Wednesday, August 16, 2006

When Was the Last Time You Read Something Like This?

I give “Wall Street’s Finest” a rather hard time on these virtual pages, and, I think, for good reason.

Having been one once, I know the drill: work hard, know your companies, schmooze with your clients, and above all, don’t upset anybody—bankers, brokers, and buy-siders, not to mention CEOs and CFOs.

Cynic though I may be about the process, it ain’t as easy as a bystander might think, and the ones who do all those things well while at the same time picking good stocks are few and far between.

So my metaphorical hat goes off to the folks at my alma mater, the Merrill Lynch equity research department, for their continued in-depth work on the options back-dating scandal now spreading through Silicon Valley like ammonium perchlorate through an aquifer.

In a report that hit my email this morning, called “Risks of options irregularities at Apple (and Pixar),” Merrill’s Richard Farmer details the various issues involved in possible instances of back-dated stock options at both companies—and quantifies them, including the size of potential earnings restatements.

But Farmer goes further, and discusses as well the potential that Steve Jobs’ job is at risk, particularly owing to his presence on the board of Pixar, where “Statistical analysis suggests [option] grant pattern [is] unlikely due to chance.”

I won’t get into the details, and please don’t ask for them—ask your friendly Merrill rep.

But you will not find many analysts with the intellectual integrity—not to mention guts—to write something like this:

“…our review of Pixar disclosures does not allow us to rule out the possibility” that key Pixar executives, including Jobs, “might have been involved in creating options irregularities at Apple or Pixar.”

I can tell you that that sentence is much easier said than it was written.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


wsf said...

Not sure why the special fuss regarding Jobs. Isn't it ALWAYS "key executives" who create options "irregularities"?

Gone to the blogs said...

You're giving wayyyy too much credit here. First of all, that sentence is full of hedging and qualifiers (a practice that you have ridiculed in the not-too-distant past). Secondly, it's a total throwaway observation. OF COURSE the analyst doesn't have enough information to rule anything out - if he did, he would have inside information and he couldn't write. This faux toughness on the part of the sell side is garbage. Open question: how exactly does that sentence help me make an investment decision? Seriously, how?

Barry Ritholtz said...

Actually, the Kudos goes to Prof Lie for discovering the entire issue, and to the WSJ for publicizing it . . .

Aaron Koral said...


If the sentence that Jeff alludes to in his post cannot "help [you] make an investment decision", then I would, IMHO, advise that you seek a professional investment adviser, specifically with Merill Lynch [ML] who, based on the report, can help you make an intelligent investment decision regarding AAPL.

P.S. - I do not work for ML, nor do I have any relationship with ML, and I do not own any shares of AAPL, for the record.