Outperforming the Market

With just one more day of trading left, stocks are in danger of closing lower for January. As I write this, the Dow is up only 0.4% so far this month. Yet, as my staff and I put together the February issue of the Forbes Growth Investor, we are encouraged by the strong performance we are seeing from our picks. Our model portfolio is currently up 1.6%. Our sub-portfolios are doing even better. The Aggressive Growth portfolio is up 5.3%, benefiting from the 34% surge in MEMC Electronic Materials (WFR). This company recently reported outstanding top-line and bottom-line results and enjoyed several upgrades from Wall Street analysts. We will put out a full report in the February issue, which will be released to subscribers on Feb. 2.

Our Special Situation Survey investment newsletter is also doing great. This model portfolio is up 2.5% year-to-date, also well ahead of all the benchmarks. Ironically, one of our picks, Pilgrim's Pride (PPC) is up more than 4% today alone despite missing earnings estimates and warning of higher expenses in future periods. While I remain cautious about the overall market, I continue to believe it is possible to outperform through superior analysis.

Speaking of the overall market, we will learn more tomorrow when the fourth-quarter advance GDP estimate is released. That comes out before the market opens, so we could see quite a bit of volatility. The consensus estimate is 3.0%. My expectation is something closer to 2.5%. Tomorrow is also the day the Fed wraps up a two-day meeting and announces its decision on interest rates. I'm still surprised by those who believe the Fed will cut rates. If the Fed makes any move at all right now, it is likely to be a rate hike, not a cut. However, I would be very surprised if the Fed does anything other than keeping rates steady.

Increasing Storage vs. Driving Smarter

I've been asked a number times recently what I thought about the president's plan to increase the Strategic Petroleum Reserve from its current maximum capacity of 727 million barrels to about 1.5 billion barrels.

My initial reaction is that expansion of the SPR will support oil prices and keep them from going lower because it increases marginal demand. However, the government will not be filling the expanded capacity all at once. It will do so slowly over a period of several years, so there shouldn't be much impact on world oil prices.

Yet I still have to wonder if storing all that oil makes sense. After all, oil is already stored. It is stored in the desert in Saudi Arabia. It is stored in Iran, Iraq, and Venezuela. The SPR merely transports oil from one storage facility to another. Does this make sense?

The purpose of the SPR is to provide a margin of safety in case one of our major suppliers decides to impose a boycott. That happened in the 1970s. However, despite some temporary shortages at that time, the only serious consequence was higher oil prices. And we saw that higher prices quickly eliminate shortages. What oil producer can resist saying no when the price is high enough?

I'm not convinced we need to expand the SPR. We still have enough room to store an addition 40 million barrels in the current SPR. In fact, we already have about 60 days worth of import protection.

Reducing consumption is far more effective than increasing reserves. The president also called for a 20% reduction in gasoline consumption over the next 10 years. This is not an unreasonable goal. But it won't be achieved with ethanol alone. The most promising technology on the immediate horizon to help reduce consumption is the plug-in hybrid. Several automobile manufacturers are planning to introduce these. Furthermore, demand for gas-guzzling SUVs is way down. Chrysler is even planning to bring the Smart Car to the U.S. We can immediately reduce consumption by a considerable amount simply by driving smarter. It looks like last summer's $3 per gallon gasoline price was all we needed to move us in the right direction.

Oil Prices on Slippery Slope

I've been doing quite a few hits on TV lately talking about oil prices. The two questions I'm asked the most are 1) why are oil prices falling, and 2) why aren't gasoline prices falling as much.

As is almost always the case, prices change due to supply and demand constraints. We've been seeing for some time now that there is plenty of oil around. In fact, the Saudis had been complaining about the lack of oil tankers to transport oil. That's because all the available tankers were already full and had no place to unload quickly. Furthermore, the mild winter (at least so far) in the Northeastern United States helped keep crude supplies at higher-than-expected levels.

So there is plenty of supply. What about demand? When gasoline prices hit $3 per gallon last summer, consumers suddenly woke up. For the first time in quite a while, average miles driven actually fell. Demand for gas guzzlers also fell. People started thinking seriously about car pooling and avoiding unnecessary trips. Overall demand is down.

