Authorized Embezzlements

Stock Options are touted as a means of obtaining and retaining highly qualified persons as managers or employees of publicly owned corporations.  Alternately they can be viewed as "authorized embezzlements" of ownership of the property of cash paid public stockholders, generally approved by "Institutional and Mutual Fund" holders of shares (or by controlling insiders) who are relying on their bribed and overpaid manglers to facilitate fraudulent transfers of the ratable property of all and often more than all of the stockholders equity to their stock manipulation gangs under the euphemism "stock buybacks".  The way that gimmick works is that, in order to steal the ratable property of all other stuckholders, the ones who continue to hold shares in the gutted and looted company after the thefts, the criminal manipulators rig market prices to ludicrous high levels, wildly beyond the Net Tangible Equity of the company, then "sell" their manipulated shares to the company under that euphemism "stock buybacks".  Fortunately, the distinction between those two viewpoints is quantifiable and measurable in advance of the severely damaging impacts of the "authorized embezzlement" version.

There are three components to the manner in which I am able to determine *which* viewpoint of "stock options" is applicable to any given company.  They are:  the percentage of current outstanding shares which is committed to awards of stock options, restricted stock, performance units, and other grants of shares or share equivalents for the benefit of managers and/or employees; the questionability of members of the Bored of Die Rectors which grants those shares or equivalents; and the historic reliability of the auditors of record in their reports on the financial conditions of other companies. 

The percentage intrusion into ownership is a complex thing to measure because of the manner in which it is reported, if at all.  In general, it is only when a company of interest has passed other important tests of viability before I am willing to spend the time and energy to gather the required information.  But before I am willing tocommit my hard earned money to purchase of any shares of stock for myself, I do in fact require that measurement.  How I get the information is to go to the SEC's EDGAR web site and enter the ticker symbol (or first part of the name) of the company of interest.  That brings up a listing of all of the filings available for the company.  It is typically the most recent Form 10K (annual report) or Form DEF14A (meeting notice, especially if the company is planning to increase its authorized embezzlements) which contain the information on "how many shares" are involved.  A search through the forms on the word "options" will usually get me to the requisite detail.  There are some companies so aggressive about their invasions of ownership as to create "reloading" stock options plans or plans that provide for automatic annual increases.  When they do, I assume (regardless of "plan terms") that the increases are going to continue for ten years into the future and add ten times the annual increase or reload into my calculations.  It is the sum of all of the different forms, currently granted, available for future grants, restricted stock awards, and "so forth and so on" which needs to be added up to arrive at the numerator for the percentage intrusion.  The denominator, number of shares currently outstanding, is typically disclosed near the top of the Form 10K or more recent Form 10Q or in the balance sheet of the company (or both).  Number of intruding shares/equivalents divided by outstandings is the percentage intrusion.

Boreds of Die Rectors are NOT necessarily functioning in the best interests of cash paid public stockholders.  In order to review the "questionability" of the members of the Bored, it is necessary usually to review the most recent Form DEF14A notice of annual meeting to review the characteristics of each of the individuals serving or intended to serve on the Bored.  Certain kinds of people have historically proven, during my nearly 52 years of involvement with securities, to be adverse and/or severely damaging to my interests as a cash paid public stockholder.  Quite obvious are those persons who have been involved with other companies which declared bankruptcy.  They aren't banned from "serving" on other Boreds under current Merkan law and their "experience" already points them in the direction of destroying "yet another" public company.  Licensed professional liars (euphemized as "lawyers" or "members of law firms") are another historic disaster area since they generally are not there to keep companies *out* of trouble but in fact to cover up wrongdoings.  Medifrauds (euphemized as "doctors" or "dentists" or other "health care" professionals) are another.  Those with any connections to "private equity" or "venture capital" or "investment advisory" or "brokerage" companies are another.  They aren't there to look after *my* interests nor the interests of other cash paid public stockholders but only their own special interest group.  Politicians have been especially damaging, diverting stockholder resources to fraudulent "job creating" wastages never recovered by the afflicted businesses, so all goofernors, legis critters, Snitters, ambassadors, and other "political" appointees are counted as "questioned".  Those who respect "educators" in other contexts ignore the reality that their ivory tower viewpoints just plain don't wash in the real world of business.  That failure to mesh with reality is when they're not mere representatives of criminally gutting and looting "endowment funds" such that their only interest is in stealing the ratable property of the cash paid public stockholders for the aggrandizement of their gang.  Geriatrics, defined as anyone who is now or will beduring the scheduled term as a Die Rector over the age of 70 years, are another based on the historic severe damage done by such as His British Lordship the criminal mastermind Greedspan on behalf of foreign goofermints and similar damage done even by legitimately American persons over that age.  Yes I know of several brilliant elderly persons who have successfully run public companies and I myself am within a year of being over that "questionability" age but each such person is added into the "questioned" list among the Bored of Die Rectors.  "To be appointed" to declared "vacancies" on the Bored also gets added to the "questioned" list since I have no way of knowing *what* is going to be appointed and must assume the worst.  There may be exceptions to these general rules about "questionability", e.g. medifrauds on the Bored of a pharmaceutical company, educators on the Bored of a commercial institution of education, brokers on the Bored of a brokerage company, all of whom are entirely appropriate *in context* and therefore not counted as "questionable".  But in general for the vast range of companies, these guides are what I apply.  What I do is to add up the number of questioned Directors, divide by the total number on the Board, add "one" and use that number, e.g. 1.45x, as a multiplier for anything else on which the Bored's "discretion" might be a negative influence on the value of my involvement.

