OT-Fraud at Microsoft?greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Tuesday February 22, 2000 4:00 PM Eastern Time
Company Press Release
SOURCE: Parish & Company
22-Feb-2000: Microsoft Financial Pyramid Accelerates, Collapses Health Care Privacy, Positions New Monopoly in Transaction Processing and Destabilizes the Stock Market.
PORTLAND, OR - In October, 1998 Parish & Company released a study indicating that the Microsoft Corporation had erected a financial pyramid scheme. Sadly, Microsoft employees were prepaying their own wages and the public and private retirement systems being pilfered just as Charles Keating plundered the Savings and Loan banks. Since then, other companies are now being forced to aggressively adopt similar techniques in order to compete yet these companies will fail because Microsoft's situation is unique. The pyramid is now accelerating and destabilizing both the stock market and overall economy, corrupting the Federal Reserves efforts to control the money supply and triggering false inflation. Microsoft, once a great technology company, has indeed become a "pied piper" of financial fraud.
This brief update will explain a few reasons why this situation is unique to Microsoft and clearly financial fraud. Microsoft will be compared to four other leading technology firms, Amazon.com, Yahoo, Intel and America On Line. For an extended opinion laden discussion of this situation, a summary of impacts and various citations to external sources and questions and answers see http://www.billparish.com/msftfraudfacts.html Please note that I am a competent investment advisor, not a professional writer.
The first draft of a book is also complete and I am hopeful that someone who is creative and with strong writing skills will edit the manuscript, perhaps as a contributing author, and help identify a publisher. The key skill needed here is not computer or financial related but rather pure writing and editing skills. Your suggestions would be much appreciated. In addition, various tapes are available from radio interviews including KIRO in Seattle, Aspen Public Radio and KUIK here in Portland, Oregon.
Microsoft's pyramid scheme, as with all such schemes, is about generating cash. Incentive Stock Options, ISO's, were about rewarding employees but the excessive issuance of Non Qualified or NQ stock options are not about rewarding employees but rather a scheme to generate cash. (See extended study for detailed description) This valuable cash can be used to purchase competitors and establish a beachhead in new industries and further extend the pyramid. A good example is WebMD. Few people realize that Microsoft is WebMD's largest shareholder and that in the last 6 months, while the Department of Justice is focused upon products, WebMD has come to dominate Internet based health care.
WebMD, via its purchase of Quintiles, now has the largest database of medical records between patients, doctors and insurance companies. WebMD's privacy statement also clearly states that health information is exchanged among key partners to optimize services. Linux and other competitors will now find making inroads into this important growth market more difficult. In addition, traditional medical clinics, hospitals and health care providers will also have difficulty competing unless they similarly provide valuable health profile information to key partners, most notably drug companies, and correspondingly increase revenues.
One of Microsoft's largest shareholders, the Janus family of mutual funds, also contributed $1 billion in cash to WebMD to fascilitate the development of this situation, in particular the purchase of Quintiles. Janus is starting to look more and more like one of Charles Keating's Savings and Loans. A key lesson from the Savings and Loan experience was for banks, in this case Janus, not to get too intertwined with the companies to which their depositors funds were dedicated. Janus of course earns significant management fees from its holdings in Microsoft stock, which have been in turn invested into WebMD. Yahoo.com now has an excellent new summary of institutional holders for key stocks. This can be accessed by selecting "profile" after inputting a ticker symbol, msft in Microsoft's case. The summary clearly indicates that Fidelity Investments and Janus are the largest holders of Microsoft stock.
Like many technology firms, WebMD was stock rich and cash poor. Microsoft's cash investment in WebMD also required that WebMD barter to purchase $150 million of advertising on MSN Network in exchange for Microsoft directly subsidizing $150 million in prescriptions ordered over WebMD. Microsoft has a unique position in its ability to pump up gross sales at MSN through these types of bartering arrangements. Bartering is fine yet if it is not adequately disclosed it clearly becomes financial fraud.
Intel does not have the bartering tools Microsoft has since there business is less diversified and squarely focused on technology, i.e. no media interests, etc. America On Line has the bartering ability but doesn't have the high profits on products since there focus is subscriptions, media content and ad revenues. This bartering also allows Microsoft to pump up the sales of companies they invest into and take large investment gains whenever necessary to meet earnings expectations. In the quarter ending 12/31/99, more than 20 percent of Microsoft's net income was from the sale of investments. Elizabeth MacDonald of the Wall Street Journal recently wrote an excellent piece on bartering yet there was no mention of Microsoft.
