Friday, July 21, 2006

Indictments in the "Supposed" Options Scandal

Two indictments were handed up yesterday in the executive options scandal, and the New York Times reported that prosecutors and the SEC are looking at eighty companies.

This involves what the CJR Daily's "Audit" section had famously called a "supposed" scandal, it one of a series of bizarrely off-kilter articles that have emanated from that website recently.

The Audit pieces -- it ran this one a few weeks earlier -- showed a lamentable misunderstanding of the subject matter (which is a liability when you're struggling to critique media coverage of said subject matter).

For example, the earlier piece discounted the significance of SEC investigations, as I pointed out. More recently, University of California economics professor Brad DeLong wrote a scathing critique of the Audit articles. (Hat tip: Talking Business News.) He noted that Audit had missed entirely the serious issue in the options scandal, which is false disclosure.

"A company that backdates an in-the-money option to make it look like an out-of-the-money option has falsified its income statement–done, on a much smaller scale, what WorldCom did in claiming high profits by classifying operating expenses as investments in capacity," said DeLong.

DeLong concluded by noting that CJR Daily has limited credibility and is "lacking quality control." I agree. This kind of stuff is embarrassing.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

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