This combination of greater-than-expected supplies and lower-than-expected demand has driven oil prices lower. Yet many consumers and commentators are complaining that gasoline prices haven't fallen in lockstep with oil prices. That's true, but that's normal. Gasoline prices lag oil prices. Yes, even on the way up. Nonetheless, gasoline prices and oil prices are highly correlated. In fact, the correlation coefficient for weekly price changes from June 2006 to the present is well over 90%.

Gasoline prices will go lower in the very near term. Especially if demand stays weak. As for the longer term, a cold snap in the Northeast will drive oil and gasoline prices higher. For the much longer term, demand in the U.S. may remain weak as we move toward alternatives such as ethanol, bio-diesels, and true hybrids. But that won't be enough to stem growing demand from India and China. This should keep oil prices firmly in the $40-60 range. I would be very surprised if prices ever fall below $30 again.

When Securities Laws Hurt Shareholders

When a company is owned and managed by one individual, there are no conflicts of interest. If that individual uses corporate funds to pay for personal travel, or wastes money on other kinds of perquisites, he is only robbing from himself.

However, the ownership of the typical modern public corporation is greatly dispersed. There is also a separation of ownership and control. This is why we have securities laws and a Securities and Exchange Commission. The purpose is to protect shareholders.

So what should happen to Steve Jobs, Apple's CEO, now that he has become entangled in the stock options backdating scandal plaguing corporate America? It turns out that backdating is far more common than anyone could have imagined back when the story first broke in early 2006. Now the SEC is overloaded with cases under investigation.

Should Steve Jobs be forced out of Apple? If he is, you can bet Apple's share price will sink. How does that protect shareholders? Even if Jobs resigns voluntarily, the stock will sell-off sharply. Shareholders will lose.

We've seen many examples of wealthy corporate executives trying to add a few more bucks to their pockets, but it is difficult to imagine someone as wealthy and as revered as Jobs doing the same. Perhaps the laws regulating options are too convoluted and difficult to understand. Perhaps it is too easy for even well-intentioned executives to violate these laws without fully realizing it.

On the other hand, suppose Jobs knew exactly what he was doing. Suppose he also realized that what he was doing was wrong. If laws are supposed to apply to everyone equally, should Jobs be forced out if he knowingly violated the law?

It's easier to answer that question in the affirmative if you don't own any shares of Apple. I don't. But you can bet I would oppose any attempts to get rid of Jobs if I did. There are few present-day CEOs who are more closely tied to the success of their companies than he is. Firing Jobs would be a disaster for Apple's shareholders.

There are no easy anwers to this dilemma. In my opinion, the board of directors must choose the lesser of two evils. They can call for tighter controls at the company. They can demand that all options in question be returned. But they should also make sure Jobs remains as CEO.

Stock Picking vs. Market Timing

I am thrilled once again that the Forbes Growth Investor and Special Situation Survey investment newsletters outperformed the market in 2006. According to the Hulbert Financial Digest, the three portfolios in the Forbes Growth Investor had an average return of 16%. That puts it ahead of Hulbert's benchmark, the Wilshire 5000. It also places it in the top quartile of all newsletters Hulbert follows. The Special Situation Survey did even better. Hulbert shows it up 20% for 2006, well ahead of the benchmark and also in the top quartile.

Measuring performance can be tricky. To do it correctly you must consider two skills: stock-picking ability and market timing. An investment manager or newsletter editor who beats the market when the market is rising isn't necessarily a good stock picker. Any ordinary stock picker can do that in a rising market simply by employing leverage (i.e., buying stocks on margin). In order to determine if someone is truly a good stock picker, you must de-lever the returns. That is, you must compute what the returns would have been if leverage had not been used. This is the only way you can separate stock-picking ability from market-timing skill. It is also the only way you can compare the stock-picking abilities between managers who employ margin and those who don't.

Unfortunately, Hulbert doesn't de-lever returns. However, he often warns readers that some results have benefited from the use of leverage. Neither the Forbes Growth Investor nor the Special Situation Survey employ leverage. Our results are produced solely from pure stock-picking ability.

Jobs is Apple

Apple Computer is now Apple Inc. The company changed its name as it unveiled the new iPhone. The stock immediately jumped higher, closing up more than $7 a share for the day.

Seeing Apple in the news for creating an innovative product is not unusual. It has done this a number of times. The Apple Computer and the iPod are two examples. But in recent weeks all the news about Apple had to do with options backdating. It turns out that even Steve Jobs got caught up in the latest scandal. Believe it or not, there are some shareholder rights groups calling for his head. But before anyone shows Jobs the door, they should ask Apple shareholders what they think.

