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Backdating Could Bite Juniper Execs

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News Analysis
Light Reading
6/16/2006
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The recent stock options backdating issues at Juniper Networks Inc. (NYSE: JNPR) could end up having serious repercussions for the company, sources say, possibly even leading to the ouster of some of its top executives. (See Feds Call on Juniper.)

One analyst source confirms that people in the investment community are talking about a potential change in Juniper leadership. But, the source says, both institutional and private investors are split on whether such a move would benefit the company and its stock. (See Options Scare Hits SafeNet, Juniper.)

Juniper said that on May 22 it received a Request for Information from the United States Attorney for the Eastern District of New York, regarding its stock options granting practices. Juniper says it’s cooperating, but unlike some others who’ve been ensnared in options back-dating inquiries, it's made no announcement of a formal internal inquiry.

In the meantime, shareholder irritation on the matter appears to be growing. Shortly after the Justice Department's request, Juniper was served with two separate lawsuits concerning its stock back-dating practices.

One of the complaints, which was filed in the District Court of Northern California, reads as follows:

    In gross breach of their fiduciary duties, the directors/officers of the company colluded with one another to improperly backdate grants of company stock options to defendant Scott Kriens, the company's Chief Executive Officer and several other Juniper executives, in violation of the company's shareholder-approved stock options plans...

    As a result of the Defendants' egregious misconduct, Juniper has sustained million of dollars in damages, and Defendant Kriens and the other recipients of the backdated stock options have garnered millions of dollars in unlawful profits.
(See Juniper's Suits)

Morgan Keegan & Company Inc. analyst Simon Leopold says the back-dating inquiry, in combination with the lawsuits, is souring some investors on Kriens and his team. “It highlights the anger over what is perceived as corporate greed at shareholders' expense,” Leopold writes in a June 15 investor brief.

“This news likely further pressures the stock, with the options back-dating issue and general market malaise outweighing the fact that business fundamentals are unchanged,” Leopold writes.

Piper Jaffray & Co. analyst Troy Jensen points out that, based on the fates of senior executives at Comverse Inc. (Nasdaq: CNSI) and Vitesse Semiconductor Corp. (Nasdaq: VTSS) stemming from the stock options scandal, one shouldn’t rule out executive ousters at Juniper. (See Vitesse Gets Subpoenaed and Comverse CEO, CFO Resign.) The removal of CEO Scott Kriens would be a big, big deal, of course. “If Juniper lost Scott, that’s the culture of the company,” Jensen says.

Kriens has been CEO at Juniper since 1996.

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very_objective_dude
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very_objective_dude,
User Rank: Light Beer
12/5/2012 | 3:51:26 AM
re: Backdating Could Bite Juniper Execs
I guess there are a few reasons:

1. Companies that already fired the management are a done deal. No more news to talk about until SEC takes further action.

2. If you read the posting carefully, it says "Juniper says itGÇÖs cooperating, but unlike some others whoGÇÖve been ensnared in options back-dating inquiries, it's made no announcement of a formal internal inquiry."
The fact that Juniper is not making effort to clean itself is questionable and an interesting piece of news.

3. Juniper sued Light Reading for message boarders' identities.... This one still puzzles me, but it might have created bad blood ........ :)

4. Juniper probably has not advertised enough on Light Reading...... :)

5. Juniper is a big enough networking company that is worth covering in news.
Honestly
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Honestly,
User Rank: Light Beer
12/5/2012 | 3:51:26 AM
re: Backdating Could Bite Juniper Execs
LR, seems like you are witch hunting Juniper. Why not go after others and companies that have already fired management teams?. Hey, in America its innocent until PROVEN guilty. Are they pissing you off and not giving you enough scoops, or are you just short on relevant news.?
gigeguy
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gigeguy,
User Rank: Light Beer
12/5/2012 | 3:51:25 AM
re: Backdating Could Bite Juniper Execs
Honestly, you must be a Juniper employee.

