Some of the most recognizable and trusted names in the network industry are under scrutiny - both internally and from the U.S. government - for manipulating the dates of stock option grants to enrich their recipients further. Top executives at storage switch maker Brocade Communications and voice mail vendor Comverse recently were served with criminal indictments. Comverse CEO Kobi Alexander is an international fugitive from justice for allegedly transferring US$57 million to Israel, then fleeing there after indictments were handed down. Other companies, such as Apple and Juniper, announced they have to delay or restate earnings after internal investigations turned up evidence of option-grant date manipulation. Anyone doing business with these companies should keep tabs on the progress of these investigations and indictments. Depending on the severity of the infractions, vendors' longevity could be at stake. "Stay tuned - closely," wrote Nemertes Research President Johna Till Johnson in a recent Network World column. "It's good to keep an eye on how companies are handling the scandal. If you're in the midst of a procurement cycle, you may want to have one of your teams track breaking scandal news, because management instability or potential mergers could affect vendor viability." Or vendor integrity. One IT executive, whose organization uses products from a number of the companies being examined, says questionable financial doings by a vendor's executive reflects poorly on that vendor. "I think this plays a part in whether or not I want to continue to do business with that vendor," says this executive, the IT director for a major healthcare organization, who requested anonymity. "If a vendor can't be trusted at the CXO or board level, it can't be trusted straight on through to their offering." One executive's missteps don't necessarily mean an entire company is corrupt, but the vendor should have a plan to deal with such an incident before it goes public. "If it's a case of a random, greedy executive, every company should have a risk model to deal with that rogue, random greedy executive," the IT director says. If the company does not, that probably means it doesn't know how to deal with other potential risks, such as flaws in a product, he adds. Others say a company should not be crucified for the misdeeds of its individual executives. United Air Lines will continue to do business with Brocade even though former Brocade Chairman, President and CEO Gregory Reyes and former Vice President of Human Resources Stephanie Jensen face criminal securities fraud charges. The executives under indictment "never seemed like crooks or people who were off-track," says Gary Pilafas, principal technology architect at the airline. "It's more indicative of them personally than the company as a whole." What else should enterprise and service provider customers do? "Nothing," says Thomas Nolle, president of consultancy CIMI Corp. "The impact on companies is mostly funny-money restatements. It's not going to affect the company per se." Nonetheless, customers should keep an eye on the progress of stock option backdating investigations. If they reach the indictment stage, there could be ripple effects, he says. One Apple user says he's not worried. "I have absolutely no concerns at all," says Chuck Sholdt, vice president of operations and co-owner of Weather Central, a Madison, Wis., provider of daily weather maps. Weather Central is an Apple shop. "The [Securities and Exchange Commission] is changing [stock-option expensing] rules retroactively, and Apple is having to go back and restate [earnings]. There's not been one brokerage firm that has downgraded its opinion of Apple," Sholdt says. Indeed, Redback Networks stock was upgraded last week after the company completed its internal stock-option backdating investigation and determined it will have no material accounting impact on its earnings. Redback's stock shot up 13% after the upgrade. Another Apple user, a director of IS technology acquisitions at a Middle Atlantic university, is a bit more cautious. He says he's keeping abreast of the stock-option backdating situation and Apple's decision to delay reporting second-quarter earnings until an independent investigation is complete. "We're following the news, and we're interested in seeing what [any potential] restatements look like and the repercussion beyond that," the purchasing director says, requesting anonymity. "As for right now, it's business as usual." The university uses Apple computers for its clustered supercomputing infrastructure. Should any penalties befall Apple, such as a criminal indictment of executives, the purchasing director says the university would revisit any volume purchase agreements with the company. Senior Editor Cara Garretson contributed to this story.