Jobs is Apple, and Apple is Jobs. Imagine what would happen to Apple's share price if Jobs were forced out. I suspect Apple shareholders would be more than happy to overlook this latest options indiscretion.

Time to Buy BSX?

David Rappa was my guest on MoneyMasters today. He is a portfolio manager with Austin Investment Management. That's a relatively small investment management firm that specializes in global equities. Austin manages about $300 million. Most of that is in separately managed accounts, but it also runs a mutual fund with about $50 million.

Austin uses an intrinsic value approach to finding stocks. Rappa told me he is particularly bullish on pharmaceuticals right now. Over lunch we also talked about Boston Scientific (BSX), one of his new holdings. BSX is a stock I've owned on and off since 1992. It's been one of my biggest money makers. I don't have a position in the stock right now, but I have to admit, I am getting tempted once again. Rappa started buying it not too long ago. The stock is currently around $17-18 per share, down from its 2004 high of about $46. The sell-off is due to reports of problems with drug-coated stents and the company's acquisition of Guidant. BSX paid too much for Guidant. It seems BSX was more interested in keeping Guidant away from Johnson & Johnson (JNJ) than it was in actually acquiring the company itself. Perhaps recent strength in shares of BSX indicate that investors believe the sell-off has gone far enough.

My MoneyMasters interview with David Rappa will be posted Jan. 25. This Thursday, Jan. 11, we will post my interview with David Frankel of firstRain, a research firm.

Expensing Options Didn't End Compensation Abuse

Several years ago, Warren Buffett petitioned regulators to make the expensing of stock options mandatory. Some accused Buffett of trying to get rid of options altogether, but his real motivation was to end the abuse. Several noted economists said expensing options would only make them more rare, but it would not end abuse.

They were right. Today options have to be expensed, and corporations use less of them. Yet executive compensation abuse continues. Home Depot's shareholders are the latest to be ripped off. CEO Robert Nardelli resigned and walked off with $210 million. Less than a year ago, Pfizer shareholders paid the price as CEO Hank McKinnell left with $200 million in his pocket.

Most shareholders don't object to paying someone well if he is doing a good job. But it's not like these guys deserved all that cash. After all, shares of both Home Depot and Pfizer were poor performers under their watch. Nardelli and McKinnell simply proved that one sure road to wealth is to become a CEO, do a poor job, then negotiate a resignation.

Whether stock options should or should not be expensed was never the appropriate battle to be fighting. The real problem is inappropriate executive compensation approved by boards of directors who are too weak-kneed to tell the CEO he can't rob the bank.

When directors discuss how much to pay the CEO, the first thing they do is hire a consultant. The consultant comes up with a list of peer companies. Of course, the CEO makes sure only high-paying firms are included in the list. The directors also convince themselves that their CEO is better than average; therefore, he must be paid better than average. This process drives up pay for all CEOs year after year.

Buffett has some excellent ideas on how to structure executive compensation. These include stock options with escalating exercise prices. He was wrong about expensing options, but so many of his other ideas make good sense.

Ending One Busy Year; Starting Another

I have been tremendously busy lately and haven't had much opportunity to post to my blog. First there was the year-end rush at work. I was trying to get as much done as I could in order to free up some time for the holidays. Then there were the holidays. At least I was able to enjoy them with my family. We did quite a bit of traveling between the Philadelphia and Boston areas visiting relatives and friends.

Before the holidays I managed to get up to Central Connecticut State University to make a presentation to Professor Zakri Bello's finance class. Zakri and I are old friends from our graduate school days at Virginia Tech. He's been teaching at CCSU for a number of years and was kind enough to invite me to speak to his class. It was good practice for a number of events coming up in 2007.

As of now, I am scheduled to attend the Money Show, which runs from Feb. 7-10 in Orlando. I will also be on the 11th Forbes Cruise for Investors, which goes from Beijing to Hong Kong in April.

Fortunately, our stock picks turned in another great year. Both the Forbes Growth Investor and Special Situation Survey outperformed all the major benchmarks. Although I remain bearish on stocks, they continue to rally and post strong gains. I am getting more and more worried, however, that these gains will soon end. I'll have more to say about this in the Jan. issue of the Forbes Growth Investor.

Board Independence is no Guarantee

Several months ago I interviewed former SEC Chairman Harvey Pitt about options backdating for my MoneyMasters video program. Pitt is a strong critic of backdating. He argues it is outright fraud.

