The Intel corporation is facing 32 class action lawsuits from shareholders and customers in connection with recently-disclosed security flaws in its microchips. Most of the lawsuits are customer class action cases that claim that users were harmed by Intel’s “actions and/or omissions” related to the flaws, which could allow hackers to steal data from computers. Ring of Fire’s Mike Papantonio and Peter Mougey discuss this.
Mike Papantonio: This Intel story, it gets weirder and weirder. Okay, you got 32 class actions filed against Intel, and what it’s about, and in addition to that, there’s a derivative suit that I’d like talk about. Here you’ve got security flaws. Talk about the story, lay it out a little bit.
Peter Mougey: The security flaws are in the chips, which is in every computer known to mankind. I mean, I don’t care what you own. Whether it’s Intel, Advanced Micro Devices, Arm Holding, every one of those contains these chips. These chips are a bandwidth or a bridge for hackers to come in and get information out of your computer. So then Intel says, “Well, I got a fix,” so they put kind of a bandage over the bridge so hackers can’t get in and steal the information, but that slows down the computer. Well, if you just spent a couple grand on a computer-
Mike Papantonio: Is it significant?
Peter Mougey: Oh yeah. It’s slow.
Mike Papantonio: Okay. All right.
Peter Mougey: It slows the whole thing down enough to warrant 32 suits. So you buy a computer, it slows it down, you have people getting their information hacked and so you have, as you mentioned, you have 32 lawsuits that fit into three categories. So, one, is I bought my computer and it’s significantly slower with the fix than what was advertised. I didn’t get what you sold me. That’s one. Number two is the derivative suit, which the derivative suit is the company essentially suing the officers and directors.
Mike Papantonio: Stockholders.
Peter Mougey: Right.
Mike Papantonio: Stockholders.
Peter Mougey: So it’s a derivative with the company’s stockholders suing the officers and directors for making terrible business decisions. And the third one is the security suit, what I love. Which means that that they knew about it, the company knew about it, didn’t disclose it. So people that bought stock paid [inaudible 00:01:40]. But here’s what I love. The CEO, I’m not going to pronounce his last name correctly, Brian-
Mike Papantonio: Krzanich.
Peter Mougey: … Krzanich, he sold 889,000 shares in November as part of his plan. He made $39 million for selling his security-
Mike Papantonio: But he knows it’s coming.
Peter Mougey: … while he knows this is all underway.
Mike Papantonio: He knows it’s coming.
Peter Mougey: Yeah, he knew as of July 27th, months before.
Mike Papantonio: So here big Brian Krzanich, he says, “Wow, I gotta keep this quiet. While I keep it quiet, I’m going to go ahead and sell stock and I’m going to make $39 million.” Well, okay, who got hit … To understand you handled derivative suits, you’ve handled them for years. A derivative suit is when the shareholder says that the conduct of management is so bad or it’s so corrupt-
Peter Mougey: You’ve ruined my-
Mike Papantonio: … you’ve ruined the value of my stock. Right? Okay, so what could have … So this guy knows that his stock is going to tank if he doesn’t secretly go do this as quickly as he can, and if this information gets out, then he’s not gonna make $39 million.
Peter Mougey: This whole compensation system is what’s wrong with Wall Street and corporate America. We pay our CEOs in large part most of their compensation comes from options and stocks. Which means I’m going to give you a stock that you can execute and buy a year or two down the line.
Mike Papantonio: Right.
Peter Mougey: And the thought is their goal is aligned with the company. Get the stock price up. Well, what it really ends up is at any means possible drive the stock price up as much as humanly possible.
Mike Papantonio: And sell-
Peter Mougey: Keep the bad news quiet while I sell my … exercise my options and then liquidate. So what he’s done is he’s … And he’s saying, “Oh, this is just part of the regular plan.
Mike Papantonio: It’s coincidence. I mean, it’s just a coincidence. I didn’t know anything about all-
Peter Mougey: But you know what? If you know something bad’s coming, you can’t sell your … I mean, $39 million, which is more money than 99.99% of the population’s ever going to dream about making in a lifetime.
