Cisco Systems has now become an even more substantial financial fraud than the Microsoft Corporation and rather than spawning innovation, like Microsoft, Cisco's scheme is crushing smaller competitors and leading to a more stagnant technology sector, resulting in many significant innovations now occurring outside the United States. Cisco boasts that it will acquire 25 companies this year. In addition to destroying many promising smaller technology firms, Cisco is also breeding an unhealthy consolidation in the media, legal and financial services industries as there are fewer promising companies to write about and provide with legal and financial services.
Both Cisco Systems and Microsoft, as reported in a NY Times Front Page Story,now pay no federal income tax due to the success of the scheme. Cisco will argue that many companies use similar financial techniques yet that is false. Their situation, although difficult to understand, is a unique and a massive financial fraud no matter their sales grow 20, 40 or 60 percent. No amount of public relations or glowing press releases on Business Wire and PR Newswire, two services that together have a virtual monopoly over Internet based press releases, can disguise this fact.
This report will explain the unique nature of financial fraud at Cisco Systems and why it is even more significant that the financial pyramid scheme being utilized by the Microsoft Corporation. It will also explain why repealing the estate tax and the pooling method for acquisitions together is good government policy and could unravel a major part of this watered stock fraud at Cisco Systems and help restore integrity to the markets. More importantly, this will stimulate interest in more innovative smaller and medium sized companies and reinvigorate the economy. Cisco is no longer able to innovate aggressively because such innovation takes time. Their focus is now sustaining a watered stock fraud scheme. This requires purchasing research and development along with any significant competitors.
Other topics include why Fidelity Investments, Goldman Sachs, Janus, AXA and Pricewaterhouse Coopers may well be subject to successful multi-billion dollar legal actions for not disclosing this risk to investors in addition to having a variety of conflicts of interest. Pricewaterhouse Coopers currently joint markets and installs Cisco's products in addition to auditing their financial statement and many leading pension funds, in which Cisco is a primary holding. Pricewaterhouse Coopers is also Goldman Sachs auditor, one of Cisco's key investment bankers involved in numerous merger transactions.
Fidelity is currently engaged in what is called "flipping" in the real estate markets. This involves continually buying and selling Cisco's shares in order to generate brokerage fees and leaving the last investor with inflated shares. More surprising to me are Fidelity's relationships with many "boutique" investment firms. These firms provide research to Fidelity regarding certain companies and are compensated on how well the stock moves subsequent to delivering the research to Fidelity.
If the stock researched goes up then Fidelity will direct a certain amount of trading activity to be credited to the research firm through that research firm's clearing firm. This may be for securities completely unrelated to those researched. It surprises me that this is supposedly legal, especially when Fidelity has a fiduciary duty to retirement plan investors and is clearly trying to manipulate stock prices rather than make sound long-term investments. Fidelity is the largest outside holder of Cisco Systems, owning more than $19 billion in shares, more than Cisco's total annual revenues. In addition, Cisco is often the most actively traded stock on the Nasdaq exchange.
Cisco is now also seeing significant trading volumes on the Instinet, often the most actively traded security. The Instinet is owned by Reuters of the UK. Reuters has been known for the quality and independence of its wire service reports which are reprinted in top publications including the NY Times. They have yet to disclose this situation even though Retuers now issues a much larger volume of stories on Cisco. Individual investors who have come to rely on Reuters deserve to have this analysis affirmed by Reuters.
Even the Associated Press, the other major wire service, has failed to disclose this situation at Cisco. In a wire story by Cliff Edwards that appeared the day following this press release the AP wrote "Tech Earnings Harder to Evaluate." This story focused on Intel and other tech firms posting large investment gains and in the last paragraph highlighted that Cisco was one company that could still be counted on for solid growth. The irony is that Intel is a beacon of financial integrity compared to Cisco. This was clearly a coup for Cisco's public relations department since the story was reprinted both on Yahoo and in the New York Times.