Recently, I've been spending a lot of time studying up on Warren Buffett. Buffett is one of America's most admired CEOs. He has a clean reputation. He has been a vocal critic of executive greed. He believes many CEOs are overpaid. He also opposes the use of options to compensate executives.

Berkshire Hathaway, Buffett's company, has long been criticized for poor corporate governance practices. In particular, the board long suffered from a distinct lack of independence. Berkshire has a greater number of independent directors today, but this is only because of new NYSE listing requirements.

Despite poor governance, Berkshire Hathaway has been an outstanding stock. It has gained more than 20% annually for several decades. Indeed, there isn't any convincing evidence that companies with independent boards turn in better stock price performance than companies whose boards are not independent. However, proponents of independence say companies are less likely to end up in some sort of scandal when the board is independent.

But a new study produced by three professors argues that even independent directors may be subject to temptation. According to this study, many outside directors profited from options backdating. Lucian Bebchuk, Yaniv Grinstein, and Urs Peyer claim that 1,400 outside directors from 460 companies benefited from options backdating between 1996 to 2005. Their study indicates that the problem is less common at firms that have a majority of independent directors. But board independence provides no guarantee against options backdating.

The moral of the story is that investing is a risky game. The company's business model may succeed or it may fail. Shareholders can't even be certain the board and executives will always act in their best interests. Even independent directors may choose to enrich themselves at the expense of shareholders. The only way you can be sure that a company you own is being run to your full benefit is to run it yourself.

Fed Continues to Worry More About Inflation

The bond market has been betting for some time that the Fed would soon start cutting interest rates. But today's statement from the Fed indicates that a rate cut in the near future is not likely. The statement did talk about slowing economic growth, but it seemed to focus more on elevated levels of core inflation.

The Fed voted to stand pat on interest rates. Jeffrey Lacker, however, voted for a rate increase. The Fed seems to be leaning more toward raising rates than lowering them.

The statement specifically mentioned "a substantial cooling of the housing market." Some would say the housing market is collapsing. Indeed, that's exactly what Gary Shilling said when I interviewed him today for my MoneyMasters video program. Shilling is worried that we could see a 25% price decline nationwide, leading to an economic recession. This video will be available for viewing on Dec. 28.

High Energy Prices and Weak Housing Will Finally Take Toll on Economy

Energy prices and the health of the housing market are perhaps two of the most important factors affecting our economy today. Stocks have rallied in recent months largely due to optimistic outlooks for both of these factors. My outlook is much more pessimistic.

Oil prices peaked around $78 per barrel in late summer. Investors cheered as prices came back down. But I've been pointing out that prices are still very high. Even at $40 to $50 per barrel, they would be much higher than they were just a few short years ago. These days they are hovering above $60 and OPEC seems to be getting serious about cutting production.

OPEC has learned a very valuable lesson. Oil producing nations like to get as high a price as possible, but OPEC was always worried that if prices went too high, economies might go into recession causing demand for oil to plummet. The lesson they learned is that most economies could easily sustain $40, $50, even $60 per barrel. OPEC's target range for oil prices used to be about $25 to $30 per barrel. Today, $60 is the new $30. Now OPEC fears falling prices more than rising prices. It seems to be getting serious about cutting production to keep prices around $60. That is not good news for the U.S. economy.

Housing is also a major problem. Most economists were betting on a soft landing in the housing market. Right now, it looks like the landing may be fairly rough. Inventories are high, prices are falling, cancellation rates are rising, foreclosures are up, and the sub-prime mortgage market is seeing rising defaults.

This double whammy of high energy prices and a collapsing housing market means GDP growth in 2007 will likely be less than 2%.

Housing Stocks Surge in Response to Bad News and Lower Interest Rates

On Nov. 13 I wrote about the options-backdating scandal at KB Home and the resignation of the company's CEO and other top officials. The stock has rallied 20% since then. But it isn't the only homebuilder to surge in the past month. All the stocks in that sector are up including Hovnanian Enterprises and Toll Brothers.

Toll Brothers recently announced fairly lousy financial results, but gave some indication that it may be seeing the bottom. That helped boost the stock. Yet the housing stocks are also responding to lower interest rates. In fact, the rate for a 30-year mortgage is down 25 basis points over the past month to 5.58%. Investors are betting that lower rates will save the industry and once again spur demand for new homes.

