can’t control the market. But when you’re making the market – as so many companies did back in the late 1990′s with the help of their bankers – well, then you have an advantage. Particularly when, as Ryan and others are alleging, companies cooked the books and back-dated option grants to make the well-off even wealthier. You can do that when you’re a private company (although it’s still dicey) but not when you’re playing with shareholders.
And oh, yeah, while we’re on the subject: The word “shareholder” in situations like this is the same as the word “consumer.” And yeah, for politicians “consumers” are “voters.” And yeah, this is politics. But, so what?
They don’t understand – we need these options to stay competitive! Yup. You do. Which is why the playing field has to be level and every company in every industry needs to play by the same rules. Interesting, isn’t that the SEC is looking at non-tech companies as well? Why? For the same reason they’re looking at Democrats and Republicans. The government isn’t supposed to be in the business of letting crooks cheat ’cause it’s good for the American economy. (Many of you may, with reason, say this has not been true of the Bush Administration; for that argument, I refer you to my Spot-on colleague Christopher R. Brauchli who is eloquent on this and other, related, topics)
But this whole competitive argument reminds me of something I find fabulous annoying: Put that stupid excuse about India and China – how they don’t have stock options – away and forget you ever heard it. There’s private property (the right to own stock or property) in China but its existence isn’t that secure and the per capita income in India’s capital is about what your average California business person pays to fly to New York.
Then there’s this chestnut: Everybody does it. Well, clearly they did and maybe some still do. But remember when your Mom asked what you would do if “everybody” jumped off the Brooklyn Bridge? Well that logic applies here as well. Yes, Silicon Valley is special – you guys changed the world and some of you are still at it – but guess what? You play in the public market – as the companies being investigated for back-dating do – you play by the laws as enforced by the Securities and Exchange Commission to protect shareholders (consumers and voters).
And lastly: This is not a crime, no one lined their own pocket. That’s for the courts to decide and it’s cases like this and situations like this that help create our understanding of the law and the regulations that stem from the law. The New York Times – coming late to the story as it does with everything Silicon Valley – did a nice job of exploring the back-dating practice pointing to Sonsini’s law firm as one that apparently advised clients that the practice was legitimate. Wilson Sonsini famously pioneered the practice of taking stock options as payment for its young start-up clients. In hindsight, that seems like a classic conflict of interest – a firm that could benefit financially from taking its own advice to a client – and it’s been unexplored until now. Maybe it’s fine, maybe it’s not. But we won’t know until the SEC makes a decision.
Remember, the government regulates white collar crime by example. That’s why they’re stepping in now – they can see Bubble 2.0 as clearly as the rest of us. And while much of what Silicon Valley will say in response to the investigations, the investigators, the scandals, the indictment and the possible convictions may well be true – it doesn’t matter. This is how regulation is enforced and laws are interpreted.
And while everybody does it and we need to do this to stay competitive and what’s the harm, no one made themselves rich it was for the company so how can that be a crime and politicians really don’t understand the pressure of running a business….in the end, no one gets – or should get – to give lame excuses for cheating. Not in kindergarten. Not now.

Share  Posted by Chris Nolan at 9:37 PM | Permalink

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