Stock option programs are an excellent benefit and, while many technology firms have such programs, Microsoft has a unique ability to generate cash from its program due to its high profits on product sales. Based upon a review of Microsoft's 10Q report available from the SEC at www.sec.gov, they are on track to take a $15 billion tax deduction for stock option wages this year, much higher than total net income, allowing them to create almost $5 billion in cash in the form of lower taxes on product sales. This is valuable cash that is being dedicated to investing in new technologies and dominating one industry after another. An example is Transpoint, which was recently purchased by Checkfree and now positions Microsoft, as one of Transpoint's largest shareholders, to dominate the electronic processing of financial transactions. Retired Microsoft employees are similarly making venture capital related investments in many key new industries and have tight relationships with Microsoft.
Amazon.com, Yahoo and America on Line have similar stock option programs but they are unable to unlock the cash from these deductions because they don't have adequate profits. This is probably one reason why America On Line is purchasing Time Warner, that is, to unlock these large unused deductions by offsetting them with profits from Time Warner. What America On Line hasn't figured out is that Microsoft is simultaneously eroding the value of "content" by giving away for free what others charge for.
Microsoft's goal is to generate transaction based revenue sources, not unlike Ticketmaster, and commoditize content. Paul Allen has done a splendid job of implementing Microsoft's business model for Ticketmaster, on whose board sits one of Allen's key advisors, Bill Savoy. Ticketmaster has become a top notch destructive monopoly causing false inflation due to a lack of competition. It is noteworthy that even the NY Times can still be read at no cost over the Internet. The Times is currently be sustained from advertising, perhaps the largest of which may be Microsoft. Microsoft is of course also a direct long-term competitor to the New York Times in the Internet news market. Intel and other tech companies struggling to keep up with Microsoft do not generally have such extensive media properties, often none at all, and therefore do not have the advertising clout Microsoft enjoys.
Since Microsoft has large profits from products and is able to fully utilize the cash generating quality of the stock option wage deductions, they have been confident enough to speculate on their own stock in the options markets. For the quarter ending 12/31/99 they collected cash of almost $200 million, betting the stock will not decline. If Microsoft guesses wrong and incurs significant losses on the options they will simply issue more stock, that is, fire up the photo copy machine in the back office. There are now more than 6 billion total shares outstanding meaning that a $1 change in Microsoft's stock price changes the overall market value by $6 billion. Microsoft's gross annual revenues are only $25 billion.
The point is that Microsoft can generate close to $1 billion in cash from this speculation activity and that this is a solid source of cash that others, including Linux based companies, can not compete with. Again, these Linux companies are stock rich and cash poor. See "Why Microsoft's Stock Options Scare Me" by Rob Landley on 2/17/2000, a reporter for the fool.com, for a good description of how this cash is generated at http://www.fool.com/portfolios/rulemaker/2000/rulemaker000217.htm A second good source is available from the Linux Show titled Microsoft's Dirty Little Secret." at http://www.thelinuxshow.com/009_view.shtml
The reason this is financial fraud at Microsoft is a function of disclosure. Many people know that Charles Keating served hard time in a real prison and is walking about with $5 billion in judgments against him. What they don't know is exactly what he did, that is, how he got away with it and how he got caught. The answer lies in three words which form the essence of determining whether or not financial fraud exists. These words are "adequate disclosure" and "materiality." Materiality is accounting jargon for saying that "size matters" and one had better fully disclose the larger, material, items. If you do not adequately disclose large or material items that is negligence. Willful failure to do so is fraud. That is how financial reporting works.
Many readers have confused the Generally Accepted Accounting Principles (GAAP) with the Statements on Auditing Standards (SAS). Microsoft is technically following the GAAP rules, even though the system has broken down, yet the SAS disclosure requirements are independent of and in addition to GAAP. I specifically requested that Deloitte and Touche issue a qualified audit opinion and address several areas, including the option speculation on their own stock, leveraged debt associated with the stock option program and cash impacts and significant bartering agreements, prior to the audit being completed for the period ending 6/30/99. This request was made to Bob Herbold at Microsoft, Mark Peek at Deloitte and Touche, Stephen Holly of Sullivan and Cromwell and Pam Edstrom of Waggener Edstrom. The request was ignored.