To understand Pricewaterhouse Coopers relationship with Cisco Systems one need only look to Microstrategy, another Pricewaterhouse Coopers client. Pricewaterhouse Coopers also co-markets Microstrategy's products. The question becomes, will similar accounting irregularities be disclosed and Cisco's stock plummet 55 percent in one day? One area to watch closely is leasing disclosure to determine whether Pricewaterhouse Coopers adequately discloses Cisco's leasing activity and product financing arrangements given their significance to Cisco's financial statements. Cisco generally doesn't announce large sales but rather the provision of "vendor financing." This is the link to one such deal. Hanaro Telecom Signs $200 Million Pact with Cisco Is Cisco really making genuine sales or rather providing financing to secure sales that it would otherwise lose to competitors more reliable products?
This report will also examine Lockheed Martin's selection of Cisco as a primary vendor in its multi-billion dollar "Blue Team" bid for the next generation of Naval Destroyers in addition to legal actions against Cisco with respect to their business practices now filed in several states, as reported by CNET. With the long history of financial procurement controversy in major contracts with the Pentagon one might wonder why Lockheed Martin would risk choosing Cisco Systems as a key vendor when many other top quality alternatives exist. Especially given the significance of Cisco's watered stock fraud scheme to government employees pensions and fact that they earn billions and don't pay a dime of federal income tax. These key facts should be of interest to Lockheed.
Lockheed Martin is now competing directly with Litton Industries for a multi-billion dollar naval destroyer contract. See two page summary of Naval Destroyer Contract for details. More than 75 percent of Lockhead's sales are to the federal government, including the Pentagon and Commerce departments. Interestingly, a respected former legislator and top ranking Lockheed executive was just appointed to be the Secretary of Commerce by President Clinton. One has to wonder why Lockheed does not remove Cisco from the project and chose another vendor from the quality pool of such vendors available. Perhaps it is Cisco's aggressive sales techniques as summarized on CNET news, "Cisco Faces Lawsuit Over Gear, Business Practices."
In addition to the watered stock fraud and non payment of federal income tax issues, CNET has also reported that Cisco is being sued over quality of service problems, patent infringement in the fiber optic area and conflicts of interest with respect to its business practices. One company in Louisiana, AMC, according to CNET, rejected a $40 million settlement offer from Cisco. Ideally, Lockheed should chose a top quality medium sized firm with higher quality products.
As with Microsoft, Cisco is attempting to access significant government
contracts and this is their right. The problem is that we can't afford
to have these marketing and legal driven companies, like Microsoft and
Cisco, who are leveraging growth via financial fraud, responsible for our
national security and the efficiency of government. Too many excellent
alternatives exist.
A Closer Look at The Estate Tax and Pooling Method of Acquisitions
The idea behind the estate tax is to transfer wealth upon death to a broader segment of society, thereby invigorating the economy. The stated objective of the pooling method of acquisitions is to make it easier for companies to merge and thereby also invigorate the economy by accelerating innovation. In reality, both the estate tax and pooling should be repealed because they are manufacturing unemployment and underemployment, igniting variable annuity and other insurance abuses, creating false inflation, destabilizing the stock market and most importantly undermining the economy. The estate tax represents less than 5 percent of federal tax receipts. Unfortunately, repeal of the estate tax is viewed as unfairly rewarding wealthy individuals yet those it will reward the most are ordinary citizens.
The two most important figures in achieving such a repeal could be Ralph Nader and Phil Gramm, without whose support repealing both the Estate Tax and Pooling may fail. Nader needs to first understand the economic mechanics in each area and the glaring hypocrisy of having one third of his assets in Cisco Systems stock while trying to appeal to organized labor and saying he will only speak with "big media" going forward.
Gramm needs to stand down Cisco Systems intense lobbying effort and support an end to pooling in exchange for repealing the Estate Tax, which will delight his constituencies. This will be a tough fight since Cisco knows its watered stock could implode if pooling is repealed. Failure to do so by Gramm, however, could also identify him as one of the great enablers of the biggest financial fraud since Charles Keating pilfered the Savings and Loan Banks. Many prominent politicians from both parties were tarnished by that episode, including John Glenn and John McCain.
In Nader's case he will be a central figure in this scandal given his outspoken positions on Pension Rights and Corporate Welfare at the same time he has one third of his assets in Cisco Systems stock. Cisco is now pilfering the retirement system and pays no federal income tax due to the success of its scheme. In Nader's recent acceptance speech for the Green Party he referred to the average worker paying more tax than GE in 1983. Imagine the ridiculousness of that speech given his investment in Cisco Systems. Nader needs to freshen up his perspectives because it is as if he is trying to write "Unsafe At Any Speed" while having one-third of his assets in General Motors.
