The Five Dumbest Things on Wall Street This Week

George Mannes

Congressional Accountants FASB overruled by 'experts'

1. Congress Has Your Number

When doctors are pondering how to treat a vexing heart disease, Congress tends to delegate the decision to the cardiologists.

When NASA has to choose a new Mars rover, Congress usually lets the engineers design the right model.

But when a bunch of accountants are determining how companies should account for employee pay -- well, all of a sudden our elected representatives figure the industry experts can't be trusted.

Yes, this Tuesday, the House Financial Services Committee voted to override the Financial Accounting Standards Board's decision to force companies to account for all stock options as a compensation expense.

The bill, which has an alarming number of co-sponsors in the House, would instead require the expensing only of options granted to a company's top five executives. Plus, according to Reuters, it would delay implementing any change for a year so that the Securities and Exchange Commission could study its potential impact.

Wow. As if the options-expensing rule, which was first proposed about a decade ago, hasn't been studied enough. As if expensing options granted to an arbitrary number of employees makes more sense than expensing all of them. Would Congress be so agreeable if, say, FASB decided that Intel (INTC Quote) didn't report any of its debt other than the money owed its top five creditors?

The dumbest thing here, though, is how so many congressmen have convinced themselves that -- with the help of a few meetings with lobbyists and a few big-pocketed constituents -- they know better how to accurately write up financials than do the professionals who have been debating accounting theory for years.

Yes. Congress has done such a good job with the public sector's finances that it can't help cleaning up the private sector's, too. Thanks, guys, but no thanks.

Red Hat's Red Alert Lab dips hat to real-time reaction

2. Red Hat Wonder

Some companies aren't distracted by the vicissitudes of the market. They keep their eye on the operational big picture, not the tiny ups and downs of their stock price. They take the long view.

Red Hat (RHAT Quote), we learned this week, is not one of those companies.

It all started after the market's close Monday evening, when the Linux provider announced that Chief Financial Officer Kevin Thompson was resigning to pursue those near-mythic "other interests" that departing executives so often pursue.

Skittish investors, however, interpreted Thompson's resignation not so much as a reflection of the CFO's personal growth, but as a sign that something was stinky at Red Hat. Red Hat's stock tanked in after-hours trading Monday, dropping 12%.

So what did the company do? With its fiscal first-quarter earnings already scheduled to be released Thursday, did Red Hat keep a stiff upper lip? Did executives say to themselves, "We'll teach those doubters a lesson. Once our numbers come out three days from know, they'll learn never to doubt the soundness of our business operations. Good things come to those who are patient?"

Of course not.

In fact, Red Hat panicked. The morning after Red Hat announced Thompson's departure -- about 120 seconds before the market was scheduled to open -- the software company issued a press release previewing the first quarter. Earnings, Red Hat said, would exceed $10 million, or 5 cents a share, 1 cent better than the Thomson First Call consensus expectation.

By setting some sort of record for the shortest time span between an earnings preview and the earnings release, we suspect that Red Hat has demonstrated how little it trusts its shareholders, and how little its shareholders trust Red Hat.

"There was a lot of scrutiny in the analyst community," says a Red Hat spokeswoman. "We felt it was important to address questions as quickly as possible." The company wanted, she says, "to allay some of the concerns that were coming out."

In the end, Red Hat wasn't completely able to allay those concerns. Perhaps smelling the company's fear, investors didn't rush back to embrace Red Hat's stock. At the end of normal trading Tuesday, Red Hat closed at $22.06 -- up from the after-hours lows but still 9% off of the previous day's close.

And after the quarter's actual numbers came out Thursday evening, investors took an even dimmer view of Red Hat. Sure, the company hit its 5-cent earnings target, thanks in part to a boost in other income. But Red Hat missed the revenue target it set three months ago. After hours, the stock fell nearly 8% to $20.64. Rock 'n' roll!

3. Adelphia Goes from Bad to Wirth

As the Adelphia Communications fraud and conspiracy trial winds down, we've got some alarming news for you.

In addition to the alleged conspiracy perpetrated by four top executives on trial in New York City, it turns out there was a whole other conspiracy of people defrauding Adelphia.

Not only that, but they were part of a psychic friends' network. Seriously.

This second conspiracy is a long, bizarre and complicated story, but we'll keep it as simple as possible.

Last month, a man named Josepf Steven Horvath pleaded guilty to conspiring to defraud Adelphia Communications, according to The Morning Call of Allentown, Pa.

Well, we think his name is Josepf Steven Horvath. Around Adelphia, he was known as John Wayne Truelove -- a false identity previously used by Daniel Wirth, a confessed co-conspirator who has also pleaded guilty to conspiracy, according The Morning Call.

The men were accused of bilking Adelphia out of $2.1 million through computer service contracts that Horvath supposedly funneled to Wirth while Horvath served as an information technology manager at the now-bankrupt Adelphia.

The Horvath-Wirth conspiracy is an odd little footnote to the higher-profile New York conspiracy trial, in which three members of the Rigas family, which once controlled Adelphia, are accused of fraud along with a fourth executive.