The historic reliability of the Auditors of Record is important because, although I may not know what they're doing in any one specific company, I can look at the history of carnage which false or incompetent or inadequate reporting has done to other companies of interest.  Over the years, I have developed another multiplier based on "who" the Auditors of Record are.  The current Ernst & Young LLC and any of their affiliated companies are provided a multiplier of 1.30x (they had so many "problem" companies that at one point the SEC even sanctioned them by prohibiiting them from serving as auditors for anybody new).  Next highest is Price Waterhouse Coopers LLC with a multiplier of 1.25x based on their apparent wrongdoings at TYC, Gazprom, and BMY.  KPMG LLP is rated 1.05x based on a fraud at APWR without other known wrongdoings.  Only Deloitte & Touche LLP has escaped notice as a source of questionable financials and still has a multiplier of 1.00x, as by the way do all of the smaller Auditors of Record who have yet come to my attention as sources of questionable financials.

Multiplying the three measured factors together, I come up with "a number" which I call the BEZZLE FACTOR.  For example, a company intruding into ownership to the extent of 12.3% of current outstandings, which has a questioned component of 1.45x on its Bored of Directors, and which uses auditors with a reliability rating of 1.05x would have a Bezzle Factor of 18.7% which I translate to 1.187 for other purposes beyond its original computation.  Over time, I have developed a set of standards as to what those Bezzle Factors *mean* to me as a potential or current stockholder.  Below 12.5%, that's a simple "okay, genuine obtaining and retaining qualified people".  Between 12.5% and 25%, well, they're getting a little "enthusiastic" about invading ownership but I can probably survive (although I do use the upper part of that range as a divisor into otherwise expected full value in some instances when pricing potential sales).  Between 25% and 37.5%, I consider the Bezzle Factor ALARMING and will tend to avoid involvement and lower the amount I'm willing to pay to buy into such situations by the appropriate divisor, e.g. 1.352, resulting in a biddable price 35.2% *less* than I might pay if the company wasn't engaged in ALARMING intrusions into ownership.  Between 37.5% and 50%, I consider the Bezzle Factor DANGEROUS and typically will avoid such things altogether.  Over 50%?  Well heck, whose game is this anyway? a fraud and theft game for empees who are already being overpaid, provided with salaries and fringes at the expense of ripped off cash paid public stockholders which are at least "competitive" and typically above normal anyway?  Pshaw! not investable situations for human sorts.  By the way, I have seen "a few" that exceeded 100%, i.e. insiders were stealing the company lock, stock, and barrel.

The pretense of the munchiment which proposed the changes that caused me to sell my remaining shares of LSI, that it was they and their empees which "created the value" demonstrated in the skyrocketing stock price, was absurd in any event.  Reality was that it was the criminal manipulations of the Internet Mania swindles engineered by His British Lordship the criminal mastermind Greedspan and such fraud and deception spewing media as the Generic Eclectic "financial news" telebitchin station of that time period which skyrocketed the shares.  Nothing to do with "the company" at all, only a wild and woolly criminal manipulation environment in which borrying gamblers were able to *pyramid* their holdings as the prices skyrocketed and there was a "greatest fool of them all" in the form of Soros' money mangler Druckenmiller who had been short of massive quantities of shares and then reversed himself by covering and going long of the dot cons and dot gones into March of 2000.

