MM: It got traction at the time, a lot of these stories. I’m not sure that it created the widespread change or at least closer look that you might always like. But a number of the stories did have impact. The primary impact, unfortunately, of the golf and jet data was that companies moved to block their jet aircraft from being tracked and the golf association that had made that data available said you can no longer get that data. I think it’s a pretty sad commentary.
But certainly the next year when we worked on the backdating and stock-options investigation—that one had an explosive impact. Certainly can’t complain about impact on that one.
TA: One of the great business investigations of all time. Can you talk about that and the advent of that series?
MM: I think it’s one of these things where I was rooting around in the same neighborhood already, which was executive compensation. One of the people I talked to said there was this paper circulating in academic circles on this theory that this guy has at the University of Iowa, Erik Lie, that people were improperly backdating their options to make them worth more.
Once executives started having to file when they got their stock options, you could start compiling a huge database and then analyzing that against stock prices, which is what he did. And he found that they were on average given on very advantageous days, which was extremely improbable. So somebody must have been cheating.
I thought that was kind of interesting. But the issue was that it was a theory and there were no actual cases of it. We called around to a few people and no one believed it was true. In fact, the guy was actually having trouble getting the paper published because of that very thing. Essentially what he was saying was there’s massive fraud going on inside corporate America that no one’s discovered, and basing that on statistical evidence from the database.
About two weeks after that initial conversation, I saw that the SEC actually brought a case about something that looked similar against a company in California. I thought, “Wait a minute. Maybe there is something.”
So I jumped in and worked with the reporters on a small story that day. And then I did a page-one story about how the SEC had been looking in this area in a somewhat limited way. But no one seemed to pay the slightest attention. There were no follow-up stories, as far as I could tell. I decided there’s got to be more of these companies out there.
I was talking with James Bandler, who worked for me at the time about going into this stuff, and Charles Forelle, who worked in the Boston office but in a different unit, was a mathematical type. He was sort of wandering by this hallway conversation and said “Why don’t you do something about probability of these people getting their options on particularly favorable dates?” That’s essentially how the project was born. I had the idea and Charles had the mathematical approach to it and James did a lot of digging.
We published the first article, which said this is so highly improbable that the only explanation would be backdating. We didn’t actually accuse anybody of doing anything illegal, we were very careful. But when you’re talking about billions-to-one odds, it seems likely.
There was silence for a while. And then a couple of companies announced internal investigations, and Wall Street research firms started doing their own analyses of different companies using a slightly different statistical approach.
TA: Was it frustrating to you—I can remember the pushback, including by the editorial page of the Journal itself, saying “Well, this isn’t fraud.” I think most people were shocked and thought this stuff was fraud, but was this something you had to take into account in subsequent stories?