Few institutions and individuals have the integrity and respect enjoyed by Ralph Nader. His efforts have made an enormous contribution toward protecting consumers, and have also contributed to maintaining the overall integrity in our free market system. Many may disagree with Mr. Nader on certain positions, including myself, yet his integrity is unquestionable.
The article also cited that Nader has $2 million in a money market account, given away more than 80 percent of his income over several years and does not own either a home or an auto. With 50 percent of his assets in a money market account and 32 percent in Cisco Systems stock he is obviously too busy to pay much attention to his investments. Key Nader funded projects over the last few years include The Pension Rights Center, Corporate Welfare Review, Privacy Advocacy and Media Access. These projects are all greatly affected by this watered stock scheme yet the issue has yet to be raised, probably due to its perceived complexity.
Today Parish & Company is formally defining watered stock fraud and requesting that Mr. Nader use his consumer advocacy platform and presidential campaign to call a high profile press conference to announce the sale of his Cisco Systems stock and initiate a dialogue regarding watered stock fraud.
Reasons for this request are outlined in various press
releases in the press archive at www.billparish.com. As the New York
Times reported in a front page story on Tuesday, June 13th, neither
Microsoft nor Cisco Systems now pay any federal income tax due to the success
of the scheme. The link to the Times story is as follows:
Watered Stock Definition:
Parish & Company defines watered stock as a company that meets all five of the following criteria. These criteria quickly eliminate more than 99 percent of all companies from consideration. Only those companies satisfying all of the following parameters are considered watered stocks. The two most watered stocks, and strikingly similar in their overall business practices, are Microsoft and Cisco Systems. Other watered stocks include Dell Computer and AOL. Intel, Hewlett Packard, Qualcomm, GE, Eaton, IBM and Xerox are not watered.
1) Gross revenues exceed $5 billion and reported annual net
income exceeds $500 million.
It is important to note that watered stock fraud can only exist in large and well established companies. Smaller companies that are highly valued are a natural function of the capital formation process and many will indeed grow substantially and through such growth eliminate the dilution from aggressive financial practices used to ignite the business.
2) Gross revenues divided by the total shares outstanding (including
employee stock options) yields a number less than 10.
The objective here is to capture the impact of the excessive use of the pooling method for acquisitions in which shares are printed on a photo copy machine and used to pay for acquisitions with no subsequent accounting for the cost of this activity. This activity is captured by relating gross annual revenues to the number of shares outstanding. The biggest abuser here is Cisco Systems. Even Microsoft has 25 percent fewer shares outstanding than Cisco Systems. Cisco's annual revenues are approximately $20 billion yet it has 8 billion shares outstanding.
3) The stock option wage expense taken as a tax deduction but not charged to the publicly disclosed earnings statement exceeds taxable income in 2 of 4 quarters in any given year. Employees are now taxed at ordinary income rates for the amount of the tax deduction taken by the company when they exercise options, even if the stock is not sold. In addition, employees also have to pay the exercise price upon exercising the options. They are clearly prepaying their own wages in a massive watered stock based pyramid scheme.
This measure will reveal only those companies that grossly abuse the right to provide stock options to employees and thereby shift their entire corporate federal income tax burden to employees. Neither Microsoft nor Cisco Systems now pay any federal income tax due to the success of this scheme. The scheme is also grossly distorting the underlying reported success of their primary businesses by inflating reported net income and stimulating interest in the stock price. This is because none of this wage expense, for which a tax deduction is provided, is charged to the earnings statement we see.
4) The company's total market value must exceed 1 percent of
the Standard and Poors 500 Index and the annual dividend yield must be
less than 2 percent.
This again highlights that watered stock fraud is really only an issue for companies that reach a certain size and influence on the overall market. At their recent peaks Microsoft and Cisco Systems together represented more than 8 percent of the entire S&P 500 Index and neither has ever paid a dividend.
5) The remaining stock option debt exceeds gross annual revenues.
This measure will show how leveraged the future is by commitments in place regarding unexercised stock options granted and their relation to gross annual revenues. At Microsoft, with almost 800 million options outstanding, that means that a wage debt of $800 million occurrs with every $1 increase in the stock price.
