Some U.S. Public Companies Being Charged with Backdated Stock Options for Senior Executives

Mar 2007 // CNN in the Money

VELSHI: All right. Something like 200 U.S. public companies under investigation over charges of backdated stock options for their senior executives. Tom Ajamie is going to explain why all of this or how all of this might have an impact on you. He is a partner at Ajamie LLP in Houston; he is a securities fraud attorney. Tom thanks for joining us.

TOM AJAMIE, PARTNER, AJAMIE LLP: Hey Ali thanks for having me.

VELSHI: You and I have had this conversation before. I’m a shareholder. As a shareholder I’m an owner of a company, which means that company owes me a debt of responsibility. When I hear about these stock option back dating scandals as an investor, as an individual, have I’ve got any recourse or do I just hope that sort of justice works its way through?

AJAMIE: Well you at legal recourse, you probably don’t have a whole lot, unfortunately. It’s hard to bring a lawsuit in these circumstances. I think the recourse you have, though, is to sell your stock in these companies where their executives are cheating and back dating the stock options, granting themselves huge, multimillion dollar pay packages and really is not honestly paying themselves. It shows a lack of integrity by certain companies and I say, you move on. Because when you’re a shareholder you’re voting for the company, you are saying hey I like this management and I trust them with my money. Why would you want to trust your money with someone who’s, frankly, just cheating?

WESTHOVEN: OK. I got that you can say, you know, I’m taking my ball and I’m going home. I’m not playing with you guys you’re cheaters. I’m wondering if there’s something else can you do? And that is because I’m interested in the concept that instead of me having to be responsibility, I know, weaseling out here, for every single company that I invest in, can’t I go a socially responsible fund, where someone like me, we pool our money together and that way we know that this is an activist group, that they’re calling that company and that they’re really doing something to change? Because you know we can leave, that’s true, but how do you really affect change? You might care about that company. People who work for Home Depot for years they really care and were really upset at what happened there.

AJAMIE: If you’re a shareholder, obviously you have some rights, there are annual meetings that all companies have and a lot of individual shareholders actually show up at those meetings and make statements of such. Of course you can write to the company and things like that. So you do have some power as a shareholder, of course.

WESTHOVEN: Don’t you look a little bit like a kook, though when you are holding up a sign at the stock market?

AJAMIE: Right. Standing in the back of the room holding a sign up? Well, that’s the degree of your power. As an individual shareholder, as a smaller shareholder, it’s not as though you have clout to vote the bad guys out that is for sure. That is the extent to what you can do. Now, in some of the really major cases, I’m going say like United Health, where the stock option grants were so huge, the company had to actually come back and restate its earnings over a billion dollars.

VELSHI: That was outrageous!

AJAMIE: Outrageous. And there’s class action there’s now. So if you are a shareholder, you may recover some money through the class action process.

WASTLER: Tom, what about an honest shareholder? Like Home Depot I shopped there all the time. Until they drove all the other hardware stores out of business. But shop there; I don’t own any of the stock. Should I care about astronomical pay packages and things like?

AJAMIE: Actually you should care about it. When an executive is taking $80 million in paying himself, or $100 million and paying himself, that’s money that’s not going in to improving the store. That’s money that’s not going to pay the employees. That’s money that’s not going in to the pension funds for those people. And that does have an affect on a store. If you have a bunch of unhappy employees, if you have a bunch of employees who maybe don’t have good healthcare programs and such, you also have a lot of turnover, right? People that don’t want to work for that company. So you will see these types of things actually do affect service at companies, and so the quality of the company.

VELSHI: Tom, correct me if I’m wrong, you’ve actually represented people in some of the biggest settlements in the securities industry. When people do get settlements, when they successfully sue, whether it is a class action or in the case of some of your clients, individuals what kind of money do they ever see in these big fraud cases?

AJAMIE: Well look, Ali, if it’s a shareholder class action case, I think the general rule of thumb is you might recover 5 to 10 to 15 cents per dollar you lost. If you go to a lawyer and he or she just takes you on individually as a client and sues, just a one-on-one, those recoveries are often a lot higher. You can see 50 cents, 75 cents; even sometimes you can get all of your money back.

VELSHI: Tom good to talk to you. Thank you so much for being with us.

AJAMIE: Thank you, guys.

VELSHI: Tom Ajamie, securities attorney joining us from Houston.

It is, that is the case in the end. Your view is interesting that if you get under the front end of this and make investment decisions wisely at the front end, it is going to be a whole lot easier to recover lost money.

WASTLER: Down the road.

WESTHOVEN: Can you imagine these people at Enron that lost their jobs and their life savings? To get 10 cents back on the dollar? That is everything they ever had. It’s horrible.

VELSHI: Good advice to think ahead about the companies that you want to invest in.

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