Sanjay Kumar, the ex-CEO of CA Incorporated (NYSE:CA), was sentenced today to 12 years in prison and ordered to pay an $8 million fine for his role in the company's $2.2 billion accounting fraud. The primary concern was over the so-called "35-day month" scheme, which consisted of the company keeping its books open past the end of the quarter to realize additional revenue and meet Wall Street expectations. One person, testifying for immunity, also revealed that the company had regularly backdated contracts to manipulate sales - even going so far as to say that within the company, they referred to the practice as "the CA way".

The verdict comes after many years in the court system, tied up after the government agreed to a deferred prosecution agreement in 2004. The agreement soon went sour, however, after the fed discovered the company's executives were destroying evidence and lying to investigators. This led to additional obstruction of justice charges imposed on Kumar and other executives facing conviction. Investigators noted that they were very suprised at the number of senior executives who participated in the scheme or tried to cover it up. As one law enforcement official put it, "nearly every executive listed in the company's 2000 annual report ended up pleading guilty to something in the case".

Mentioned Executives
Sanjay Kumar

After three trials over the course of nearly a decade, U.S. Federal Prosecutors were finally able to put Walter Forbes behind bars after he masterminded one of the largest cases of stock fraud in history back in 1998. A jury found the 63 year old ex-chairman of Cendant guilty of conspiracy and two accounts of submitting false documents to the Securities and Exchange Commission, where he overstated his company's earnings by $250 million. He was acquitted, however, on a forth account of securities fraud. Forbes is currently free on a $1.5 million bond, but will be sentenced on January 17th, facing up to 25 years in prison.

The U.S. Securities and Exchange Commission filed civil charges yesterday against the former CFO and CEO of Delphi along with 11 others, charging them with altering the company's financials between 2000 and 2004. The SEC said that Dawes has agreed to pay around $687,000 to settle with the SEC, while six others took similar deals. The rest of the defendants are fighting the charges.

The problems began last year, when an internal investigation by Delphi's audit committee revealed a series of accounting problems. These problems included improper accounting for $237 million worth of warranty claims to GM as well as several million dollars of debt that could not be found on the company's balance sheet. These accounting misstatements led to an inflated net income number and an artificially higher value (due to less debt appearing on the balance sheet). Typically such misstatements are used to reach financial targets to achieve bonuses or other executive perks. In a press release, current CEO Robert Miller said, "We have cooperated fully with the commission's investigation and will continue to do so. We are pleased to put the SEC investigation behind us and consider this settlement an important step in our transformation process."

Regulation 162(m) is a part of the IRS tax code that restricts tax deductibility of the five highest-paid executives in a public company to $1 million. Bill Clinton was the one who instituted this change in the tax code that was intended to curb executive compensation; however, it had some major flaw - it didn't apply to "performance-based" compensation. This caused the entire plan to backfire as the government and shareholders lost billions more while executives made out with more than ever before.

How did companies get around the regulation? Instead of paying executives the majority of their salary in standard compensation, companies began expensing stock options, LTIPs (long-term incentive plans), perks, and other bonuses that were based on low "performance-based" standards. They passed this by shareholders by tying down these performance metrics to many intangible factors that the company could inflate, such as customer satisfaction, diversity, and customer service. Moreover, they were released in obscure 8K filings with the SEC that normal investors rarely check. And to put the nail in the coffin, neither the SEC nor the IRS evaluate or check over these metrics - so it is impossible to tell if the company is being truthful. Sometimes targets aren't even defined, and in some cases can be as vague as tying compensation to "individual achievement of personal commitments"!

As a result of Reg 162(m), the government has lost out on roughly $20 billion in tax revenues while investors were stuck with extensive share dilution as executive compensation levels skyrocketed yet again to their highest levels ever. In 1980 the average executive earned only 40x what a normal worker would; now, executives make approximately 400x as much as a normal worker! Finally, in September, The Senate Finance Committee acknowledged the fact that they made a mistake, and is now evaluating other possible solutions. Whether or not they will come up with something effective remains to be seen; however, it is becoming increasingly important for investors to watch executive compensation levels.

