Galleon: Another Black Mark for the Tech Industry

Posted by: Steve Hamm on October 28

When the tech industry and Wall Street intersect, often, bad things happen. First came the shenanigans around the dot-com boom and bust, then the skullduggery at CA and Peregrine, then the stock option backdating scandal, and now the Galleon insider trading blowup. For the tech industry, it has been a decade of infamy.

I guess this dismal track record is no surprise for a dynamic industry where stock prices are volatile and fabulous fortunes have been gained by so many. Tech is an easy mark for unscrupulous people.

But are these waves of badness the work of a few rotten apples or is there a climate of corruption surrounding the tech industry? I asked this question today of John Mutch, CEO of software maker BeyondTrust Corp., who has seen the tech industry from some very interesting vantage points. After working for nearly two decades at Microsoft, one of the straight-arrow companies, he later served as CEO of Peregrine Systems after several of its executives were fired and prosecuted on charges of falsifying sales and accounting information. He recalls that the scandal was still unfolding after he was hired as CEO to attempt a turnaround of the company. During a speech he was giving to the staff, the FBI entered the room and arrested two Peregrine managers.

Early this morning, I had read one of the government’s complaints in the Galleon matter, this one against Danielle Chiesi and Mark Kurland of Newcastle Partners and Robert Moffat of IBM. Then I read that former AMD CEO Hector Ruiz, long considered one of the industry’s boy scouts, is being implicated. It all made my head swim.

I asked Mutch: Is the Galleon mess an anomaly or are there many crooked information-gathering networks operating under the covers? His answer: “Unfortunately, I think the tentacles of information networks that cross the boundary of insider trading are deep and pervasive in the industry.”

He recalls being called in the past by Wall Street types in search of intelligence about upcoming earnings announcement. Which he rebuffed. He said people in the investment community work hard to develop sources of information, sometimes without much regard for propriety. And their sources within the tech industry, he said, don’t seem to understand when they’re nearing or crossing the line. “People feel, ‘If I’m not trading, I’m not doing anything wrong,’” he said. “They don’t understand that tipping is an illegal activity.”

Clearly, there’s harm in this type of activity. It gives some people unfair advantages in the equity markets. But Mutch says it also puts a black mark on the reputation of the tech industry—hurting the entire industry’s credibility. “This is a great industry. I don’t want to see it dragged into the mud,” he told me.

I remember that during one of the earlier scandals, I surveyed some of the most respected leaders in Silicon Valley, and Bill Campbell, the longtime chairman of Intuit scolded the industry for having lax values. But, think about it: you seldom hear giants of the industry preaching about law-breaking or ethics. Maybe it seems uncool.

I’d like to hear more of it. The tech industry has a high calling. Information technology has tremendous potential to improve the workings of companies and the services of government, to build economies, and to empower individuals. But every new scandal cuts into the industry’s credibility—making people wonder whether claims about the capabilities of tech are feed too often by the desire to profit at any cost.

In fact, I think the tech industry should operate with higher standards than others. Not only should people not break or shave the law, they should aim to have a positive impact on the world. This business isn’t the same as selling toothpaste, or widgets, or complex derivatives, or sugar water. At least, in my view, it shouldn’t be.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/