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Off-Balance Sheet: Barnes & Not-So-Noble


How were they supposed to know helping themselves to an extra $45.5 million was against the rules?


Relax, it's only money. Here in the 'Ville we like to keep things smart, but we also love to laugh. All work and no know how it goes. With that in mind we give you The "Off-Balance Sheet," a place where Minyans can experience humorous takes on the world of finance, personal stories from our Professors and Minyans and all the other stuff that makes life worth living. So take a break from the flickering ticks and dive in.

Today's Wall Street Journal reports that "an internal investigation at Barnes & Noble (BKS) found pervasive backdating and misdating of stock options" but that senior managers believed that it was "permissible to select a date other than the actual approval date" for an option award if the new date was "reasonably close."

Fair enough. It's not like options manipulation has prompted the biggest corporate probe since the mid-1970s. Only a small number (a little over 200) of low-profile companies-mom-and-pop outfits like Cablevision (CVC), Broadcom (BRCM), Apple (AAPL)-have been investigated for it, only 66 executives have lost their jobs over it, and only about 10 people have been prosecuted criminally for it. Come on, people-the Barnes & Noble employees were just highly-experienced top-level captains of industry running a $2.6 billion company. How were they supposed to know helping themselves to an extra $45.5 million was against the rules?

Barnes & Noble: in the dark about options backdating rules

Law is one of those areas that is open to endless interpretation. There are often mitigating circumstances that create some sort of rational explanation for a criminal act. Murder by way of insanity. A crime of passion. Patty Hearst suffered from Stockholm Syndrome, causing her to feel a sense of loyalty toward her Symbionese Liberation Army abductors, which "forced" her to help them rob banks.

Patty Hearst feeling loyal to the SLA

Another display of loyalty by Patty Hearst

Barnes & Noble's board secretary, an attorney by the name of Michael N. Rosen, had an interesting defense. He was quoted as saying he thought the use of hindsight to select advantageous grant dates was "OK."

Interesting. Rosen, a lawyer, believed that fudging grant dates to make options more valuable as long as the phony date was "reasonably close" to the real one was "OK."

How would this logic apply in other areas of the law?

CASE #1: Gary Lee Wills, Inmate 33-40789, FCI Florence Supermax

Gary Lee Wills: one really, really scary dude

Convicted of First Degree Murder with a weapons enhancement and an additional kidnapping charge. Applying the "reasonably close" defense, what Wills did was "reasonably close to legal." He only pulled the trigger half-an-inch before the gun went off. That's reasonably close to not having pulled the trigger at all.

CASE #2: Hector Velasquez, Inmate 84-10937, Pelican Bay State Penitentiary

Hector Velasquez: 2nd from right-and not wrong

Sentenced to 25 years for Interstate Transport of Narcotics with Intent to Distribute. Again, applying the "reasonably close" defense, Velasquez did nothing wrong. The chemical makeup of cocaine is "reasonably close" to that of benzocaine-a key ingredient in Orajel, an over-the-counter topical medication used to treat toothaches. Therefore, Velasquez is innocent.



CASE #3: Gerald MacKinnon, Inmate 27-33367, Auburn State Penitentiary

Gerald MacKinnon during his weekly recreation hour

Doing a 15-year stretch for Grand Theft Auto. Once again, the "reasonably close" defense would exonerate MacKinnon of all charges for the simple reason that stealing a car is "reasonably close" to borrowing one. The only thing that makes it theft is that the "borrower" didn't know the owner personally-a simple technicality. If MacKinnon knew the titleholder, it would've been considered a loan.

Are the Barnes & Noble executives innocent of any wrongdoing in the options backdating case? They say yes. Which is reasonably close to "maybe." Which is reasonably close to "no." Which is reasonably close to "Wow, those Barnes & Noble execs have some chutzpah."
No positions in stocks mentioned.
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