Google Inc. (NDAQ:GOOG) insiders continue to sell stock at an astonishing rate (according to their Form 4 filings with the SEC), having unloaded nearly $1.7 billion during the past six months alone. Topping the list are Lawrence Page with $312,482,000 in sales along with Eric Schmidt with $290,538,000 in sales, both during just the past six months. There is a debate on Wall Street as to whether or not this kind of selling can be justified as "diversification" or whether it constitutes a negative sentiment on the company - after all, if insiders were confident in their company's future, why would they be selling? Warren Buffet has 99% of his net worth tied into Berkshire, while Bill Gates has the vast majority of his money tied up in Microsoft... why should Google be any different?

The fact is that even after over two years of being public, Google still tops the insider selling list on Wall Street, without a single purchase during recent months. Many maintain that the insiders are merely diversifying their holdings by selling Google stock and buying other companies. In reality, this type of diversification is typically of companies that have recently gone public; however, the selling usually subsides after the first year or so. If we look at Microsoft, Cisco, and other large companies, we can certainly see some spending; however, these companies pale in comparison to Google. Microsoft has only experienced sales of $500,000,000 during the past six months, while Cisco recorded under $100,000,000. While many experts cannot agree what the insider selling means, it would be difficult to argue that they are not significant.

Wouldn't it be interesting to see how a CEOs pay measures up to an average workers'? Well, a report put out by the Economic Policy Institute does just that! The 2005 study found that the CEO of a company making at least $1 billion in annual revenues made $10,982,000, compared to the average workers' $41,861. Amazingly, the average worker made $377 less than the average CEO made in an hour! The study also found that CEO pay increased an amazing 82% between 2000 and 2005, while the average workers' pay declined by 0.3%. This inbalance in pay has caused an uproar in Corporate America, as an increasing number of people question whether or not such large compensation packages are really needed to attract and retain talent.

These people are quick to criticize CEO pay, saying that it is a problem that boils down to basic corporate governance. They acknowledge that CEO pay is determined by the Board of Directors (a group voted in by shareholders); however, in two-thirds of all companies the CEO also serves as Chairman of the Board, which is clearly a conflict of interest. Moreover, the company often has extensive control over who is nominated to the Board of Directors. Only in extreme cases do majority shareholders get a seat on the Board; rather, the Board is most often hand-picked by management. And even if shareholders do wish to nominate other candidates, there are often large costs associated with the proxy process with no guarantees of success.

Who is this hurting? In the end, shareholders are most often left footing the bill. In addition to actual company money being spent on compensation, investors must also deal with the dilution of stock options and grants (often given as incentive). With the recent stock option backdating scandals hitting the market, this issue is being pressed even further. These people suggest that companies should work to tie CEO compensation packages closer to company performance, while also maintaining an independent Board of Directors to eliminate any conflict of interest.

Bristol-Myers Squibb (NYSE:BMY) announced today that CEO Peter Dolan will leave the position of chief executive officer, effective immediately. This announcement stems from the recommendation of a court-appointed monitor to the Board that Mr. Dolan and General Counsel Richard Willard be dismissed from the company because of their failed efforts to protect sales of the company's drug Plavix. This latest accusation is only one in a long string of corporate mishaps for Mr. Dolan and the company's management.

The troubles began in 2005 when the company became embroiled in an accounting scandal. Federal prosecutors were concerned that the company was engaging in an illegal practice known as "channel stuffing" by providing wholesalers with more product than they could sell in order to inflate the company's income and earnings. Since any federal indictments would have caused substancial damages to the company and its shareholders, the government settled the case by making the company promise to keep accurate records from then on and maintain the utmost corporate transparency. In addition, the company was assigned a court-appointed monitor, to make sure the company kept its records squeeky clean.

Meanwhile, investors were furious as the whole ordeal tarnished the company's image. However, it was the events that unfolded afterwards baffled investors and ultimately caused the removal of Peter Dolan as CEO. Recently, the company had been in negotiations to prevent the Canadian company Apotex from producing generic versions of its most popular drug - Plavix. Note that Plavix is the world's second most popular drug with sales of over $4 billion per year - it also accounts for 30% of BMY's revenues. The negotiation involved paying Apotex to halt production of the drug until 2011, when the drugs patents expire. However, BMY inexplicably abandoned its rights to triple damages should its patent prevail at trial. As a result (since Apotex faced no penalties), the market was instantly flooded with generic versions of Plavix. Analysts and investors were shocked and confused, while the company struggled with damage control. Now, federal antitrust prosecutors are investigating the sour deal while the court-appointed monitor recommended the removal of the officers responsible.