Equally remarkable is that Mr. Nader is making overtures to the Teamsters Union, saying he is pro jobs and a friend of labor, when Cisco is the leader in issuing watered stock via the pooling method for acquisitions. This is forcing significant layoffs and resulting in underemployment in many areas of the economy including key sectors of union membership, in particular the Communications Workers of America.
Reasons For Repealing The Use of The Pooling Method For Acquisitions
1) Pooling essentially involves using a photocopy machine to print stock to pay for acquisitions without accounting for the cost of such activity in the financial statements. Many eloquent arguments exist to justify pooling but it's that simple. If a merger makes sense, pooling is not necessary. One need only look to other leading technology firms that regularly engage in mergers, including the Intel Corporation and IBM, that generally do not use pooling. Goldman Sachs will fight for pooling because it is a useful tool for generating investment banking fees resulting from such mergers.
As reported in USA Today on July 3, 2000 "But a recent study by McKinsey & Company, a consulting firm, labels Cisco's argument a myth. According to McKinsey, rules banning "pooling" wouldn't damage profits or shareholder value. Rather they would require companies to look more closely at deals and communicate more with stockholders." Cisco's position is understandable since they could now be viewed as the champion of watered stock fraud. One effect of this situation is that the SEC has prohibited Cisco Systems from doing any share repurchases since 1996. This amazing fact is largely unreported in the press. Other leading technology companies, including Intel, regularly repurchase shares to offset some of the dillution created by stock options and other factors.
2) Although legal, pooling grossly overstates future net income by excluding the cost of acquisitions and thereby fuels interest in a company's stock price. For this reason Cisco buys its research and development in the form of other companies rather than using internal development which would require the wage costs to be reflected as a charge against earnings. This in effect crushes many small promising competitors and often has become part of their long-term strategy, at which point to sell out to Cisco.
This staggering financial fraud at Cisco is prior to considering stock option related issues, which combined with pooling, make Cisco Systems without question the greatest financial fraud of the last 50 years. Microsoft has also clearly erected a financial pyramid yet Microsoft does have a monopoly yet Cisco doesn't even manufacture its own products and has become nothing more than a marketing, legal and financial machine.
3) Pooling causes other companies stock prices that do not use this technique, those that pay wages to employees who develop new products and services, to decline correspondingly, no matter what industry they are in or how well they are managed. This eventually leads to cost cutting measures including job and benefit reductions, in order to compete for interest in their stock in the capital markets with Cisco Systems. The result is an accelerating destabilization of the economy.
This is the irony of Mr. Nader's position. Nader is focusing on those companies which are an effect of Cisco's watered stock fraud scheme rather than going to the source. One might say he is only looking at the "usual suspects." Many of these companies would not be converting to cash balance pension plans and adopting other worker unfriendly measures if it were not for a need to compete with Cisco's scheme for capital. Businesses will do what is necessary to survive, even if that means battling within and adapting to a system of financial fraud and corruption.
4) Pooling destroys quality jobs and destabilizes many communities whose tax base is removed due to the effect of unproductive mergers that would not occur without pooling. The Sprint/MCI proposed merger is a good example as MCI is desperate to gain a presence in the wireless industry, even though Sprint can succeed fine as an independent company. Pooling, when combined with aggressive stock option grants, has also become a means for CEO's to rob workers, pension participants, their communities and their customers. In Sprint's case somehow William Esprey, even though a great visionary leader, believed he could walk with almost $1 billion. This is an absurdity that would never occur but for pooling. It would also represent the loss of a key employer for the city of Kansas City where Sprint is headquartered.
5) Pooling is now the greatest source of inflation
risk. This technique has led to many industries being dominated by
a few large competitors and this is quickly resulting in higher prices
due to a lack of competition. Higher inflation is bad for both consumers
and investors.
Reasons Why The Estate Tax Should Be Repealed for
Estates of less than $100 Million
1) When an estate plan is prepared it is generally accompanied with a substantial and expensive life insurance policy aimed at covering estate taxes upon death so that a company's assets need not be liquidated. Attorneys often co-market their estate planning services with insurance companies in order to sell such insurance policies. Naturally these insurance policies, often written when the owner is in their 50's, are very costly and extract valuable resources from a company that could otherwise go to wages and new product development. It also results in many owners selling their businesses for stock to create a more liquid asset in order to pay estate taxes.
