Greetings, Arthur, Thanks for this article-- I had a flash as I was reading it. This seems so much more than a matter of even many individual executives pumping their stock to the public while selling it themselves. It seems to me that we also have to see this as a societal event. The stock went up, really, because millions of people bought into the patterns of thinking that supported the phenomenon of buying stock at PE ratios that had seemed absurd only a few years before. I was with a technology company in the mid to late '70s, and put a number of very promising technologies into our R&D portfolio. Seeing the potential, and the revenues soar as we brought technology to the market, brokers started recommending us and the public buying. Our PE went into the 40s and we were all freaked out, feeling that while we loved the company and what we were accomplishing, that the PE was simply 'too' high and could not be justified on financial grounds. But stock buyers weren't looking to real value from us, at that point; they were gambling that someone else would show up and buy the stock for even more. It really was gambling, more than prudent investment, and it occurred because of a mass hallucination on the part of the stock-buying public.
Has anyone on this list seen a book about mass hallucination and fiancial bubbles? (Sorry, I don't have the book to hand here.) It went into detail into a number of financial bubbles. The one that struck me the most was that of the Dutch tulip bulbs; for some reason first the Dutch and then more generally other Europeans began speculating on tulip bulbs. Different varieties could command greater prices, and a stock market developed for the sale and purchase of investments in bulbs. An industry emerged, focusing on developing new variants, and offering them for shares in the market. And then the bubble burst, and the price of the bulbs plummeted, creating large financial losses to those who had put somethimes fortunes into bulbs. The thing that struck me was how little people had to think about when considering a bulb investment: there was nothing mysterious about the product, or even speculative about the true value (that of a pretty flower). It wasn't like the current rash of arcane IT technological capabilities that only specialists can truly understand or appreciate. Yet, there were the supposedly stable and sensible Dutch pouring fortunes into...bulbs. It seems that maybe the telecom dot.com bubble was akin to the Dutch bulb bubble, a mass hallucination, a case of doing it because 'everyone' else seemed to be, a fear of getting left behind. It is scary to think how easily this happened, how 'everyone' joined the rush to dot.com riches. One can imagine it happening in areas in which the feedback is not as conclusive, in the end, as the dot.com and Dutch bulb bubbles, in areas of political, cultural, or religious belief. And if the feedback is ambiguous at best, how then can we know whether we haven't signed up in a bubble? Guaranteed wage, we are reminded was one of the driving questions for the establishment of this list: might we be in a bubble that precludes us from thinking about this and other kinds of issues clearly? I wish I had a guaranteed bubble-pricker handy. <smile> Best regards, Lawry > -----Original Message----- > From: [EMAIL PROTECTED] > [mailto:[EMAIL PROTECTED]]On Behalf Of > [EMAIL PROTECTED] > Sent: Monday, August 12, 2002 10:49 AM > To: [EMAIL PROTECTED] > Subject: FW: Telecom > > > > > > Dialing for Dollars: Before Telecom Industry Sank, Insiders > Sold Billions > > in Stock --- As They Cashed Out Shares, Many Executives Touted Sector's > > Growth Potential --- Mr. Galluccio's New Winery > > All told, it is one the largest transfers of wealth from > investors -- big > > and small -- in American history. Hundreds of telecom executives, almost > > uniformly bullish, sold at least some portion of their stock and made > > hundreds of millions of dollars, while many investors took huge, > > unprecedented losses. It dwarfs the much more highly publicized Internet > > boom and bust. And the economic and personal damage in jobs lost and > > bankruptcies is far worse. > > > > By Dennis K. Berman > > 12 August 2002 > > The Wall Street Journal > > > > These days, Vincent Galluccio spends most afternoons at the wheel of a > > tractor, overseeing his $5.2 million Long Island vineyard, Galluccio > > Family Winery. Just two years ago, Mr. Galluccio was one of thousands of > > executives overseeing a different product: telecommunications. > > Mr. Galluccio, 57 years old, was a top European executive of Metromedia > > Fiber Networks Inc., a high-flying White Plains, N.Y., telecom-network > > builder. As Metromedia's value soared to its peak of $31 billion, Mr. > > Galluccio began selling small amounts