Leaving Shareholders in the Dust
By DAVID LEONHARDT
Reuters
Senator Maria Cantwell partly financed her campaign with RealNetworks stock.
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avid Rickey had done it before, and he was about to do it again.
"You know, Maria, I am very bullish about the company," Mr. Rickey, the chief executive of Applied Micro Circuits, told Maria Bartiromo, the CNBC anchor, during an interview on March 2. The company had recently warned that its earnings would fall short of its projections, and its stock had fallen 67 percent in six weeks. But when Ms. Bartiromo reminded Mr. Rickey of a dare he made to investors a year earlier, he quickly made it a second time.
"I dare you not to own my stock," he said. "I'm kind of a gutsy guy, and I have a lot of confidence in what we're doing."
What Mr. Rickey did not say was that he had already come close to accepting his own dare. Between July 2000, when Applied Micro Circuits' stock was trading at $100, and March 2, when it was trading at $29, Mr. Rickey had sold 800,000 shares in the company, or more than 90 percent of his stake. Since 1999, he had sold more than 99 percent of his stock, making $170 million in the process, according to Securities and Exchange Commission filings.
In an inversion of the notion that corporate managers should align their interests with shareholders', Mr. Rickey and many technology executives unloaded many shares during 2000 — as other investors were taking a beating — and thus became some of the year's most lavishly rewarded managers.
On the other hand, the executives who held onto their stock have relatively little to show today for that allegiance to shareholders — though they were worth hundreds of millions of dollars a year ago.
Most of the luckiest, or financially savviest, worked for technology companies that have been in business for at least a few years. David Peterschmidt of Inktomi, for example, made $50 million from stock sales during 2000, while the company's shares fell 80 percent. Timothy Brier, a former executive vice president of Priceline.com, gained $74 million, even as Priceline's shares dropped 97 percent.
By contrast, at dot-com start-ups, including those that have gone bankrupt, most executives sold a small portion of their shares, according to pay consultants and proxy analyses conducted for Money & Business. At some companies, share prices had already fallen sharply by the time the lockup period after the initial public offering ended, allowing insiders to sell. At others, executives decided that selling their stock suggested pessimism.
"If you're a C.E.O. when the market is in flux, it sends all sorts of wrong messages about your long-term belief in the company," said Robert W. Wrubel, the former head of Ask Jeeves, who still works for the company. At the end of 1999, Mr. Wrubel's holdings were worth about $180 million. He has since sold about $1.2 million of stock, but his remaining holdings have shriveled to $500,000.
"My wife has looked at me and said, `What were you, nuts?' " Mr. Wrubel said. "I just thought it was not ethically appropriate for me to take advantage of the situation." He has stopped thinking about a bigger home and has decided that raising three children in a medium-sized house "is better for family dynamics."
Still, Mr. Wrubel appears to have done better than some peers. Julia Wainwright, the chief executive of Pets.com, was once worth $10.2 million, but she never sold a single share in the company, according to a study by SCA Consulting. (Pets.com is in liquidation.) William L. Schrader was forced to sell all 11.4 million of his shares in PSINet — now trading 97 percent below their high — to satisfy a margin call from the Bank of America. Senator Maria Cantwell of Washington, once an executive of RealNetworks, made $11 million, selling some shares before they fell to $5, down from a high of more than $80. But for her campaign, she also took out a loan backed by RealNetworks stock, which is no longer sufficient collateral, and now must raise money to pay off a $3 million debt.
Of course, just about any investment adviser would counsel executives to diversify their holdings. And some executives managed to do just that, while hardly denting their holdings in their companies.
At Vitria, which makes servers, JoMei Chang, the chief executive, and her husband, Dale Skeen, also a Vitria executive, sold $136 million of stock before the shares plummeted. But the two still hold about 40 million shares, or 30 times the number they have sold. "They are totally committed to the future of Vitria," said Richard Kain, a spokesman.
A spokesman for Mr. Peterschmidt said he continued to hold many stock options. Mr. Brier, formerly of Priceline, declined to comment.
By contrast, management experts say the speed with which executives like Mr. Rickey sold their holdings raises questions about their confidence in their companies' long-term health.
"It's appalling," said Charles M. Elson, the director of the Center for Corporate Governance at the University of Delaware, who serves on three boards. "If you don't have confidence in your own abilities, why should anyone else?"
Large sales of insider stock, Mr. Elson added, suggest that a chief executive may "know something everybody else doesn't know."
Mr. Rickey, in a statement sent by e-mail, reiterated that he remained bullish about his company's prospects. He said he had sold stock on a regular basis, "to achieve personal financial goals without appearing to signal a change in confidence in our company and all the while complying with the strict rules against trading on nonpublic information."
Mr. Rickey said he held five million options to buy stock in Applied Micro Circuits, a San Diego-based company that makes silicon chips. As a result, he added, his interests are aligned with shareholders. Because the company's shares are actively traded and the stock has been rising for much of the last two years, he said, many investors have realized "tremendous returns."
Not so long ago, Mr. Rickey, 45, was a compensation hero. He became chief executive in February 1996, after working at I.B.M., Intel and Nortel Networks. Twenty-one months after he arrived at Applied Micro Circuits, it went public.
For 1998, 1999 and much of 2000, all looked well. The stock rose from about $1.50 on its first day of trading to $75 early last year. It fell during the tech sell-off last spring, but rebounded to over $100 last summer.
Each year, Mr. Rickey took a salary and bonus of less than $600,000. Graef Crystal, a former pay consultant who often criticizes executive compensation, praised him in an interview in December 1999 with a columnist for The San Diego Union- Tribune. The column called Mr. Rickey "a paragon of virtue" amidst a sea of greed.
Mr. Rickey, for his part, said he was happy. "I don't feel undernourished by the company," he said back then.
No wonder. During 1999, he sold about $24 million of stock. In 2000, he kept at it, selling 100,000 shares in January, 170,000 in February, 300,000 in April and May and 250,000 in July, according to S.E.C. filings.
Perhaps most worrisome, management experts say, he has exercised tens of thousands of options that did not expire for another eight or nine years and then immediately sold the shares he acquired. In general, finance theory holds that people should hold onto options for most of their 10-year terms, because stocks tend to rise over long periods.
All along, Mr. Rickey continued to offer brash predictions. After other technology manufacturers warned of earnings shortfalls late last year, stocks for the entire sector fell, and Mr. Rickey complained that Applied Micro Circuits was being unfairly tarnished. "There are all these negative perceptions going on, but our business is booming," he said in the Jan. 16 issue of Investors Business Daily. Two days later, he sold 167,000 shares of his company's stock.
By last month, Mr. Rickey was no longer so confident. During the CNBC interview, he conceded that the company's earnings forecasts had been too optimistic and that the slow economy was hurting revenue.
Mr. Crystal, himself a shareholder in the company, has soured on Mr. Rickey. "He seems to have two jobs," Mr. Crystal told The San Diego Union-Tribune in August. "By day he runs the company, and by night he plans the stock sales he will make the next day."
But Mr. Rickey still has fans. Last month, the Corporate Directors Forum, an association of board members, named him one of its "directors of the year" and celebrated with a dinner in La Jolla, Calif. The forum cited Mr. Rickey for "enhancement of economic value."
On Friday, the stock closed at $16.50, down 83.5 percent since last summer. |
