I never know what I'm going to blog about next, and neither do you. So we're even.
Today's subject is Sue Sachdeva, the vice president of finance for Koss Corp., a maker of stereo headphones located in Milwaukee. She's accused of embezzling millions of dollars from her employer between 2004, or 2006, and 2009. We're really not sure how much she took. The minimum seems to be $4.5 million, and the maximum would be $31 million. We'll get to those details in a bit; for the moment, we've got a member of Milwaukee's upper middle class caught red-handed with her hand in the till. The only real question for her right now is how much time she'll do.
As technology companies go, Koss is an afterthought. The company is so small that it has been exempt from standard reporting requirements, and its financial dynamics are simple. That's probably why Koss figured it could get by with a glorified bookkeeper rather than a real chief financial officer. When the bookkeeper was nabbed, the federal government's power landed on her like a ton of bricks. Which is where the latest chapter in modern irony comes in.
Now, I'm not saying that anyone should let Sue off the hook. I'm only pointing out that, as these things go, it was small potatoes. Take Cisco Systems, the gigantic California networking equipment company, as a counter-example. Back in the late '90s and early '00s, Cisco "sold" billions of dollars worth of equipment to startup telephone companies. Actually, they lent the equipment but were able to book it as sales, a bit of fiction integral to sending that company's stock price through the roof during the Internet bubble.
Alas, much of Cisco's stuff didn't work outside of carefully controlled and unrealistic laboratory conditions. The "sales," which were financed with loans, collapsed. Cisco's stock dropped by almost 90%, but not before billions of dollars worth of bonuses, stock options, trading profits, money management commissions, and investment banking fees were paid out. Now that Cisco has been relegated to selling things that work to customers that can pay for it, the stock trades for a little over one-quarter of its peak bubble price.
Sue's Penny-Ante Fraud
Let's have a closer look at the Koss fraud. Sue is charged with taking $31 million, but a look at the company's financial statements doesn't support that number. Or, to put it differently, if Sujata Sachdeva managed to swipe that much from Koss over the four to six years she's alleged to have taken it, someone needs to put her in charge of Citibank. That's how good she'd have to be.
Koss's finances, as reported to the Securities and Exchange Commission, have been stable over the past 12 years. Annual revenues have been $30 million to $50 million; cost of goods sold has run at 60% to 65% of sales; administrative costs, typically 18% to 22% of sales. During the years that Sue supposedly stole $31 million, Koss reported a total of $25 million to $30 million in both net income and operating cash flow.
To have taken $31 million from a company that generated less than $30 million prior to paying $15.5 million in dividends and buying back $9.1 million worth of stock, the clever Sue would've needed to be a juggler worthy of top billing in the Cirque du Soleil. It would have required a degree of falsification and manipulation of revenues, costs, and bank accounts that would have been utterly inescapable even to Grant Thornton, the company's sleepy outside auditor, and to Michael Koss, the class clown and son of the company's founder who held both the CEO and (clearly in name only) CFO titles.
So why is she charged with embezzling $31 million? Either I'm not seeing something in the numbers (unlikely), or the "unauthorized transactions" mentioned in her indictment were largely intracompany transfers intended to hide, at most, three or four million dollars worth of thefts. Maybe a lot less.
What Happened At Cisco?
To start, let's point something out: Cisco is roughly 1,000 times Koss's size, give or take. Last year's revenues round up to $37 billion. Lost in that rounding error would be Koss's revenues of $38 million.
Back in the late 1990s, there was a frenzy to bring high-speed Internet access to the masses. Part of that frenzy involved upgrading telephone lines from carrying voices, a narrowband activity requiring transmission capacity of 64 kilobits (thousands) per second, to data, requiring a transmission capacity measured in the megabits (millions) per second. Along with it, a new federal law required what had been the Bell System to lease their local wires to competitors, and allow them to put their equipment in Bell switching offices around the country.
Cisco, and its financial friends in California and New York, got involved in a big way. They sank money into startup Internet providers, and Cisco started "selling" them equipment. The financiers brought these companies public, with Cisco's involvement prominently mentioned to enhance the speculative appeal of their stock. Why was Cisco so important? Because, before all of this got going, that company had established a solid #1 position in computer networking. It's not too much of an exaggeration to say that, without Cisco's data routers, there'd have never been much of an Internet to begin with.
When it came to upgrading the telephone system to provide Internet access, Cisco seemed like a natural for the job. The reality was very different: Upgrading phone lines is much more complicated than it looks, and Cisco simply didn't know how to do it -- period. But it made a great story for Wall Street, and for a time the story was all that mattered. For a couple of years, not a lot of people cared if the stuff really worked. There was stock to sell, trades to be made, bonuses to be paid. Billions of dollars worth.
It all came crashing down in 2001 and 2002. The equipment that Cisco had "sold" to startup phone companies, on credit that Cisco itself had provided, sat unused, in many cases because it didn't work too well in the field. Customers defaulted on their loans, and most of Cisco's equipment wound up not in the telephone network but in landfills or silicon salvaging operations. Cisco issued retroactive financial statements that wiped out the "sales," and left the upgrade business. The company's stock dropped from $80 a share to $10 a share, and everyone moved on.
Sue, You Fool, You Didn't Steal Enough Money
What about the ill-gotten bonuses and trading profits generated from the misleading "sales" reported by Cisco and hyped by its management, and its various financial friends? Those stayed securely in the pockets where they had been deposited. Cisco's CEO, John Chambers, a man possessing enough oily charm to coax a smile out of the most hardened Russian hooker, decided he'd better quit charming Wall Street with tales of 35% annual growth as far as the eye could see. Neither he nor anyone else went to jail for theft or fraud. Meanwhile, back at little ol' Koss Corp., Sue isn't going to be so lucky. She won't keep a thing. The feds are going to pick her bones clean, right down to her $800,000 house. In a desperate attempt to win leniency, her lawyers are arguing that she's crazy. Such is life in flyover country when you didn't swipe enough dough to hire yourself a p.r. staff.
No doubt about it, Sue Sachdeva is a thief. So's the poor schmuck who knocks over some banks and finds himself pursued by an entire FBI task force, all while the CEO of the same bank is looting thousands of times more money with a stroke of a pen. What's the use in being outraged? The rich gettin' richer ain't exactly a new story. "Holy Ecclesiastes 1:9, Batman, what did you expect?!" Okay, okay. But you'll have to forgive me if I don't get all that outraged at Sue, or the bank robber. Theirs are ancient stories too. Truly, there is no new thing under the sun.