Since Microsoft now owes almost 800 million shares to employees in its stock option program, this debt increases $800 million for every $1 increase in their stock price. This leveraged contingent debt in itself, given that it is more than twice gross annual revenues, should result in a qualified audit opinion. Microsoft's own internal auditor, a respected Deloitte and Touche veteran, also noted in a separate issue that earnings manipulations designed to meet expectations were illegal and constituted fraud. He was given the option to resign or be fired and settled for $4 million under the Federal Whistleblowers Act (See expanded report for details).
Another conclusion from the original study included forecasted a destabilization of the stock market if the Federal Reserve raised interest rates without first exposing this massive fraud to the American public. Barrons published a cover story on February 20,2000 clearly indicating that two stock markets have developed without disclosing the scheme. The first stock market is one of companies with real earnings and depressed stock prices, including Catepillar and Federal Express.
The second stock market is a pyramid scheme led by Microsoft in which their competitors, even Intel, are vainly trying to keep pace with Microsoft. By not disclosing this fraud at Microsoft, the Federal Reserve is further destabilizing the economy by raising interest rates since most companies have bank debt and the greater interest expense will affect their reported earnings. Microsoft's debt is stock option debt, and even though leveraged and more than twice annual gross sales, it has no related interest cost.
Another market concern is that brokerages are tightening margin restrictions on smaller companies. This may be prudent but by not similarly tightening these restrictions on Microsoft they are encouraging capital to further flow into its pyramid scheme.
Also forecast in the original study was a structural decline in corporate tax receipts and corresponding rise in individual receipts. Sunday 2/20/2000 David Cay Johnston of the NY Times highlighted this situation in an article titled "Corporate Taxes Fall, but Citizens Are Paying More." Strangely, Johnston highlighted Allied Signal and made no mention of Microsoft, even though this year Microsoft will transfer $15 billion in corporate taxable income directly to employees who have exercised options. This is almost as ridiculous as Worth Magazine highlighting McDonald's stock option program in a piece titled Floptions, highly critical of top management there when the overall impact on the financials was trivial compared to Microsoft.
A copy of Office 2000 at Office Depot now costs $599. Many wonder why Microsoft's products have enjoyed significant price increases while in general prices have plummeted in the computer industry, a good example being Intel whose unit volumes are up yet gross sales, in dollars, increased by only 6 percent in the most recent quarter compared to the prior year. The reason Office 2000 costs $599 is that Microsoft is desperate to sustain a pyramid scheme whose base has grown too wide. Aggressively raising prices make no sense; otherwise, especially given the Department of Justice inquiry.
We are enjoying a great economy and Microsoft was a major part of this new economy up until 1995. Since then, however, Microsoft has erected a pyramid scheme that is waging war against smaller companies and the Internet, two areas that are the key to our future prosperity as a nation. A related effect is a wave of "roll-up" mergers that make no economic sense as other competitors struggle to compete by merging in order to dismiss large numbers of employees, curtail benefits and reduce regulatory burdens. It is also somewhat disturbing to see the extent Microsoft has dipped into the public tax coffers, both directly and indirectly. This week Bill Gates became a key shareholder in one of the largest shipyards in the country, one with significant government contracts. A smart move if one imagines all the computer equipment on an average ship. Of course the military has also made some highly publicized moves to alternative operating systems given concerns over security issues with Windows NT. Gates investment was made with money effectively stolen from the retirement system that is now successfully laundered into a company dependant on government contracts. He is brilliantly working the system while waving his "freedom to innovate" flag.
At its recent peak, the value of Microsoft's stock reached the equivalent of 40 percent of the entire Federal budget of $1.8 trillion, including defense, social security, medicare and all other areas. Using this pyramid scheme that is clearly financial fraud Microsoft has become a taxing authority equivalent to the Internal Revenue Service and a de-facto government. They have surveyed this great new economy that has stormed upon us yet also left many key financial systems in need updating and looted as quickly as they can. It is most unfortunate and a genuine failing of the media to not provide more scrutiny regarding this scheme.
