Text size

"Raising money on the Tel Aviv Stock Exchange is a big bluff." (Serial entrepreneur Giora Yaron, July 4, 2006.)

Where were his media advisers? His PR sitter? Did Giora Yaron, a wondrously successful serial entrepreneur who sold three startups - Comsys Communication & Signal Processing, PentaCom and P-Cube for $400 million consult nobody before braying his opinions to the press?

We think Yaron should avoid talking to the stock market in general, and about bluffs in particular. Perhaps he should stop appearing in public altogether for the time being.

This week Mercury Interactive (Nasdaq: MERQ) filed its restated reports for the last 12 years, after it transpired that its records had been falsified, in that they failed to accurately reflect when stock options had been granted to executives and workers.

Sounds like the gibberish of an advanced course in financing, doesn't it, or the dry technicalities of bespectacled number-crunchers. But it isn't. When Mercury's accountants re calculated the company's figures to faithfully demonstrate the true dates of stock option grants, it turned out that profit for the period 1992 to 2004 wads actually $566 million less than reported.

Look again: $566 million. $560,000,000. Even if we multiply that number by the especially low share price to which Mercury sank this week, we still reach NIS 2.5 billion that has evaporated in an eyeblink, from the profit & loss statements that Mecury presented to investors over ten years.

We had to wonder

Now for three quick questions.

1. Is it difficult to conceal an amount that gargantuan from a company's financial statements?

No. 

2. Where is the money? Is it a virtual fiction of accounting?

No. It's real money, much of which apparently lies in the pockets of Mercury managers and workers.

3. Has everybody involved in this sorry story been fired, or at least paid in some fashion?

No. One has even, as we surmised, become an expert on lies.

Over the years Mercury lavished tremendous amounts of stock options on its managers and workers, first and foremost on its chairman and CEO, Amnon Landan.

Cui bono, and who pays?

American accounting regulations enabled Mercury not to book the tremendous profits that the recipients of these stock options made in its profit & loss statement, if the options were granted at market price. The underlying logic was that the company wasn't spending cash on this perk, it was just diluting its shareholders. No need to book that as a cost, right? The market pays the piper.

We have written time and again that the logic is highly dubious, and specifically pointed at Mercury as a company whose financial statements we did not believe reflected its true situation.

But Mercury went a step further: it allocated options to managers and workers, and also backdated them to convenient dates. What dates did it choose? Dates on which Mercury's share price had swooped low, of course, when the profit from the allocation to the beneficiaries would be greatest.

In English, first you spin the roulette wheel, then once it's stopped, you place your chips.

That nefarious practice was exposed first at Mercury and later at Comverse Technologies (NASDAQ: CMVT). Now other companies are suspected of having done similar things.

Why do we in the Israeli press call it "backdating" options? Because we are careful types, but if you search the world press a little deeper, you'll find it called "stealing money from shareholders".

Landan had to quit, tail behind legs, but the directors who had manned the committee that approved the falsified stock options - Giora Yaron, Igal Kochavi and Yair Shamir - saw no need to resign.

When the whole affair came to light, we asked Mercury for a copy of its full audit committee report, explaining how the company falsified its financial statements, so we could understand the role that the trio played in this gigantic fraud. But Mercury ignored our request.

When the company published its amended financials, showing that $566 million had vanished into the ether, it reported that the U.S. Securities and Exchange Commission was considering a civil suit against the three directors, for breaking federal securities law.

Mercury says the three claim innocence and argue that they had not abetted the backdating.

The SEC will investigate, but the threesome, headed by Yaron, should take the initiative and pack their bags. Sir, when $566 million vanish from the company without passing through the profit and loss statement, you look like a lump, not a director. And that's the best case, which assumes that you actually didn't understand the options finagling of the management.