A Friend in Need or a Friend in Greed?

Posted: 05/2000

A Friend in Need or a Friend in Greed?

A friend, I am told, is worth more than pure gold.

Popeye, “Popeye the Sailor Man”

In a recent coincidence, Popeye’s reference to pure gold could be interpreted to mean shares of stock at exactly the right time.

Reported profits in shares of “friends and family” stock the CEO of one company gave to a few well-placed “friends” of a larger company–with an intense interest in that first company–should have raised the red flag of business ethics. Leave that flag waving at half-mast, however, because according to the Securities and Exchange Commission guidelines on friends and family stock, nothing improper occurred.

It was coincidence that a half dozen Williams Communications Inc.
(www.williamscommunications.com)
executives and engineers walked away with a tremendous payday, because they received friends and family shares from Sycamore Networks Inc.
(www.sycamorenet.com) just before Sycamore went public, according to a March 20 Fortune magazine article.

On Oct. 22, when the market opened, Sycamore was trading at $38 a share. The company was considered to be worth $11 million. When trading ended that day, the company was worth $15 billion.

Six months earlier, Williams had signed a deal with Sycamore to buy $400 million of the optical networking company’s products. At that time, Williams was Sycamore’s only customer.

To investors, however, Williams had sent a signal of confidence when it chose Sycamore to build exact specification optical equipment. Sycamore benefited from the Williams’ decision, and it appears that Sycamore returned that favor with the friends and family stock.

Was it an ethical quid pro quo?You decide.

Many top industry players prohibit their employees from taking friends and family stock from any companies with which they do business, saying it is not ethical. Other companies have rigorous guidelines to ensure no conflict of interest is implied or could be inferred.

The practice began as a nicety to give actual company friends and employees’ real family members a stake in the company, or as a token way for the company CEO to express gratitude to his employees, friends and family.

With no guidelines, the definition of “friend” has changed. In the past couple of years, customers, business partners, buyers and suppliers are suddenly “friends.” According to the Fortune piece, some people negotiating business with companies actually ask for friends and family shares. Some CEOs view the practice as a way to get new business, or to reward those who have given them business in the past.

Welcome to today’s competitive marketplace where friendships are created out of need. Williams needed optical equipment; Sycamore needed a boost. That
single-day effect their relationship had on the financial market, however, demands a closer examination of whether friends and family stock is fair.

Currently, the SEC only asks to know the number of shares set aside for this practice. Because of the potential dramatic impact the practice has, perhaps the SEC needs to learn more about real friends and true family.

Bruce Christian

Managing Editor