One common sense immediate step America On Line could lead is to require wages paid in stock options to be charged to earnings "only" if the tax deductions are actually realized. For most technology companies without profits or low profits, including Amazon.com, this would not be an issue until they become profitable. In Microsoft's case earnings would drop by 80 percent and integrity restored to a key sector in the market as its pyramid deflates.
With both Alexander Haig and Colin Powell, two distinguished former Chairman of the Joints Chiefs of Staff on the board of America on Line and up to their eyeballs in stock options, it would seem a good move for both the company and them personally. The long military experience might also be helpful given that since 1995 Microsoft has waged war on this great economy in an effort to sustain a pyramid scheme that like all such schemes benefits only a few levels of old investors. The rest, including Microsoft's own employees, especially relatively new hires, are left holding inflated paper.
Haig and Powell might also encourage Microsoft to build privacy into its market dominating browser, an easy task and one that could redefine the importance of content on the Internet and halt the sale of privacy which has diminishing returns afterall. Even the National Rifle Association might support this effort. It is ironic that the NRA has so successfully prohibited gun registrations yet all one needs to do is match credit card purchases for assessories with a master gun file by type and thereby create a national registry of firearm owners. In a simple survey of 4 popular gun shops here in Oregon, every clerk asked noted that most assessories were indeed purchased with a credit card, each item having a unique SKU number. With this information a 9th grader could prepare a top quality database of gun owners, a clear violation of their privacy rights. Microsoft is now one of Checkfrees largest shareholers, the company that dominates such processing.
Microsoft has done great things in the past, in particular application programs such as Word and Excel. Where they have failed is in operating systems and the integrity of their financial results. As noted in the extended study, Microsoft lost $10 billion last year even though they reported profits of $7.8 billion. In addition, 75 percent of their available cash has not come from product sales but rather this pyramid scheme. One need only imagine how a company like Waste Management would be treated if they engaged in similar practices of the same magnitude.
Windows 3.1 was a great product yet it benefited from a close collaboration with IBM. While Intel and others now produce great efficiencies in terms of lower prices and higher quality products, and suffer the short-term financial consequences, Intel's sales were up only 6 percent in the last quarter, Microsoft is fighting to feed a pyramid scheme whose base has become too wide and therefore is raising prices and igniting false inflation. Although Intel's financials now grossly misrepresent actual results, since it has the high profits and is fully utilizing the stock option wage deductions like Microsoft, it is important for Intel to not fall behind because it is perhaps the only company able to pierce Microsoft's scheme via product innovation. The collapse of the quality of Intel's results is clearly an effect of Microsoft's scheme and Intel did indeed continue issuing ISO stock options longer than Microsoft did. Now they have no choice but to focus on cash generation and acquiring new technologies in order to compete.
An extended study on this pyramid scheme is available at http://www.billparish.com/msftfraudfacts.html The upcoming book will summarize this study in addition to many new areas not yet discussed. If you are a publisher and interested in this book, please do contact me. I am also available for media appearances, conferences or forums to help explain this issue and a variety of others relevant to the investment management. Please do also visit my web site at www.billparish.com.
Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, as well as The Tech Review, a Canadian investment journal, and The Independent, a major British newspaper. He has also appeared on ABC news and has been interviewed by KUIK, a Portland area radio station, KIRO in Seattle, Aspen Public Radio, Colorado and various other media stations.
Mr. Parish is a Registered Investment Advisor and former CPA providing fee based investment management services in addition to assisting companies structure their 401k plans to meet their fiduciary obligations and provide top quality well diversified investment choices at the lowest cost. Please consider hiring Bill to be a permanent member of your 401K committee and thereby utilize the services of a top investment professional in order to clearly communicate your commitment to managing your employees 401K plan or what I now call their "Mutual Savings Bank." If you are no longer interested in receiving updates, generally 4 times per year, please type remove in the heading on a reply note.
Contact: Bill Parish Parish & Company 10260 SW Greenburg Rd., Suite 400 Portland, Oregon 97223 Telephone: 503-643-6999 Web Site: www.billparish.com Email: email@example.com
-- Spoonfed (Spoonfed@spoonfeddd.xcom), February 24, 2000
Does Bill Parish think this would have happened if the sheeple had chosen apple?
-- INever (firstname.lastname@example.org), February 24, 2000.