Friday, April 30, 2010

Did Lehman's Dick Fuld Lie Under Oath About Compensation?

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A quite fascinating piece in Bloomberg for those interested in the subject matter, that being executive compensation, how it is hidden by abusing the "spirit of the law", board of director cronyism, and the myth that the CEOs of failed companies actually felt any real pain. We have created a heads we win, tails we still win [Sep 27, 2008: Heads We Win, Tails We Win] executive compensation culture - which is leading to asymmetric outcomes.

But nothing will change in Cramerica, so let's keep the good times rolling. [Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain] [Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Rugs] [Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]. And it is not just with our oligarchs... Home Depot paid former CEO Bob Nardelli $200M just to leave (heckuva job Brownie!), and Chesapeake Energy ... well it's too long to explain. [Apr 9, 2009: Chesapeake Energy CEO Aubrey McClendon With New Shady Compensation Deal] Many only slightly less egregious events happen each quarter, and year. Be assured you can go company by company ... and realize public corporations have simply become feeding troughs for the few & proud - while jetissoning the American middle class worker to the unemployment rolls in proud fashion [Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]

As for Dick Fuld, of failed Lehman Brothers, we'll see if years of lobbyist compensation will keep him out of the hot seat for misrepresenting (allegedly) his compensation status under oath. I realize it takes special "talent" to run a company into the ground, but really folks - we're talking half a billion in compensation to 1 individual for not even a decade's work.

As an aside, here is yet ANOTHER example of a whistleblower who contacted the SEC ... and the captured regulator could care less.


Snippets via Bloomberg:

  • On Oct. 6, 2008, three weeks after Lehman Brothers Holdings Inc. filed the largest bankruptcy in U.S. history, Lehman’s former chief executive officer found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform.
  • “Mr. Fuld will do fine,” Waxman said. “He can walk away from Lehman a wealthy man who earned over $500 million. But taxpayers are left with a $700 billion bill to rescue Wall Street and an economy in crisis.”
  • Fuld said he was a victim... Reckless management had nothing to do with it. “Lehman Brothers,” he said, “was a casualty.”
  • Fuld and Waxman went on to disagree about just how much money Fuld had taken out of Lehman before it went under. Fuld, now 64, said his total compensation from 2000 through 2007 was less than $310 million, not the $485 million that appeared on Waxman’s chart.
  • He said 85 percent of his pay was in Lehman stock that had become worthless. “I never sold my shares,Fuld said at one point. (errr!!) At another, he said he had not sold the “vast majority” of them.

Just typical charades up to this point.... now it gets interesting:
  • Among those closely observing Fuld was a 49-year-old former Lehman lawyer named Oliver Budde who was watching the hearing at home on C-Span. Budde (pronounced Boo-da) was certain Waxman’s figures weren’t too high. They were too low, and he could prove it. Fuld, he believed, had understated the amount he was paid during those years by more than $200 million, and now he had done it under oath, for the entire world to see.
  • For nine years, Budde had served as an associate general counsel at Lehman. Preparing the public filings on executive compensation had been one of his major responsibilities, and he had been infuriated by what he saw as the firm’s intentional under-representation of how much top executives like Fuld were paid. Budde says he argued with his bosses for years over the matter, so much so that he eventually quit the firm.
  • He contacted the Securities and Exchange Commission and the Lehman board of directors and says neither showed interest in meeting him. (well the latter group was just joke to contact, considering they are the people setting the pay hah! That's like telling the fox you'd like to met him about the matter between him and the hens)

The middle part of the story goes into how option grants were abused, reclassified, logged into footnote areas on annual reports rather than in plain sight, etc etc. All the usual obfuscation so that we have transparency. It is actually very enlightening...


Specific to the SEC, the organization looking over your back dear readers (watch for the knife):
  • Budde decided to go to the SEC as a whistleblower. He sent a detailed two-page e-mail on April 14, 2008, to the SEC’s Enforcement Division, under the subject line “Possible Material Noncompliance with New Executive Compensation Disclosure Rules.”
  • ... detailing what he believed was Fuld’s failure to disclose more than $250 million in restricted stock awards,
  • He got a standardized form thanking him for his letter in return. He never heard anything else. (thanks for playing!)

Bottom line:
  • While Fuld said he earned less than $310 million from 2000 through 2007, he actually had received $529.4 million, according to Budde’s calculations.
And about that "I did not sell any shares... err I mean I had not sold the vast majority of them"
  • In direct contradiction to Fuld’s claim to Waxman that he had not sold the majority of his shares, Budde estimates that Fuld earned $469 million from stock sales between 2000 and 2008. These calculations are supported by the working paper from a Harvard University study that was made public late last year and is scheduled to be published this summer in the Yale Journal on Regulation.
  • In “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman, 2000-2008,” Harvard Law faculty ..., calculated that Fuld earned $522.7 million from 2000 to 2007, only slightly less than Budde’s tally.
So it's not just a rogue ex employee detailing the "lies". (allegedly)

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Anyhow that is what the "free market"* will bear for compensation, just as the massive bonuses are continuing today as the "free market" is holding short term rates at zero so banks can print money in their sleep. Viva la free market.

*free market = a small subset of board members who direct compensation packages, many of which are CEOs themselves. You rub my back, I'll rub yours. Just think how awesome we'd all be paid if we set the pay for our peers at other companies. We'd all earn half a trillion in 8 years.

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