Shares of BYM moved higher by nearly 4% on the news today despite the fact that most of the damage had already been done. Now after the company's rollercoaster ride from $26 to $20 back to $24, there is speculation on the street that this may clear the way for a possible buyout. What happens as a result of the investigation remains to be seen; however, this is yet another example of just how illogical management can act.

Mr. Robert P. Cummins' days may finally be numbered as CEO of Cyberonics, Inc. (NDAQ:CYBX) as shareholders move in to control the Board. Some may wonder how he stayed in office this long; after all, he is the subject of an SEC investigation while his company's stock has lost more than 50% of its value this year alone. These same people would be shocked to learn that he is not only still in office, but he also received a new five year contract extension and a 50% pay raise!

So, just how much money is Mr. Cummins making? Well, he made the most money on June 15, 2004 when he and two other company officers netted a cool $2.5 million overnight – not bad for a day’s work! How is this possible, you ask? Well it turns out that the company just happened to receive a favorable FDA report with regards to their flagship product the day of their stock option grant. While trading was halted for the rest of us at $19.58 per share (the prior day’s closing price), they were issued 170,000 options at this price while the press release was circulated. The next day the stock opened at $34.81 per share – netting a whopping $2,589,100 overnight! Unfortunately for them, the SEC took issue and they are currently still under investigation.

However, in addition to that “bonus”, Mr. Cummins has also made an estimated $17 million in proceeds on the sale of shares received through stock option grants in addition to a substantial grant of restricted shares. This is not to mention his $800,000 per year regular salary. In fact, the executive compensation was in such excess that one board member actually resigned, saying that he “cannot support the direction of the governance practices of the Cyberonics board, in particular its practices regarding CEO compensation and succession.”

While this man is minting his own money, investors are losing millions. Even now, when the company is facing delisting from the NASDAQ and a possible default on its senior notes, this man remains in control of the company. Fortunately, an activist hedge fund is seeking control of the Board to turn things around. You can read their letter to shareholders here, which outlines many of the issues addressed in this article. Whether they are successful or not is contigent on several factors; however, this story goes to show just how corrupt Corporate America can be.

The SEC recently shed more light on its newly proposed rule, which now would require non-executives who make "significant policy decisions" to disclose their compensation. In a 436 page proposal posted on their website on August 11th, the SEC made the following comments regarding the new rule:

"We also solicit additional comments regarding the proposed disclosure requirement of the total compensation and job description of up to an additional three most highly compensated employees who are not executive officers or directors but who earn more than the named executive officers. In particular, we have specific requests for comment as to whether the proposal should be modified to apply only to large accelerated filers who would disclose the total compensation for the most recent fiscal year and a description of the job position for each of their three most highly compensated employees whose total compensation is greater than any of the named executive officers, whether or not such persons are executive officers. Under this approach, employees who have no responsibility for significant policy decisions within either the company, a significant subsidiary or a principal business unit, division, or function, would be excluded from the determination of the three most highly compensated employees and no disclosure regarding them would be required."

Why is this rule necessary? In the past, some companies have placed their top decision-makers in non-officer positions in order to conceal their compensation. This new rule would require mid to large cap companies to disclose the pay of their top employees, who would be identified by their salary and position rather than their name. These employees would have to make more than one of the top five executives in order to be listed. According to the SEC, these people could be "the director of a news division of a major television network, a portfolio manager in charge of equity funds at a money management firm, or the head of technological innovation unit". Meanwhile, the SEC insisted that "a salesperson, entertainment personality, actor, singer, or professional athlete who is highly compensated but who does not have responsibility for significant policy decisions would not be the type of employee about whom we would seek disclosure".

This article is the first in a series of articles regarding the SEC's newly proposed executive compensation rules. The proposal is currently in its final stages with a request for additional comment.