But the little footnote gets a little odder. It turns out, as we learned from this week's Chronicle of Higher Education, that Wirth has another claim to fame.

Wirth -- who, as it happens, met Horvath in the 1980s when they were both in graduate school studying psychic phenomenon -- co-authored a suspect academic study published in the peer-reviewed Journal of Reproductive Medicine in September 2001. Wirth's study -- widely derided following its publication -- indicated that women's chances for a successful in vitro fertilization doubled when total strangers in far-off countries prayed on their behalf.

One Chronicle source said the study -- in which neither the subjects nor their doctors were told they were part of the experiment -- had "bewildering" methodological flaws. Another speculated that the whole thing was faked. The Journal finally removed the much-criticized paper from its Web site, reports the Chronicle, after Wirth's guilty plea in the Adelphia case.

And to think we thought that the weirdest things to come out of Adelphia were the hundred pairs of bedroom slippers that Adelphia bought for Chief Financial Officer Tim Rigas. We obviously weren't thinking hard enough.

4. Super Subscribe Me

A big shout-out this week to Hollinger International (HLR Quote). Thanks to them, we've got a whole new set of numbers not to trust.

See, on Tuesday, the publisher -- best known for its free-spending, snooty, privilege-loving former CEO Conrad Black -- announced that the circulation figures at its Chicago Sun-Times had been overstated "over the past several years."

By how much, they're not saying; the rival Chicago Tribune floats a 25% overstatement, but the Sun-Times' new publisher told Crain's Chicago Business that's the wrong number.

Anyway, we're amused by Hollinger's statement that the new leadership at the Sun-Times has worked on "ensuring the accuracy of circulation figures reported to the Audit Bureau of Circulation (ABC)."

That's odd. The ABC, if you don't know -- it's actually short for Audit Bureau of Circulations, plural -- is the Good Housekeeping Seal of Approval for circulation numbers reported by most major consumer magazines and newspapers in the U.S. It's the reason that advertisers and other observers actually trust the statistics we read about how many people are getting copies of particular publications.

Circulation Logic Now I don't know my ABC...

The ABC's rules "govern not only how audits are conducted, but also how publishers report their circulation figures," says the ABC. "ABC strives to conduct audits that set the industry standard for integrity, objectivity, and accuracy, and uses state-of-the-art techniques to produce and disseminate ABC-audited information."

Sounds impressive. Except for the part about how an auditing organization with "Audit" in its name apparently missed several years of overstatements in circulation by a major U.S. newspaper.

That's a shock, isn't it? An auditor not catching wind of an alleged multiyear fraud? Who'd have thunk it?

Anyway, we called up ABC to find out how its industry-standard-setting integrity, objectivity and accuracy fell down on the job in Chicago. "Our audits are very stringent," says a spokeswoman, who declined to discuss the specifics of the Sun-Times case. "There's a high degree of stringency involved with each and every audit."

That reassured us. Until we got another statement from another ABC spokeswoman. "ABC audits are not designed to detect a concerted deliberate intent to misstate information," says ABC.

Oh. Now they tell us.

5. Adding Injury to Insult

When all is said and done, what really matters is your health, right?

Wrong -- at least if you work at 99 Cents Only Stores .

See, we know that employees are supposed to keep their personal lives separate from their professional lives and all that. Still, the discount retailer's recent efforts to downplay medical problems faced by its CEO struck us as borderline absurd.

We're referring specifically to last Friday's announcement from 99 Cents, one that focused primarily on how the discount retailer said it would miss prior guidance for the second quarter to a colossal degree.

Instead of April's forecast that 99 Cents will earn 19 to 20 cents per share in the quarter ending June 30, the company now says earnings per share will come in between 4 and 7 cents.

But that's not all. Same-store sales in the quarter will be worse than expected. Prior guidance for the rest of the year is being withdrawn. The financial news was bad enough to send 99 Cents' shares down 31% in a single day.

But lost in all the bad news was a separate piece of information that shareholders might have found disturbing -- if they even found it at all.

Hidden deep inside Monday's press release -- following 1,031 words devoted to the restated guidance and preceding the blah-blah boilerplate announcing that 99 Cents Only Stores makes forward-looking statements -- came this relevant piece of news: "We also report that our CEO, Chairman and founder Dave Gold is presently hospitalized after heart bypass surgery earlier this week."

In other words, the guy who has led the company for nearly 40 years is a little out of pocket right now.

Considering that Gold is a key man at the company, and considering that the company gave no prior indication that anything was wrong with him, we think it kind of odd that the company made such a little deal about the operation.

(On Monday, 99 Cents said Gold was "recuperating satisfactorily" from his "scheduled elective" surgery. We're glad to hear it. Even so, we find the company's "elective" characterization kind of odd. It's as if the company is implying that bypass surgery is no more serious than a tummy tuck.)

So there's our two cents. We left a message at 99 Cents asking to talk about Gold, but no one dropped a dime to return our call.

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