A stockholder suit against Juniper (or any other company) especially if could lead to the removal of the CEO or other shakeup, is big news and very newsworthy for LR or anyone else in the media. LR is reporting on all of the telecom companies caught up in the options mess, not just Juniper.
optiplayer
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optiplayer,
User Rank: Light Beer
12/5/2012 | 3:51:23 AM
re: Backdating Could Bite Juniper Execs
While the story leaves open the question of the legality of "backdating" there is clearly an issue of accounting impropriety when options are back-dated to a lower price.

For example, lets say a company decides to grant options at a Board mtg on March 31 and on that day the stock trades at $12. It picks Feb 15 as the grant date because that is the date at which the stock was at its low point for the quarter of $10 and grants options with that strike price. I believe accounting rules (even pre FAS 123) require the company to record a charge because that option clearly has intrinsic value... the strike is below the current price.

So, at a minimum, companies that did this understated their costs and would have to re-state results.

Whether there is a paper trail to prove it is another question
materialgirl
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materialgirl,
User Rank: Light Beer
12/5/2012 | 3:51:22 AM
re: Backdating Could Bite Juniper Execs
Kriens sells about 500k shares of stock a quarter. That is alot relative to other CEOs. This is while his acquisition plan is not working.

I think he has become greedy and lazy. Perhaps it is time for him to go. He has his cash and perhaps should now concentrate on his golf game. Let another management team in that is hungrier for deals, and not so insistent that core dominance "naturally" leads to edge dominance. Perhaps MOT will buy this thing after all.
lightreceding
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lightreceding,
User Rank: Light Beer
12/5/2012 | 3:51:21 AM
re: Backdating Could Bite Juniper Execs
Didn't most of the management move on?

Back dating is a form of theft since the company gets less net cash when the options are sold while the execs get more.

There certainly is a paper trail as each option grant is recorded as required by law. That is what was used in the investigation that led to these inquires.

"Innocent until proven guilty" applies to the legal process in criminal cases. This is a civil case where preponderance of evidence rules and the evidence is abundant and clear.

Scott does not say that winning in the core leads to winning at the edge, he argues that it is a prerequisite. Scott has been talking the same stragety from the beginning. It is a conservative one, based on following Cisco and taking a piece of the action.

startup_shutup
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startup_shutup,
User Rank: Light Beer
12/5/2012 | 3:51:18 AM
re: Backdating Could Bite Juniper Execs
Compared to startup SCAM this is nothing ...
very_objective_dude
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very_objective_dude,
User Rank: Light Beer
12/5/2012 | 3:51:07 AM
re: Backdating Could Bite Juniper Execs
Pradeep is still there. Not exactly in mgmt role, but I think he is on the board and most likely has a lot to say about the company's direction. However, you are right that if there is going to be a fall guy, it will have to be Kriens. I suppose he will bargain hard before resigning, if ever.

What Scott once said was that "Juniper parachuted directly into the core" and gradually spread to the edge. I think he was comparing the strategy to others who built the edge stuff and moving up to the core and failed. You interpret it anyway you want, "prerequsite" or "leads to winning". Either way, I think it was a "backdating" message and "glorifying an already working business model". The truth is that it was hard engineering work plus a big luck to test the box at MCI. The strategy story is mostly backdated...... :)
very_objective_dude
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very_objective_dude,
User Rank: Light Beer
12/5/2012 | 3:51:07 AM
re: Backdating Could Bite Juniper Execs
I think the key here is "public companies". Obviously, more well known and bigger market cap companies will attract more scrutinies. If it is a private startup, I am not sure if SEC even wants to get involved at all. Of course, the problem with startup is tracking the papertrail. Private startups are usually so small that one or two guys own the papertrails and not yet subjected to Sarbanes Oxley. Maybe you want to give examples?
startup_shutup
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startup_shutup,
User Rank: Light Beer
12/5/2012 | 3:51:05 AM
re: Backdating Could Bite Juniper Execs
>> Maybe you want to give examples?

Suffice it to say I AVOID startups like PLAGUE because they have no accountability on OPTIONS .....

I feel happy when startups go BUST ...
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