My original copies of the annual reports and proxy statements for LSI Logic have long since been discarded since my last transaction in the shares was now more than 13 years ago.  In order to shed some light on what alarmed me so severely as to recognize substantial taxable income by selling all of my remaining shares of the company on April 5, 2000, I looked at the filings which remain available even now on the SEC web site.

The DEF14A proxy statement was filed March 24 with the SEC and my original copy arrived in my postal box only a few days prior to the sale of the rest of my shares on April 5.  It and a related document on the SEC web site indicated that as of the March 17 record date for voting (why I could vote at that meeting despite the sale of the rest of my shares on April 5) there were 302.750 mln shares outstanding.  There were also 67.666 mln options granted and 1.194 mln shs remaining available under an Employee Stock Purchase Plan (whose effect is to take only 15% of the amount involved in optioned shares hence I apply a multiplier of 0.15x such availables).  Proposals at the annual meeting included increasing the options availability by 10 mln shares and the ESPP shares by 1.500 mln shares.  That would bring the total intrusion into ownership to 67.666+10+0.15x (1.194+1.500)= 78,070.1 mln shares vs the 302.750 outstandings was going to be 25.8% raw intrusion into ownership.

Looking at the six members of the Bored of Directors, there was one geriatric, one member of the Chicago Federal Reserve Board, and one auditor conflict (a former partner of the firm nominated to do the audits of the company).  Under the circumstances of year 2000, when His British Lordship the criminal mastermind Greedspan was refusing to rein in the criminal manipulations of the Internet Mania swindles, despite himself having stated that the only way to rein in manipulative bubbles was to increase *margin* rates (not the interest rate increases that he yammered about while refusing to rein in the fun and games of the criminal manipulators in years 1998 through 2000), the notion of having one of Greedspan's flunkies on the Bored of a company in which I had a financial interest was reprehensible all by itself (still would be in light of the felony abrogations of Article IV of the US Constitution Amendments in which the Frauderal Reserve Bored continues to engage against the American people).  Then too, although the remaining available documents don't disclose it, I recall that the Chairman and founder of LSI was a widely known "venture capitalist" making it four questioned of the six member Bored, a multiplier of 1.67x.  The Auditors of Record proposed to be ratified at the meeting were PriceWaterhouse Coopers LLP which then had and still has a required multiplier of 1.25x, while the auditor conflict on the Bored was a former partner of that same firm.

The combination of all of those things 25.8% raw intrusion x (1+4/6) multiplier for questioned directors x 1.25 Auditor reliability adjustment was equal to a computed Bezzle Factor of 53.7%, far above the DANGEROUS range.  Adding insult to injury, the Bored was proposing that it be authorized, in addition to the 450 mln maximum number of shares for which it already had authority, to spew forth yet another 850 million shares at whim for any durn thing they might please to spew the shares forth, i.e. more than two shares "to be issued to whomever for whatever" for every one share voting at the meeting.

It is likely, based on this years later perusal of documents still extant on the SEC web site, that the Bezzle Factor for LSI was already quite high, albeit not so absurd as 53.7%, even before the meeting.  That likely was a reflection of my considerable tolerance for bad behavior by companies in which I have a financial interest *after* they establish themselves as "Fully PaidFor stocks", i.e. after I have recovered at least 1.41x my remaining basis in the shares that I still have.  As shown on the chart of LSI which I presented here, that was the case ever since my partial sale of shares on 990709 by which time I had established a PaidFor Stock Ratio of 1.52x my then remaining basis in the 54.5% of maximum holdings that I still had.

The key point of this discussion remains that excessive spewings of freebie stock options to munchiment and empees is destructive not only of stockholder value but even suicidal for the interests of the empees provided with those freebie shares.  Too much of a "good thing" (what stock options are touted to be) turns out to be a very bad thing indeed, as it did for LSI and the continuing stuckholders of year 2000.
 


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