Lower rates may stabilize the housing industry, but I seriously doubt we will see a surge in demand. This market is saturated. Speculators have already moved on to other things. Defaults are on the rise--especially in the sub-prime market. Foreclosures are also up. I don't see interest rates falling low enough to save those who are seriously overextended.

Bernanke Thinking About Raising Rates Despite More Weakness in Housing

Today's existing home sales report was mixed. The good news is that October's 6.24 million homes sold is better than expected. It is even slightly higher than September's 6.21 million figure. The bad news is that it is down 11.5% from October 2005. Even worse, the median price is down 3.5% from a year ago. And inventories are up almost 2% over the past month, and 34% over the past year. There is now a 7.4 months supply of previously-occupied homes on the market.

The price drop is particularly worrisome. That's because sellers don't have to sell if they don't like the offer. It's not reassuring for the housing industry that more homes sold than expected, but at lower prices.

After initially rising on the news, shares of homebuilders reversed course and sold off. There is growing concern that the housing market may not have yet bottomed.

On top of all this, Fed Chairman Ben Bernanke gave a talk today that stressed the risks of rising inflation. He disappointed investors by not making any mention of a possible interest rate cut. Many investors had been hoping the Fed would start easing soon. They weren't happy to hear the Fed is thinking more seriously about another interest rate hike.

Sales Up 19%. Sorry, That's 6%

It's funny how numbers are frequently used to promote a specific agenda. The National Retail Federation released spending figures yesterday for Black Friday weekend. Several media outlets jumped on one figure and put it in their headlines: "Retail Sales Jump 19%."

It would truly be astounding if retail sales actually increased 19% in one year. Of course, that is not what happened. The 19% increase refers to the average amount of money spent by shoppers. This year, shoppers spent an average of $360.15. A year ago, they spent $302.81. That's the good news. The bad news is that there were an estimated 5 million fewer shoppers this year; and sales on Black Friday were up only 6% from a year ago. That's still an impressive rate of growth, but no where near the 19% figure highlighted in the headlines. In fact, the NRF is sticking with its forecast of 5% overall growth this holiday season.

Some retailers will be having a very Merry Christmas. Apparently, Wal-Mart is not one of them. The nation's largest retailer said November same-store sales are down 0.1%. On-line retailers are expected to do very well. The on-line market is still small compared to bricks and mortar stores, but on-line is where the real growth is.

White House Says Slower Growth; Higher Inflation

Yesterday Edward Lazear, Chairman of the Council of Economic Advisers at the White House, lowered his growth forecasts. These forecasts are produced twice a year for budgeting purposes.

He called for 3.1% economic growth for 2006. That is a healthy figure, but down significantly from the June forecast of 3.6%. For 2007, he is projecting growth of 2.9%. The reduction in the forecast is primarily due to the slowing housing market.

The White House is also projecting 2.3% inflation for 2006. Despite slowing growth, it expects inflation to rise to 2.6% in 2007. But with unemployment at only 4.4% and calls for a higher minimum wage, there is a good chance that inflation will be higher. And if oil prices reverse themselves and start moving back up toward $70 a barrel, inflation will become problematic.

The housing slump and energy prices are key to what the future holds. The numbers of homes available for sale are rising quickly. Home prices will continue to fall. Homebuilders will continue to report declining earnings.

As for energy, that really depends on what OPEC does. Energy traders are skeptical about OPEC's ability to stick to announced production cuts. Saudi Arabia is the big player in this game. If the Saudis were to cut production significantly, oil prices would move higher. But if the Saudis see that other OPEC countries are not doing their fair share, they may actually raise production to teach them a lesson. That, of course, would cause oil prices to plummet.

Democrats Wait for 2008

I had an interesting discussion with Mike Holland, Chairman of Holland & Co., a New York City private investment firm. Old-timers will recognize his name from his frequent appearances on Louis Rukeyser's Wall Street Week.

Mike and I discussed the Democrats taking over Congress and what this may mean for tax policy. I asked him if the election results will prompt him to change his investment strategies. His answer was no. He still continues to favor large-cap, blue chip, dividend paying stocks. This MoneyMasters discussion is currently available for viewing.

Dining with Investment Legend Jack Bogle

There are few people in my line of work who can be called legends. There are fewer still who are living legends. Warren Buffett is one. Jack Bogle is another.

