SOURCE:  Parish & Company.

Parish & Company Opens Virtual Legal Discussion with Cisco Systems 

PORTLAND, Ore.   Today Parish & Company is opening a virtual legal discussion aimed at helping Cisco Systems understand the importance of supporting a few key fundamental reforms to the 401K and 403B retirement systems.  These reforms have been aggressively pursued by Parish & Company since the fall of 1998 yet Cisco Systems has yet to see how such reforms will not only benefit the overall financial system yet also Cisco itself.

We are now in the midst of a wave of class action lawsuits pertaining to financial fraud, including a major action by Milberg Weiss against Cisco Systems executives for illegal insider trading.  Although these law firms are making a most important contribution to maintaining the integrity of the system, they have not to date been aggressive in supporting reforms to the retirement system that could prevent such actions.

One need only examine the Milberg Weiss website at www.milberg.com to see the significant number of cases being brought against various companies.  There are 25 separate class action lawsuits involving companies that begin with the letter "a" alone. If one also refers to the ultimate outcome of successful cases it becomes apparent that the average investor achieves little redress from such actions.  Let's examine the $50 million settlement Milberg Weiss had with Microstrategy and its auditors Pricewaterhouse Coopers.  Milberg's fee was 33 percent and this left roughly cents per share for the average investor.

Since the real legal argument at companies like Cisco Systems is whether their actions represent "watered stock fraud," this means that class actions will provide almost no benefit to existing investors.  For example, since Cisco has more than 8 billion shares outstanding including options, this would imply that a $1 per share judgment would require a settlement before attorney fees, assuming a discounted legal fee of 20 percent, of more than $8.2 billion.  That will clearly not happen and it is also a powerful incentive for legal firms to play a numbers game, that is, get a settlement and move on to the next case.

It is also noteworthy that the Securities and Exchange Commission is under an extra-ordinary amount of pressure and doing remarkable work given limited resources.  Recent accomplishments such as the FD Disclosure rule and changes in merger accounting were herculean accomplishments given the intense lobbying pressure applied to the House Banking and Senate Finance committees, the two primary oversight groups for the SEC.

Please also note that Parish & Company, although a strong advocate of past Chairman Arthur Levitt's reform agenda, is not collaborating directly with the SEC but rather pursuing an independent parallel effort.  I am however hopeful that this effort will help preserve valuable SEC based resources to be dedicated elsewhere. I will therefore copy the SEC on all aspects of this discussion.  Parish & Company would also support a litigation reform measure that mandates that 3 percent of all class action settlements in excess of $1 million be remitted to the SEC and used to fund specialized financial fraud related actions.

What now needs to come out of these legal actions are fundamental up front changes to the system and most fundamental are two key changes to the retirement system.  This has been the focus of Parish & Company's efforts since the Spring of 1998.

The first such proposal to Microsoft occurred in the late Spring of 1998. This included a variety of areas with respect to retirement plans in addition to suggesting that Bill Gates become known as a charitable giving machine and begin by gifting 80 percent of his Microsoft shares, while retaining the voting rights, to the employee stock option program.  This would have reduced the dilution of existing shares, allowed him to maintain solid control and demonstrated a genuine commitment to employees.  He chose instead to fund a foundation and aggressively use donations to leverage Microsoft products into libraries and other organizations and leave employees who had effectively prepaid their future wages with inflated shares.  He has also aggressively sold shares and diversified into steel, defense and other basic industries while the average employee at Microsoft has more than 60 percent of their entire 401K balance in Microsoft stock. A complete chronology of these proposals will be posted on this web site within 30 days.

Parish & Company Proposal to Cisco Systems

Parish & Company has also made specific proposals to Cisco Systems beginning in the Spring of 2000.  The evolution of these proposals will also be chronicled in detail within 30 days.  Based upon a complete rejection of any attempt at even the most basic reforms and a powerful effort to discredit the integrity of my work, I then decided to assume defeat on the pooling loophole issue and compromise with Cisco.  The following proposal represents this compromise.