2) Small and medium sized businesses are a great source of dependable long-term employment. Sadly, the estate tax can often force the sale of such businesses or the addition of significant debt to finance the taxes. This puts downward pressure on current wages and therefore results in less future federal income tax receipts. It is also common for long-time high wage employees to lose their jobs in such situations if the business is sold and transition into a situation of underemployment due to an inability to geographically relocate. The point is that by destabilizing solid businesses with an estate tax, the government is undermining its ability to collect future income tax. This is bad policy and both Ralph Nader and Phil Gramm should know that.
3) The best and brightest workers may not be interested in working for a family business due to ownership complications introduced by the estate tax. This furthur undermines these businesses chances for success in the marketplace due to an inability to hire the talent necessary to provide long-term success, forcing many such companies into mergers.
4) Ralph Nader and others mean well when they criticize the repeal of the estate tax yet rather than fight repeal of this tax perhaps they should look in their own back yard if they are concerned about jobs, corporate welfare, pension rights and a strong economy. This was a lesson from the 1960's. Mr. Nader has 32 percent of his total assets in Cisco Systems stock, a company that has 8 billion shares outstanding and only $20 billion in gross annual revenues and is clearly a massive watered stock fraud that is triggering severe economic dislocations. Cisco now purchases most of its R&D and out sources a significant amount of its production.
A similar confusion exists with the pooling technique for acquisitions. It has been justified based upon its ability to stimulate economic development yet by looking at its biggest user, Cisco Systems, it can be seen for what it is, a massive watered stock fraud.
In addition to the unproductive life insurance premiums
with respect to the estate tax, insurance companies are also extracting
massive investment management fees on Cisco Systems via mutual funds wrapped
in variable annuities. These fees are often in the form of variable annuity
as the insurance companies make speculative bets on Cisco Systems in the
annuity products and take much higher risk that they would otherwise. They
are making a desperate attempt to justify excessive fees through such speculations.
Resolving Day Trading Abuses, Variable Annuity Fraud, Excessive Mutual Fund Fees, Promissory Note Fraud and Media Conflicts of Interest Will Require Addressing the Watered Stock Scheme at Cisco Systems
If Cisco Systems and Microsoft were not corrupting the financial markets by using a watered stock fraud scheme there would be less volatility in stocks and thereby less incentive to day trade. Earnings would be earnings and other companies with integrity in their financial results would compete on a more level scorecard. Their shares would not plummet when they miss earnings by one cent and cause capital to rush to Microsoft and Cisco Systems, even though the two companies are "cooking the books."
The biggest beneficiaries to this volatility are companies like Janus and Fidelity Investments. Fidelity will now actually pay you $100 to open an active trader account. Clearly, they are trying to stimulate trading volumes and extract massive fees in the form of the spread between the bid and ask on stock purchases. Investors do not see this cost but rather a standard transaction fee. In addition, by touting and inflating Cisco Systems and Microsoft they can earn billions more in management fees from their mutual funds by pilfering the retirement system.
Rather than invest in financial analysts and top quality fund managers they are instead investing in massive marketing campaigns and using practices such as "boutique research" to conduct stock manipulation. One might even wonder if "boutique research" are really code words for price fixing.
On a philosophical level, even more egregious are the so-called socially responsible mutual funds that are heavily concentrated in Microsoft and Cisco Systems, given both companies abusive business practices and massive watered stock fraud scheme. These funds have become nothing more than a creative means to fleece investors by appealing to their good intentions and extracting excessive management fees and destabilizing the stock market.
In order to fully understand this most situation regarding watered stock fraud at Cisco Systems and Microsoft please refer to the archive at www.billparish.com for a sample of stories from leading publications. A reading of the first detailed two-page report on Cisco should be most helpful.
Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, including The New York Times, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate and The Independent, a major British newspaper. He has been interviewed by Infoworld, ZD Net, Wall Street Journal, Newsweek, Computer Reseller News 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, formerly a 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 employeesÂ’ 401K plan or what can now be called there "Mutual Savings Bank."