of shares. Leaving the company in > > 2000, he liquidated all of his holdings, for a total of about > $27 million. > > He used the proceeds to buy the 160-acre winery known for its > Chardonnays. > > > > Metromedia has since landed in less idyllic territory: In May, it filed > > for Chapter 11 bankruptcy protection and the Securities and Exchange > > Commission is examining the accounting practices the company used after > > Mr. Galluccio's departure. Mr. Galluccio is unapologetic about his haul, > > having worked 18-hour days for three straight years. "My father > taught me > > that when you play poker and win a hand, put half in your > pocket and walk > > away from the table," he says. > > The telecommunications industry, once a safe stock haven for "widows and > > orphans," became a gigantic poker game during the late 1990s, a > > competitive, high-growth business drawing billions of dollars of fresh > > capital. Supported by bullish Wall Street analysts and investment banks > > eager to reap big stock-offering fees, industry executives > helped the pot > > grow bigger and bigger with talk of telecom's endless growth > > possibilities. Then, by the hundreds, they folded their hands at what > > turns out to have been the peak. > > Starting in 1997, telecom insiders directly cashed out over > $14.2 billion > > in shares, a Wall Street Journal/Thomson Financial analysis > shows. Add in > > shares sold by venture capitalists, executives' trusts and private > > investment vehicles, and the number soars to roughly $18 billion. > > Some of the sales by telecom insiders have been truly massive. Qwest > > Communications International Inc. founder Philip Anschutz sold nearly $2 > > billion of shares, and former chief executive Joseph Nacchio sold about > > $250 million. Global Crossing Ltd. founder Gary Winnick sold > $734 million > > in shares on a $20 million investment. Global Crossing entered > Chapter 11 > > proceedings in January and reached an agreement to be sold on Friday. > > A spokeswoman for Mr. Winnick said that all of his trades followed > > applicable rules and were reviewed by company attorneys at the time. A > > representative for Mr. Nacchio said all of his sales were in compliance > > with trading regulations. A spokesman for Mr. Anschutz said that the > > executive had put $1 billion of his own money into Qwest and declined to > > comment further. > > WorldCom Inc. Chief Executive John Sidgmore, who predicted > nearly endless > > growth for the industry as head of UUNET, the Internet backbone > purchased > > by WorldCom in 1996, sold a total of $87 million in WorldCom stock. > > WorldCom filed for Chapter 11 bankruptcy protection earlier this summer > > and was slapped with civil charges by the SEC after reporting > the biggest > > corporate accounting fraud in history. > > "The point of my presentations always was the Internet > infrastructure and > > the capacity of our network was growing 10 times" annually between 1994 > > and 1997, Mr. Sidgmore says. He added that the overwhelming > portion of his > > sales were of holdings that were originally UUNet shares, not > newly issued > > WorldCom shares. "The only thing I've sold since 1999 were > transfers into > > trust funds for nieces and nephews," he says. > > But the insider selling went far beyond the Winnicks and > Sidgmores of the > > industry. The selling also reaped huge profits for hundreds of > relatively > > unknown telecom executives such as Mr. Galluccio. Their fortunes are > > indicators of just how much the telecom bubble expanded, enriching > > executives at companies with the most limited track records. > Today, of the > > 305 companies canvassed in the Journal survey, 38 have total > insider sales > > since 1997 greater than their current market capitalizations. > > All told, it is one the largest transfers of wealth from > investors -- big > > and small -- in American history. Hundreds of telecom executives, almost > > uniformly bullish, sold at least some portion of their stock and made > > hundreds of millions of dollars, while many investors took huge, > > unprecedented losses. It dwarfs the much more highly publicized Internet > > boom and bust. And the economic and personal damage in jobs lost and > > bankruptcies is far worse. > > With over 60 bankruptcies to date, it's now clear that the sector sank > > under too much capacity and debt. Telecoms have now shed half a million > > jobs and about $2 trillion in market capitalization. > > At JDS Uniphase Corp., a maker of fiber-optic components, insiders > > unloaded nearly $1.2 billion of shares over the past five years. The > > company is now valued at $3.5 billion. Insiders at Foundry > Networks Inc., > > a San Jose, Calif., maker of switches for data networks, have sold close > > to $700 million