When a loan isn’t really a loan and options aren’t really options…

July 24, 2006

Next Sunday marks the fourth anniversary of Sarbanes Oxley and despite lots of complaints from certain quarters about just how horrible the law is, something in Flextronics’ (FLEX) preliminary proxy filed late Friday reminded me about just how easy it is to drive a truck through the legislation. Back in May 2003, the company loaned chief technology officer Nicholas Brathwaite $2.83 million. Though the loan was made nearly a year after SOX outlawed loans to executive officers, this loan didn’t count because despite the lofty title, Brathwaite was not considered an executive officer until earlier this year. As a result, this is the first time that Flextronics investors are learning about the loan, whose balance is now $2.9 million and whose due date was extended from December 2005 to December 2007. Given Flextronics’ performance over the past few years, we’re betting that the loan must have been for options that are now underwater.

Indeed, Flextronics’ performance (or lack thereof) brings up another interesting question: how could the board justify giving recently departed CEO Michael Marks (he remains Chairman) a $7.4 million bonus last year?  The filing notes that the bulk of that — $5.94 million — was due to an acceleration of Marks’ "contingent share award agreement" which the company disclosed in this exhibit back in November 2004. Even more interesting is that a closer look at that agreement shows that Marks appears to have been pretty lucky in picking the date when those contingent shares were granted: Aug. 17, 2004, which not so shockingly was a low point for Flextronics stock that year. Now contingent shares may not technically be the same thing as options, but the timing on them certainly seems to bear at least a passing resemblance to the problems we’ve seen at other companies on back-dating.

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