Dang, That’s Good

With many moving parts, the WSJ's options series took serious stones to publish

Sometimes The Audit can only drop its monocle, place the riding crop under its arm, and bring its heels together with a deferential “click” in recognition of truly original and potential-lawsuit-defying work in the business press, and this can and will be done today in the direction of the Wall Street Journal’s options-backdating series.

Sure, this is a bold position for The Audit to take, coming mere days after the Pulitzer board upstairs said basically the same thing. What if the board changes its mind? What if someone disagrees? But The Audit says, “I will take that risk.”

But here’s the thing: It’s one thing for business reporting to win a Pulitzer. It happens. But to win the Public Service prize, well, journalism honors do not come any higher. I mean, winning the investigative prize is hard enough. That, by itself, takes courage, foresight, perspicacity, refinement, good looks, a certain—comment dit-on?—muscular rectitudinous virtuosity. Indeed, one would think that would be glory enough for a lifetime, and it is!

The options series, though, was extremely creative and bold, even as these things go. It showed that scores of companies – including brand names – gave top executives the right to buy shares at a date in the past, when the price was low, in effect betting on a horse race(1) after it was over, while pretending the grants were given at the market price in real time. The series resulted in 140 companies coming under investigation by the Justice Department or the Securities and Exchange Commission, eighty executives losing their jobs and criminal charges against ten people, including the fugitive in Namibia.

And while the total number of potential wrongdoers identified is less than 3 percent of public companies, I leave it to Audit Readers to decide whether the series provides fresh evidence of the willingness to define deviancy down at the top levels of the U.S. business culture.

So, you must read the Wall Street Journal options series, by Charles Forelle, James Bandler, Mark Maremont, and Steve Stecklow (all based in Boston, by the way, and not, as The Audit mistakenly suggested two weeks ago, part of the Money & Investing Group, based in New York. Maremont heads a special projects group there). The longtime bureau chief up there is Gary Putka, who back in the mid-1990s interviewed The Audit for a job wearing a Hawaiian shirt (Overdressed in a Glen Plaid suit and rep tie, I ended up in the New York bureau).

If your heart does not skip a beat when you hear the words “options” and “series” in the same paragraph, at least read the first day, March 18, 2006. And to truly appreciate it, you must mentally send yourself back – just go back, Audit Reader, back in time, back to the evening of March 17. The paper is already coming off the presses in Hong Kong, or wherever they’re printed over there. Maintenance is vacuuming around your cubicle. It is too late for fixes. You, Forelle and Bandler, are running a story that says several companies, including Affiliated Computer Services Inc.—not a household name, but a sizable public company nonetheless with, one assumes, plenty of lawyers—paid compensation to its chief executive in ways that look suspicious and are possibly illegal. You are saying that this and other New York Stock Exchange-traded public companies—with their boards of directors, CFOs, human resources and accounting departments, general counsels—may be cheating.

Or at least, you are pointing out a “striking pattern” in which Affiliated Computer’s CEO Jeffrey Rich was awarded the right to buy shares on six different dates “just before a rise in the stock price, often at the bottom of a steep drop.”

“Just lucky? A Wall Street Journal analysis suggests the odds of this happening by chance are extraordinarily remote — around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 ticket are one in 146 million.”

Remember, there is no such thing yet as an options-backdating scandal. There are no guilty pleas, earnings restatements, forced ousters of executives. The rest of the business press hasn’t yet piled on, pretending it knew it all along. There was then an SEC probe, but those can, and usually do, fizzle, leaving you, the reporter, alone.

And that incendiary 300-billion-to-one figure? That’s based on your own math. Sure, you had help (an assistant statistics professor at Yale) and have a fairly strong endorsement of the whole thing from a New York University associate finance professor (since promoted). But what if your x really should have been an n or pi should have been raised to the fifth, not the sixth power? What if the company’s battalion of PR people, accountants, lawyers, and compensation consultants, who will no doubt study the story like Gemara , find the odds were “only” 240 billion to one?

Now, you are on defense. Your methods are up for grabs. Your assistant associate deputy professors are no good to you. You are writing the correction, which, by necessity, will be half as long as the story, along with a stoically businesslike memo to your bureau chief, copying everyone up to Jesus H. Christ. It is quieter than usual in the elevator. Someone says, “hey, the rest of the story was great!” but, somehow, you are not comforted and even momentarily question this person’s motivation. You contemplate a new phase of your career as night copy editor for the Far Eastern Economic Review.

Think it hasn’t happened before? MMAR’s $220 million libel verdict versus Dow Jones in 1997 was eventually thrown out, but the case took a toll.

But the “Perfect Payday” story is just the start. You are also going to say, among other things, (on July 15) that ninety-one companies, including Home Depot Inc., Merrill Lynch & Co., and United Health Group Inc. “rushed, amid the post 9/11 stock market decline, to give executives especially valuable options.”

And in case readers don’t get the point, after raising the question of whether these corporate icons backdated options, which is usually illegal, you say:

“The multiple options grants after 9/11 raise a different question: Did companies take unseemly advantage of a national tragedy?”

And if you are under the impression that Dow Jones & Co., the WSJ’s publisher, is some kind of financial juggernaut that can withstand big jury verdicts, then I can safely say that you, unlike The Audit, are not a DJ shareholder. You can thank your broker now.

The point?

The series was smart, effective, original, and took institutional, as well as individual, courage. And while Pulitzers are only one measure of the health of a paper, work at this level must be recognized. Otherwise, why have The Audit?

1. That’s a good Bandlerian analogy. As for options: If your stock trades at $20, it’s better to own the right to buy it at a low point, say $10, so you are guaranteed $10 a share, rather than at a random point, say at $19, which means you only make $1, or at $21, which means your options are worth nothing.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.