Yesterday I had the honor of interviewing Bogle for my MoneyMasters video program. Afterwards, I had the pleasure of taking him to lunch. He is a wonderful and gracious man.

As most investors know, Bogle is an advocate for passive investing. Because he believes investors cannot expect to do better than average in the long run, they are best served buying index funds that have very low fees. He has strongly criticized the money management industry for putting its own interests ahead of investors' interests. In particular, he says funds run by public corporations and conglomerates focus on maximizing returns for owners and managers--not for investors.

Bogle is a man who could have been fabulously wealthy. Instead, he created a mutual fund company, The Vanguard Group, based on minimizing fees. His whole life mission has been to increase the wealth of his investors rather than his own. While I'm sure he is comfortably well off, there is no question he could have done better for himself if he had chosen that as his goal. It was extremely refreshing to be in the company of a man who truly cares about ethics.

I learned a lot about Bogle during lunch. He told me how he had to work his way through Princeton, and how he almost failed. He told me he struggled with Paul Samuelson's economics text, but getting through that book marked a turning point in his life. He told me about some of his conversations with Warren Buffett. Many people would be surprised to learn that Buffett actually favors index funds for ordinary investors.

Bogle is an incredibly prolific writer. He has written several books. There are many more written about him. He roams the country delivering speeches. Best of all, he is more than willing to share his knowledge and opinions. You can read many of his writings at his personal website.

While we were having lunch, I noticed many people in the restaurant looking our way. Of course, they recognized Bogle. As we were leaving, one gentleman got up and came over to say hello. He thanked Bogle for sticking up for integrity in the money management industry.

My MoneyMasters interview with Jack Bogle will be available for viewing on Nov. 30. This is one video you won't want to miss.

Housing Foreclosures are on the Rise

Yesterday I heard through a reliable source that the credit union of a major corporation headquartered in Connecticut is suddenly seeing a larger than usual number of employees in financial distress. Several have approached their credit union seeking help.

Most of the problems are housing related. Many of these troubled employees had purchased homes in recent years. Others had refinanced existing mortgages. The problem is they relied on new and exotic mortgages including interest-only mortgages with very low teaser rates. These mortgages are now being adjusted to a higher rate. In addition, borrowers have to start making principal payments. They were already stretching themselves as it was, but suddenly their required monthly mortgage payments have at least doubled.

RealtyTrac, which follows foreclosure rates, says the number of homes nationwide that are in some stage of foreclosure is growing. The highest foreclosure rate is in the Detroit area, which has suffered from the automobile industry's slowdown. Many parts of Florida are also seeing rising numbers of foreclosures.

Yet many economists continue to ignore these warning signs. They all seem to be focused on holiday sales. Perhaps consumers will keep up the spending for a while, but how much longer can that last if some of the air is coming out of the housing bubble?

Options Backdating Scandal Hits KB Home

Way back in 1998, I had breakfast with Bruce Karatz, CEO of KB Home. At the time, the company was still called Kaufman & Broad. Karatz was extremely bullish about the home building industry and the prospects for his company. He turned out to be right. About a year later, I added the stock to the Special Situation Survey's recommendation list, and as everyone now knows by now, home building stocks went on a tear.

Of course, I didn't know at that time that Karatz was personally benefiting from backdating his own employee stock options. Harvey Pitt calls backdating fraud and explains why on my MoneyMasters video. There is no question that backdating is wrong. After all, it requires that you lie about when the options were actually issued. Instead of pricing them on the issuance date, you simply pick a more favorable date from the past.

Ironically, there was no reason for Karatz to backdate his options. After all, the Wall Street Journal reports that Standard & Poor's estimates that Karatz reaped $180 million from the exercise of stock options alone since 1992. In 2005, his total compensation, including options, amounted to $150 million. KB Home said backdating benefited Karatz to the tune of $13 million, which he will repay. Compared to his total compensation over the years, this is chump change. It won't make a dent in his bank account. Of course, by the time the SEC gets through with him, he may end up paying a whole lot more.

Karatz isn't the only one leaving the company. Richard Hirst, chief legal officer, and Gary Ray, head of Human Resources, are also leaving. But Ray is the only one being fired. Karatz and Hirst were allowed to resign. It seems they cooperated in the company's internal investigation while Ray refused.

Backdating is gearing up to be the next big corporate scandal. Karatz is the biggest name to fall so far, but it looks like there will be plenty more coming up in the near future.