Sunday, July 23, 2006

One Reyes Leads to Another

Greg Reyes, former CEO of Brocade, is the first executive to be charged for options backdating by the SEC. Although this story was in the news for several days, I was surprised that no one mentioned that there is another high-ranking executive named Reyes in Silicon Valley. His name is George Reyes, the current CFO of Google. A little research on the Internet indicates that George and Greg are related. I pointed this out on Kudlow & Company last Friday and said we could see a huge sell-off in stocks if the backdating scandal were to spread to a company as prominent as Google.

Do I think Google is guilty of backdating options? It's possible, but I doubt it. So far, the companies being investigated appear to have engaged in this practice prior to the enactment of the Sarbanes-Oxley Act in June 2002. Google wasn't a publicly-traded company until 2004. The required Sarbanes-Oxley controls make it more difficult for companies to get away with backdating today.

Yet even if it's more difficult to do it now, that doesn't mean that no one is doing it. After all, it isn't even clear yet if backdating is illegal. Almost everyone agrees it is unfair and perhaps unethical, but until someone is actually convicted, it won't be clear if it is illegal. After all, there is no law on the books that explicitly bans backdating. So the SEC has to argue that backdating is equivalent to fraud. That may be the case, but it's up to the courts to make the decision.