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Ghost of Informix rises in accounting scandal indictment as CEO faces jail threat

CRM-FORUM.COM

Just when it seemed that the big accounting scandals were behind the IT industry, along comes a reminder of one of the originals with the long-anticipated indictment of Phil White, former CEO of once high-flying database and software vendor Informix.

White has been indicted on eight counts in connection with financial accounting fraud at Informix in the late 1990s. He is accused of signing bogus 1996 financial earnings statements, concealing improper transactions and acting to prevent the restatement of earnings. Court papers filed allege that overstating earnings at Informix was so rampant that company insiders referred to the end of the year as ``December the 45th.''

After company auditors and its board discovered the irregularities in 1997, White was fired and the company restated its 1996 earnings to show a loss of $73.6 million instead of $98 million in net income, prosecutors said. The company's stock plunged 50 per cent. White made $465,000 in salary and $3.2 million from stock sales in 1996, according to the indictment. The U.S. Securities and Exchange Commission also filed a civil lawsuit against White.

Informix’s database business - once a serious contender to Oracle - was later sold to IBM for $1 billion while the remaining Web services software is now sold through Ascential Software which was split off from Informix.

His attorney, Elliot R. Peters, said White was a victim of legislative fashion. "In today's climate it is politically popular to indict former CEOs," said White's attorney, Elliot Peters. "In this instance the government has wrongly charged a man who did nothing more than act as a responsible corporate leader. When Mr. White is ultimately cleared, we hope the public and the media will ask why an innocent man was forced to answer these baseless charges," Peters said.

The Informix scandal has been waiting to explode for years. An earlier SEC investigation concluded that Informix faked $295 million in revenue from 1994 through 1997 by back-dating contracts, booking income on unsold products and other violations of accounting rules. Informix settled the case in 2000 while in 1999, Informix and its former auditors, Ernst & Young, settled dozens of securities fraud lawsuits for $142 million.

Federal prosecutors two years ago indicted Walter Konigseder, Informix's former head of European sales, in connection with the fraud allegations, but German law prevents him being extradited to the USA.

White will make his first appearance in court Tuesday. If found guilty, White faces a maximum 10 years in prison for each of the eight counts alleged in the indictment.

I don't have the full information I would need to make a conclusive judgement, but I don't believe these people did anything wrong.

It was fairly well recognized that the Internet boom was likely to crash and burn at some point, since the profits weren't there. So if you were a savvy CEO or executive, would you not cash in enough of your shares to make sure your future was protected?

I know I would, if I was CEO. It's just the smart thing to do, and as long as my financials are honest, there's nothing wrong with selling shares.

Public warnings that the tech boom was going to collapse were all over the place before it happened. A friend of mine wanted me to help him invest in Internet stocks at the top of the boom. I researched it and told him everything was way too overvalued, so I didn't want to do it. And guess what? I was right.

Here's the heart of the matter: Many of them held on to more stock than they sold, to give them continued control over their companies, and because they genuinely believed in their future.

Graef Crystal, a leading compensation expert in Las Vegas, believes the problem has been overblown. He points out that while many executives sold their stock, many of them could have sold far more, which they elected to keep and which eventually became worthless.
``The fact that they left huge amounts of money on the table does not suggest they knew something was coming,'' Crystal said.

In other words, they were not betraying their company, but simply diversifying their assets.

Is that bad? And should that be illegal?

Many of these people were probably as surprised and disappointed as their shareholders. And to forbid insiders to sell stock, as one fellow suggests in this article, would destroy the very motivation that makes entrepreneurs start new companies.

You start a company, you work like hell, you succeed, you sell some of the stock so you can realize some of the benefits of your work, and then the bottom falls out.

I hate to say it, but that's the way capitalism works. Creative destruction. A hundred companies fail, but one succeeds, and transforms the economy and the country. For a while there the boomer generation thought they had a permanent entitlement to a 15% or more return on their money every year, but that simply isn't possible.

The alternative is centralized control and planning, and over-regulation, so sick companies are kept alive and innovation is killed. That just doesn't work. In the end, people are much worse off. Just ask the Eastern Europeans or even the Japanese.