Mike Papantonio: Yeah.
Peter Mougey: He sold in one liquidation and pocketed all the while knowing that his shareholders were about to get crushed and he sold it.
Mike Papantonio: Well, you know, the interesting thing about the point that you just made, and this is so important, people don’t understand that used to be the CEO of a company would be with that company sometimes 20, 25 years. Okay? Now the new MBA ideas get out of MBA school and get into what they called the MBA network, the CEO network. What that means they’re moving from one company to another within a period most of the time anywhere between three, five years at the most. Okay? So what happens? This thing Peter just talked about, they build in this process. Now let’s talk about a drug company, for example. A drug company ends up making what they call … They create a cash cow. That’s a drug that they’re going to sell to everybody, it’s going to make a lot of money, but the CEO is already seeing the edge of a crisis.
He’s seeing that, “Oh yeah, we’re selling a lot of this drug, but the problem is we know that it has potential to kill people,” right? So what he does is he maximizes all of his interest in that company, like this cat did, made $39 million. He does that before the story is out there that this drug has the ability to shut down your kidneys, or this drug has the ability to shut down your liver. He gets to see that information early on.
Peter Mougey: Mm-hmm (affirmative).
Mike Papantonio: It’s insider information, but more importantly, what he does is he knows he’s moving through the company. We’ve actually seen cases where the CEO does what they call this quick sale. He has a drug that’s going to kill people.
Peter Mougey: Right.
Mike Papantonio: He knows it’s going to kill people. His scientists are going to tell him it’s going to kill people. So what he does is he’s already looking for the second job during the time that he sells this stock while the cash cow drug is making so much money. Happens every single day. There’s very few cases I’ve handled Peter where I haven’t seen this happen.
Peter Mougey: It does. And the culture to me is what the problem … If you push it back, because obviously the sale of the stock is the problem, it’s part of the problem. But if you push it back, there’s absolutely zero incentive to stop the drug that they know has a high probability of hurting people. Maybe they know what they told the FDA is inaccurate. Maybe they get updated information and the whole time they’re thinking, “Oh, I’ve got to keep this on the down low because I’ve got $150 million in options.”
Mike Papantonio: And that goes to what you were saying, the system-
Peter Mougey: Yeah. Why do we continue to pay our CEOs based on these options down the line knowing that if they keep the information down, they perpetrate fraud. I mean, that’s what it is at the end of the day.
Mike Papantonio: It promotes fraud, doesn’t it?
Peter Mougey: It does. It’s a whole system that says, “I need to maximize potential now,” not long term value, which is what it was. Short term quick profits, which also if you compare that to Wall Street and all the crazy trading scandals we have, everybody knows that I’m going to take home and put in my pocket short term profits from crazy risk. Their shareholders take the risk. I get the reward.
Mike Papantonio: They even have a term for it and the term is big risks, quick profits. And we actually see it in memos where there’s dialogue going between management and the CEO and saying, “Well, you know, to make big profits, we got to take some quick risks sometimes.”
Peter Mougey: Of course [crosstalk 00:07:08]
Mike Papantonio: Then they pass it on to the shareholders and maybe they get caught, the company gets fined, they don’t pay it in monies.
Peter Mougey: They just go to the CEO.
Mike Papantonio: The CEO at the same time has insurance for what he’s done. He’s committed a crime. He has killed people with a dangerous pharmaceutical that he knows is dangerous. He’s maximized his income while that’s happening and he’s out of the way. He’s moved from Pfizer to Merck or from Merck to Eli Lilly. They’re always moving. And if you take a look at it, you’ll be amazed at how ugly this process is.
Peter Mougey: Your storyline that you’ve been beating this drum for a long time. If you would just hold one or two of these guys accountable, put a few people doing the perp walk. They thinking twice [crosstalk 00:07:56]
Mike Papantonio: Punt some cuffs on these freaks.
Peter Mougey: Just once or twice and you would see an end to this. But instead, when you see this pattern repeated over and over and over in all kinds of different industries.