Daniel Eran Dilger
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10 FAS: 9 – Troy Wolverton, Neil Cavuto, and the Apple Stock Scandal

10 FAS: 9 - Troy Wolverton, Neil Cavuto, and the Apple Stock Scandal
Daniel Eran Dilger
Google for ‘Apple Scandal’ and the results are overwhelmingly related to options backdating. Those backdated options from 1997 – 2001 resulted in Apple taking an $84 million charge against operations, but continued to monopolize the headlines for months with the panic that Steve Jobs might go to jail and Apple might be delisted from the NASDAQ stock exchange.


Fake Apple Scandal 9: Troy Wolverton, Neil Cavuto, and the Apple Stock Scandal.
While the SEC was satisfied with the results of a three month independent investigation at Apple that concluded last fall, the tech press continued its own investigation that largely reported on their own reporting efforts. This fascination with Apple’s stock is interesting because the actual options backdating–while frequently reported on–was rarely explained in plain English.

The story really wasn’t about wrongdoing, but the fear that something bad might happen to Apple. The reporting often got the story wrong and commonly failed to provide any relevant context. Presenting facts out of context is a great way to lie. So far, every Fake Apple Scandal has involved facts or ideas presented out of context:

  • FAS 1 presents the “great expense of the iPhone” and the “wild profiteering of 55% margins” but fails to point out that other smartphones cost more and have the same parts markup.
  • FAS 2 presents the iPhone’s exclusive connection to AT&T as anticompetitive, when all phones are sold in an anticompetitive market; the iPhone actually competes with a lower plan cost.
  • FAS 3 feigns outrage that Apple is getting fees from AT&T, while ignoring that this is common, well known, and the established business model for RIM’s BlackBerry.
  • FAS 4 worried that the iPhone was “too powerful to be secured,” while failing to present that all mobiles on the market are equally powerful and similarly difficult to secure.
  • FAS 5 pretends to believe that Apple’s 270,000 in iPhone sales in its first day and a half were disappointing, after Apple launched the most successful consumer device ever.
  • FAS 6 insists Apple has a special issue with first generation hardware, when its products are simply not extraordinarily problematic compared to others in the market.
  • FAS 7 pretends that Apple’s hardware success isn’t impressive and is easy to duplicate, when monopolist giant Microsoft has been unable to sell hardware even while losing billions.
  • FAS 8 pretends Apple and the iPhone in a completely false context, associating it with a conflict of interest story that had nothing at all to do with the company.

Considering the Options.
The context for Apple’s options is also important. Options backdating was so common during the dotcom bubble that nobody considered it to be a big deal. Carolyn Said, writing for the San Francisco Chronicle, described the historically commonplace practice of backdating options throughout the 90s and drew a distinction between the reaction of backdating at Microsoft and Apple:

“From 1992 through 1999, Microsoft Corp. awarded employees options that were retroactively keyed to its stock’s monthly lows. Annual awards were given in July, at that month’s low point. Awards to new employees were given at the lowest closing price during the month after they were hired. Microsoft disclosed and ended the practice in 1999, taking a $217 million charge. The revelation raised nary an eyebrow.”

According to Fred Koenen, a securities law attorney at the Schinner Law Group in San Francisco, ‘When Microsoft said it had to restate its earnings for backdating, the reaction of the market was ho-hum.“

[Options scandal grew out of 1990s strategy to attract and retain top employees in a competitive market – Chron]

The Real Scandal.
That being the case, why was the press all over Apple for months after largely dismissing the very same thing from Microsoft? The real Apple stock scandal wasn’t options backdating, which simply rewards employees at the cost of potential shareholders’ profits. The real scandal was the fact that Apple’s stock was being manipulated with false information for short term profiteering. This wasn’t the fault of option dates.

An overwhelming torrent of bipolar news is being generated by hedge fund managers to defraud shareholders to a far greater extent than any amount of options backdating could have. At the center of all this false information is The Street, which has published ”whispering information“ on Apple from anonymous sources for years. The Street is an advertisement for investment advice, but the advice it gives has been wrong over and over.

Sometimes the Street seeds false expectations, such as inventing rumors of new products in the pipeline. These prognostications have a tremendously bad accuracy rate, and are worthless for investors to consider. That’s because they are not based on hard information, but are invented out of thin air to create a stock response that can be exploited.

While the Street regularly presents ideas fed to it by flacks aligned with competing companies–such as Verizon-backed Roger Entner–those false expectations aren’t always designed to damage Apple. They’re really intended to turn a profit.