in shares since 1997. The company is now valued at about > > $1 billion. Even at now-defunct wireless-data provider Metricom > Inc., San > > Jose, Calif., where yearly revenues never exceeded $18.5 > million, insiders > > managed to sell off more than $35 million. > > To be sure, in most cases, the selling was perfectly legal -- > and was duly > > reported in filings with the SEC. Insiders have every right to > sell their > > shares and turn a profit. If part of their compensation comes through > > stocks and options, they have full sway to diversify their > portfolios. And > > unlike many established companies, the new telecom players faced a > > higher-risk proposition: The stock didn't pay dividends because there > > often weren't any profits. Executives point out that regular > shareholders > > are free to sell whenever they wish. Most say they sold only a small > > percentage of their overall holdings into the market, and > nearly all were > > prevented from selling stock within the "lock-up period," or 180 days > > after their companies' public offerings. > > But with much of the industry in utter collapse, investors are > puzzled and > > angry that they didn't understand how short-lived the boom would be. If > > telecom was supposed to be the backbone of a decades-long > Digital Age, why > > were so many executives selling at the same time that they were > predicting > > further growth? If timing is everything, was there something > the insiders > > knew about the state of the industry that the general population of > > shareholders didn't? > > Scores of shareholder lawsuits have flooded the courts, charging telecom > > executives with making misleading statements and selling their shares > > while prices were still high. No telecom executive has yet been charged > > with or convicted of insider trading, and such prosecutions only rarely > > stick. To be convicted of insider trading, prosecutors must prove that > > insiders used material, nonpublic information to sell for their personal > > gain. > > That doesn't mean investors aren't feeling burned. "It's very > frustrating > > as an investor," says Trent E. May, a former manager at Invesco Funds, > > whose portfolios suffered because of heavy investments in telecom and > > technology stocks. Executives "came public with these great > stories about > > how they were doing so well, and then they come back to the market and > > sell 50% of their personal shares." > > The crash and personal profiteering of the telecom industry > have become a > > platform for the surge of corporate reforms sweeping through > Congress and > > private-sector stock regulators. The response? Expensing options, > > restricting grants, limiting selling periods, pushing up the > deadlines for > > insiders to disclose their sales and hauling executives off to jail in > > handcuffs before TV cameras. These all may play a role in > calming investor > > anger. > > But for now, few executives are publicly repentant about timing their > > sales so well while outside shareholders took a bath. Randall Kruep, > > former senior vice president at Redback Networks Inc., a six-year-old > > company that went public in May 1999, says he "would have gotten out > > faster if I could have," and now wishes he could have sold > double the $100 > > million he sold in share transactions during 1999 and 2000. > Tight trading > > "windows," which limit when insiders can sell their shares, > prevented Mr. > > Kruep from doing additional selling, he says. The company's > shares crested > > at a split-adjusted $191.03 in March 2000. The shares now sell > at $1.07. > > Now the chief executive of Procket Networks Inc., Mr. Kruep says he knew > > early on that the industry could not continue at its torrid pace. > > Executives who believed that the growth would continue, "didn't want to > > believe the truth. They didn't want to look a gift horse in the mouth." > > Brian Smith, chief executive of Austin, Texas, equipment-maker > Crossroads > > Systems Inc., calls the amount of telecom insider sales "pretty small" > > given the overall size of the economy. In 1999, Crossroads went public, > > and in October of that year Mr. Smith began a regular share-selling > > program that has since brought in more than $50 million, according to > > Thomson Financial. That's nearly three times the company's > current market > > capitalization. Mr. Smith says financial advisers suggested he start > > selling shares as a way to diversify his holdings. As for Crossroads' > > valuation, "it was consistent with what others were getting valued at," > > Mr. Smith says. "It didn't seem out of ordinary for the time. > It seems out > > of the ordinary now." > > Mr. Smith recalls a whirlwind period following the IPO, when > the stock was > > often advancing