Summary Comment: It is again important to note that only those
companies meeting all 5 of the above criteria would be considered
Given Mr. Nader's significant exposure to watered stock fraud, Parish & Company would also like to extend an offer to provide investment advisory services to Mr. Nader at no charge given the extraordinary contribution he has made as a consumer advocate over many years. This offer would be predicated upon Mr. Nader investing exclusively in a mix of high quality low cost indexed mutual funds composed of common stocks and non-callable U.S. Treasuries of varying maturities.
It is often believed that all stocks are overvalued in the technology area and that nothing unique is occurring at Cisco Systems and Microsoft. Investing in Cisco Systems and Microsoft has been perceived as a socially responsible thing to do. The sad irony is that investment in both companies is now more akin to investing in tobacco companies than socially responsible companies for reasons outlined in the Financial Pyramid summary and Update in the press archive. After all, robbing the pension system just as Charles Keating plundered the Savings and Loans is unconscionable. It is also not uncommon to see children's college education funds invested heavily in both stocks. Probably most disturbing to me is their assault on our key legal and regulatory systems that are important to ensure the integrity of our free market system, not to mention the sale of privacy data, in particular health care records in exchange for advertising revenues (See February 2000 Update and discussion of WebMD of which Microsoft is the largest shareholder).
Many excellent socially responsible choices exist in the technology area, most notably the Intel Corporation. Just yesterday Intel announced funding for a program to help teachers in Silicon Valley fund first time home purchases. Intel also regularly makes cash contributions whereas Microsoft contributes software aimed more at extending a predatory monopoly than making a genuine contribution for the best purpose at hand. Perhaps it is Intel's lack of media ownership interests and lack of interest in selling privacy data that has caused it to receive less attention than Microsoft and Cisco Systems. Intel's CEO, Andy Grove, did also recently testify before Congress that technology companies do not need special tax subsidies to succeed, putting him at odds with other technology executives. Intel is a rough competitor yet it has established top notch facilities in Ireland, Costa Rica, Israel, Malaysia and other parts of the world.
Here in Oregon it is not uncommon for environmentalists to chain themselves to trees in an effort to prevent logging. Strangely, they could probably achieve more by focusing on this watered stock fraud at Microsoft and Cisco Systems. Sadly, they can't see the underlying economics involved. This is because all companies are competing for the same pool of capital and since Microsoft and Cisco Systems are getting most of the capital allocation due to inflating their earnings and printing large quantities of stock on their photo copy machines to buy companies and pay wages, other companies and industries feel compelled to take short cuts and cut costs to compete and maintain interest in their shares because they are having to pay for acquisitions and wages with cash.
Watered stock fraud at Microsoft and Cisco Systems is similarly causing many mergers in a variety of industries that make no economic sense. One might ask, why did a Scottish utility purchase Pacific Corp, a large electric utility in the Northwest? These mergers are an effort to lay off large quantities of workers, reduce benefits and cut overall costs in order to compete for capital. It is strange that both Microsoft and Cisco tout the glories of the Internet and the ability of smaller companies to compete when in fact they are now one of the greatest impediments to enabling such competition.
Given the potential legal ramifications with respect to this situation it does now seem clear why John Chambers of Cisco Systems has made "securities litigation reform" a top priority. The goal of such reforms is to reduce an investor's ability to sue companies like Cisco Systems for financial fraud. We all know legal reform is necessary yet it should be done in a structured and focused fashion rather than as a means for extending a watered stock fraud.
An extended study regarding Microsoft and Cisco Systems financial practices is available in the archive at www.billparish.com. These reports explain how the two companies are pilfering the retirement system just as Charles Keating plundered the Savings and Loan System in addition to a variety of other unexpected consequences.
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, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate, The New York Times and The Independent, a major British newspaper. He has been interviewed by Infoworld, ZD Net, Wall Street Journal, Newsweek and USA Today in addition to appearing on ABC news and various radio stations including KUIK in Portland, KIRO in Seattle and Aspen Public Radio in Colorado.
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 can now be called there "Mutual Savings Bank."