Why John Gifford is Going to Jail... And Who's Next

It only took four years.

Back in July 2002, I couldn’t believe what I saw going on in Silicon Valley. Executives and boards were robbing their shareholders blind. I thought it was criminal. And I knew it would soon bring them all down... starting with the most detestable CEO of them all, John Gifford, of Maxim Integrated Products:

“The most respected – and once the most profitable – company in Silicon Valley will soon find itself in the middle of the next national scandal. A man hailed as the best CEO in Silicon Valley will see his reputation destroyed... as his true colors come to light. Investors in a company that once posted a 9,000% return to shareholders will see their investment wiped out.”

– Porter Stansberry's Investment Advisory, July 2002, “The Next Wall Street Scandal Will Dwarf the Rest”

This past July, the U.S. Attorney for the Northern District of California requested documents from Maxim (MXIM) regarding its stock-option grants for the last decade.

As a result of this criminal investigation and the board of directors’ own investigation, Maxim has been unable to file its annual report. And without an annual report, your stock can’t trade on the Nasdaq. Gifford is now fighting to prevent Maxim from being delisted.

Amazing how many lawyers you’ve gotta hire when you steal, isn’t it?

John Gifford was paid more than $26 million per year, on average, for the last six years, according to Forbes. You might think earning more than $125 million in six years is a lot of money, but Gifford actually took a pay cut.

Between 1996 and 2002, his total compensation averaged $32 million per year! Almost all of his compensation came in the form of stock options, which until this year didn’t appear on his company’s income statement, substantially inflating Maxim’s profits.

How have Gifford’s shareholders done? How impertinent of you to ask, you sniveling little investor. (Maxim shares are down about 10% since 2000. And, just for the record, I told readers of my newsletter to short the stock at $37.00... four years ago.)

Gifford was a leading opponent of efforts to reform stock-options accounting. He even sponsored a website – and recruited professors, economists, and congressmen to stump for him on the issue. The temerity of thieves is shocking...

The year before I published my first article on Maxim, Gifford exercised $57 million of options, worth more than 25% of his company’s profits. He also put the third baseman of the L.A. Dodgers on his board of directors – thumbing his nose at the idea of board accountability or oversight.

Over the last four years, I’ve waited for someone else to notice what was happening. But the big mutual funds, such as Capital Research and Management, T. Rowe Price, Fidelity, and Barclays – all large shareholders of Maxim – hardly voiced a peep.

Why didn’t these investors move to protect their funds, which hold huge stakes in most of the 115 companies implicated in the ongoing “backdating” scandal?

This question remains unanswered and unexplored (so far) by journalists and regulators. This failure of capitalism was caused by the amazing greed of corporate boards and by the total absence of fiduciary responsibility on the part of mutual funds and other professional investors.

I know, as with sexual scandals in Washington, the more you read about these things, the less you care about them. But you should care. Behind all of the fancy jargon and financial mumbo jumbo, what’s really happening is quite simple: America’s corporate executives have been stealing billions from shareholders like you. They’ve been doing it for years. Now they’ve finally gotten caught.

Many of them are going to wind up in jail, hopefully alongside John Gifford.

In tomorrow’s DailyWealth, I’ll tell you about another CEO that’s going to jail. He’s one of the most famous and respected corporate leaders in the world... and you probably own his stock.

Good investing,

Porter Stansberry