as much as $25 a day. Around that time, he says, the > > company's sales looked like they were going to grow 25% a quarter. Those > > expectations didn't pan out. Nine months after what was once the > > fifth-most-successful IPO in history, demand for the company's products > > began to slow. At the time, Mr. Smith called it a "bump in the road." > > At JDS Uniphase, Chief Financial Officer Tony Muller was struggling to > > keep up with at least 20% growth between 2000 and the second > half of 2001. > > The company scrambled to meet demand by opening new plants and > snapping up > > competitors. "That was the world as we saw it," says Mr. > Muller. But when > > the bottom fell out of the market, "Our customers were wrong and we were > > wrong." > > Mr. Muller, meanwhile, was consistently selling his own shares > -- tens of > > millions of dollars' worth over the past five years. Mr. Muller says he > > consciously sold no more than 10% of his holdings, for fear of giving > > investors the impression that he wasn't committed to the > company. In fact, > > Mr. Muller adds, he could have cashed, "a very big number." How big? "I > > don't want it to appear in print." > > Mr. Muller's longevity trumps that of his former colleague, Mary Zita > > Cobb, a longtime JDS executive who was instrumental in a 2001 > $18 billion > > merger with SDL Inc., another maker of fiber-optic components. The value > > of the merger has since been largely written off, but Ms. Cobb > hasn't been > > around to see it. She left the company soon after the deal > closed, and is > > now circumnavigating the world on a sailboat, according to other JDS > > executives. Between 1999 and 2001, she sold stock valued at > more than $100 > > million. Ms. Cobb couldn't be reached for comment. > > Former Redback Networks chief executive Dennis Barsema was > bullish on the > > growth prospects of his company during March 2000, telling a television > > interviewer that the company was at the "very beginning stages > of a market > > that is going to grow very, very fast." > > That prediction held for the next nine months, when Redback quarterly > > sales grew by four times to nearly $115 million. But the bottom would > > later fall out, as Redback sales tumbled to $40 million during the first > > two quarters of 2002. > > Eventually leaving Redback for another start-up, Mr. Barsema sold $125 > > million in company shares, according to Thomson Financial. Mr. Barsema > > said that his entire net worth was tied up in the company, and he needed > > to diversify. "I don't think anyone knew we were in a bubble > until we were > > on the other side of it," he says. > > The hype was especially loud at four-year-old Sycamore Networks of > > Chelmsford, Mass. By all accounts, the company built a well-respected > > group of products used to manage what are called the "next > generation" of > > telecommunications networks. > > As company executives described it, Sycamore's fate was tied directly to > > that of the Internet. Locked together, the future of both > seemed limitless > > when the company took its shares public in the fall of 1999. > Sycamore was > > valued at $14.4 billion after its first day of trading. By January 2000, > > Fortune magazine said the company had the best chance of becoming a "big > > boy." > > Even after the dot-com bubble popped a few months later, Sycamore > > executives were publicly bullish on their market opportunities. One top > > sales executive noted in a June 2000 press release that "next generation > > networks will continue to grow bigger and faster than anything > we've seen > > before." > > Just three months earlier, a group of seven top executives sold $257 > > million of stock, at around $144 a share. Three have since left the > > company. One, sales executive Ryker Young, recently moved to > Oklahoma. He > > says he is "sitting on the sidelines" following an illness. Mr. Young > > declined to comment further about his stock sales, which > totaled more than > > $65 million, according to Thomson Financial. > > Deshpande Gururaj, Sycamore's chairman and chief executive, has > sold about > > $136 million since the IPO, or 4.5% of his total. A > representative for Mr. > > Gururaj said he wasn't available for comment. Though Sycamore shares are > > now trading at below $3, Mr. Gururaj recently told a Boston technology > > conference that he believes in the long-term prospects for telecom. > > Bobby Johnson Jr., founder of the profitable Foundry Networks, says he > > retains a deep belief in the promise of telecom, even after what he > > describes as "the most challenging 18 months of my 25-year career." The > > 45-year-old Mr. Johnson's holdings were once valued at more than $5 > > billion. He now says that the industry was "in denial" around > the time the > > company issued an earnings warning in December 2000. Mr. > Johnson, who has > > sold about 25% of his holdings for about $305 million, says he thought > > there would be a small dropoff in demand, and then it would be "back to > > the races in another few months." > > Remarks Mr. Johnson made on Nov. 13, 2000, are the subject of a > > shareholder lawsuit filed in the U.S. District Court for Northern > > California. In an interview at the time, Mr. Johnson said that > he was "not > > unhappy" with the company's stock price. He went on to say that > "when the > > market fully values markets as well as companies, our stock > price could go > > even higher." The next day, Foundry's shares jumped from $66.75 > to $74.06. > > But they retreated to $13 after the company posted an earnings > warning on > > Dec. 19. The lawsuit alleges that Mr. Johnson, who had a regular program > > of selling shares, possessed information about Foundry's deteriorating > > condition when selling shares in October 2000. Mr. Johnson > notes that the > > suit has been dismissed twice, adding that it is "without merit." > > Foundry's shares now trade at $8.99. > > Today, Foundry sells just 20% of its products to the telecom > carriers who > > were its most avid original customers. It is now marketing directly to > > corporations. Mr. Johnson backs away from the notion that Foundry hyped > > the Internet, whose growth has proved remarkable but far more > modest than > > once expected. "I don't think we either inadvertently or > advertently hyped > > the Internet," Mr. Johnson says. "We believed that there was a lot more > > that can be done with the Internet and can be done over time." > > Like many of his telecom peers, Mr. Johnson insists that the > > multimillion-dollar paydays haven't changed his life much. "I still work > > as many hours as I did before," he says, adding he's given away > more money > > than he spends. > > Indeed, telecom executives have been generous with their largesse: Mr. > > Barsema, for instance, recently funded a new business school at Northern > > Illinois University, coming up personally with $5 million in cash after > > awarding the school a stock gift of $15 million. Mr. Smith, of > Crossroads > > Systems, has funded international Baptist missionary groups. > Donald Green, > > another Silicon Valley executive who made tens of millions of dollars in > > telecom stock sales, gave $10 million to help build a 1,400-seat music > > hall in California's Sonoma County, modeled after the famous Tanglewood > > site in Massachusetts. > > But even well-meaning gifts can do little to insulate telecom executives > > from public resentment. Mr. Johnson, for instance, admits that it's "not > > always pleasant to tell people you're a CEO these days." Congressional > > hearings into the telecom mess have become televised embarrassments for > > the industry's top brass. Some corporate activists are lobbying for > > telecom executives who presided over corporate bankruptcies to return > > their compensation to shareholders and employees. > > David Oros is chief executive of Aether Systems Inc., which builds > > wireless-data products for corporations. Aether's market > capitalization is > > now about $116 million. Through personal sales and sales of an > investment > > vehicle he majority owns, Mr. Oros sold $140 million of stock in 2000, > > according to a spokesman. He later bought a $2.5 million stone home in > > Baltimore. Neighbors later groused about Mr. Oros's home > remodeling, which > > included a reflecting pond, as well as butterfly and sculpture gardens, > > according to a person who has seen the house's preliminary > plans. Mr. Oros > > says he's grown frustrated by criticisms about his stock sales, which > > occurred during a secondary stock offering in 2000. "I've given more in > > charitable contributions than I've paid for the house," he says, noting > > that he lives more modestly than some other executives. Mr. Oros says he > > has kept the same salary for three years and is "proud of what > we're doing > > for the city of Baltimore." > > Some investors are looking to alter the kind of compensation structures > > that richly rewarded the telecom executives of the late 1990s. Such > > changes might further restrict how much, and how often, executives can > > sell their shares. > > Carl Ferenbach, a venture-capitalist at telecom backer > Berkshire Partners, > > puts some of the blame for the huge industry payouts on > himself. "We never > > really seemed to ask the question about huge amounts of money going in, > > supporting people who ultimately walked away with a lot of money," Mr. > > Ferenbach says. "It clearly was out of control everywhere, and in some > > sense, all of us who didn't scream loudly are to blame." > > --- > > >