1)  Cisco Systems adds an independent outside member to its 401K committee.  This person must be independent of both the company and the investment firm offering the 401K plan.  Since the average 401K plan balance is now larger than the annual payroll at most companies sponsoring these plans and also given that many employees consider these assets to be their life savings, the plans are now functioning as the equivalent of mutual savings banks without adequate oversight.  Cisco is an industry leader and others will follow their lead.  Such change must be communicated via a company press release on Business Wire or any other medium of Cisco's choice.

2)  Cisco Systems will write a letter to the House Banking and Senate Finance committees, or have one written by a related party, that suggests a "safe harbor provision" for all employers offering 401K or 403B plans that, among the choices offered, include three indexed stock funds and three indexed fixed income funds.  This is especially important since many employers are not offering these plans or worse offering a type of plan that makes no sense for fear of legal action.  Even Intel, an icon of integrity, currently has its entire employer match component of its SERP profit sharing in an "enhanced S&P 500 Index" fund.  This one size fits all is absolutely absurd, especially given the large number of long-time dedicated employees at the company.  What if an employee who has been there 15 years wants to take less risk than a 22 year old college grad.  Intel obviously made this move as a genuine gesture toward helping its employees avoid the high fee predatory fund practices common to such 401K plans yet their good intentions have involved into a a gross breach of fiduciary management and in my personal view a clear violation of the 404C provisions of the ERISA pension law.

3)  Cisco Systems recently dismissed almost 10,000 of its workers and these workers were given 4 months of "paid" COBRA health insurance coverage as part of a severance package.  In a more unstable economy COBRA coverage is particularly important because this can help encourage more risk taking and entrepreneur ship.

It was not that long ago that many workers toiled in environments far below their capabilities for fear of loosing health insurance coverage.  COBRA was a great reform to the system that has particularly benefited the technology industry as workers are able to continue participation in company health plans for up to 18 months while they pursue other endeavors.

The problem here is that Cisco should have offered more than 4 months of COBRA given the intense dedication most of its dismissed workers displayed, not to mention the immediate cancellation of all unvested stock options upon these workers being let go.

Parish & Company, while representing a large group of these Cisco Systems employees laid off, suggested 18 months of paid COBRA, calling it an excellent investment on Cisco's behalf for reasons outlined in a memo to John Chambers and Larry Carter.  Perhaps 18 months is somewhat aggressive but four is certainly not adequate.

4)  A not for profit think tank established by Parish & Company aimed at common sense reforms to the education system will be funded at $4.5 million.  Being a not for profit, this will provide adequate disclosure so that Cisco or any other interested party can verify the integrity of this effort.  It is not important that this institute be funded from funds received directly from Cisco Systems but rather that it be funded.  For example, if Bill Gates foundation funded this institute this would effectively resolve this conflict with Cisco Systems.

What most investors do not see yet is that terrific reforms are now possible with respect to the education system yet if we are not careful we run the risk of repeating an HMO like debacle in which kids end up competing with shareholders for limited government resources.  One common sense reform would be to prohibit companies managing school districts from receiving stock based compensation.  Although appropriate for technology companies, this would be a shameful fraud upon taxpayers and there is no reason why significant cash bonuses using some of Warren Buffet's model compensation plans could not be used.
 

Summary

Parish & Company will develop this virtual legal discussion in the most open manner possible.  Cisco Systems, the SEC and other leading regulatory authorities, its outside counsel and accounting firms will all be copied on significant press releases. Your comments would be most appreciated.  Please also note that in the event Cisco Systems orchestrates the completion of the aforementioned four step program, this conflict with Cisco will be permanently resolved and a dialogue with the Microsoft Corporation reexamined.

Related Legal Materials to Date:

The following link is to Milberg Weiss class action legal claim against Cisco Systems.
Milberg Weiss Cisco Systems Class Action Filing

The text of this claim against Cisco reads like an executive summary of Parish & Company's reports on Cisco Systems.  This and other related reports were posted on my website and not copyrighted and therefore Milberg and other legal firms are invited to use the reports without seeking prior authorization.
Parish & Company's Cisco Systems Watered Stock Summary

Comments regarding Parish & Company analysis are always most appreciated.

Parish & Company is an independent fee based investment advisor to individuals, pensions and trusts based in Portland, Oregon.  No fees are accepted, either directly or indirectly, from any provider of investment products.  Your comments are most appreciated and please do visit my research archive at www.billparish.com.