[The Street’s Flaccid Campaign Against the iPhone]
[10 FAS: 5 – iPhone Sales vs Zune, Palm, RIM, Symbian, WM]
[10 FAS: 3 – Apple’s iPhone Kickbacks vs RIM, and Verizon vs AT&T]

The Street's Flaccid Campaign Against the iPhone

History in the Remaking.
Other times, history is revised to generate a false impression of events that have occurred. The Street, along with the Register, and Fox News’ ‘Common Sense’ program with Neil Cavuto have all propagated the idea that Apple ”only“ sold 146,000 iPhones in a night and day on the market, and that this is ”disappointing“ because Apple expected to sell either a million or a half million on the first day. This is a multifaceted lie that is absurd on its face. Each participant has its own self serving motives for presenting this false information.

Neil Cavuto

Fox subsequently edited its transcript of Cavuto’s false report to pretend that he actually presented Apple’s actual 270,000 sales numbers, but the real error was that Apple never released any expectations for sales. Cavuto’s rant centered on what he called the ”overbearing braggart marketing department at Apple,“ which he said failed to sell the half million iPhones it announced it would sell that first day. That’s not true.

If Apple was planning to ship out a half million devices from its stores by Saturday night, surely it would have stocked its stores with at least that many. But many stores were sold out of inventory on Saturday, and continued to flutter in availability for weeks.

If Apple had ran into far less demand than it had anticipated, it wouldn’t have sold out its iPhone inventory anywhere. Apple and AT&T’s 2,000 stores would have been overflowing with hundreds of iPhones per store sitting in stock, just like the 30,000 retail outlets that have piles of Xbox 360s, Zunes, and PlayStation 3s sitting around, but no Wii consoles for love nor money.

If Apple wanted to impress dittohead idiots with a ”braggart“ number, it could have shipped three million units to its stores and released a Microsoft press release announcing 3,000,000 iPhones Shipped!

But Apple isn’t pretending to sell things by confusing the public on shipment figures; it’s building a profitable business offering products people really want and are satisfied with after buying. The iPhone launch demonstrated that.

[Ten Myths of the Apple TV: Xbox and Hardware]

Apple TV Myths

Extreme Cluelessness.
While Fox takes a beating for presenting extremist hate speech and working to create a climate of fear, its reports on the iPhone were unlikely to be purposeful misinformation. Neil Cavuto isn’t a sharp tongued commentator sowing extremist ideas, he’s a rather dull anchor trying to appear informed and simply failing at it. He was delivering poorly written content that he’d been handed.

After observing that ”Never in corporate history, have so many electronic devices sold so quickly [as the iPhone],“ he started into his speech that Apple’s arrogant brags had gotten the best of it, and its mighty sales weekend was only diminished because of its excessive pride.

Cavuto concluded, ”Oh, if only these much smarter guys had talked to this admittedly not nearly so smart, anchor guy: Promise down, deliver up.“ He was hoping to aggrandize himself at the expense of Apple by coming off as a humble and meek servant offering wise advice. The problem, of course, was that Cavuto himself was being the braggart, pretending to understand a topic that he didn’t grasp at all.

He not only misstated the facts, but repeated false information about Apple’s expectations. In reality, there were no immediate sales expectations set by Apple. At All Things D, Jobs was even coy about what day the iPhone might go on sale. The only expectation Apple ever set was 10 million sold by the end of 2008, which looks to be a very conservative outlook.

The Conservative Apple.
Apple’s consistent lowballing is an obvious part of the company’s strategy. It has described the Apple TV as a ”hobby“ while Microsoft brags every year about how Media Center is going to revolutionize the living room. Microsoft has failed repeatedly to deliver, while Apple can’t lose with its Apple TV projections. Even selling a few tens of thousands is a great hobby.

Apple similarly hasn’t announced sales goals for the iPod, or for iTunes sales, allowing it to regularly catch naysayers off guard by announcing major sales milestones after they’ve gone on the record with their overreaching analysis. The Street, the Register, and Forrester Research have all been unmasked as fools by Apple’s sales announcements just weeks after making broad and sweeping announcements about the purported death of online iTunes sales.

By playing its cards close to the vest, Apple avoids looking foolish for the reasons Cavuto advised–and ironically failed at himself: if you don’t bite off more than you can chew, you won’t be caught with your mouth full.

Apple is playing a conservative game because it can afford to; everything is lined up well. It has a full pipeline of new products on the way, its existing products are all selling beyond analysts’ expectations, and it’s making lots of money.

If Apple were desperately gunning for change, it would issue wildly optimistic press releases like Microsoft and then scramble to create the appearance that it had fulfilled them.

[Forrester Research: Epic Terror of iTunes and Apple TV]

iPlanet Terror

The Apple Manipulators.
Apple is getting so much bad press compared to Microsoft because it is growing. Microsoft’s stock is flat despite impressive revenue growth and profits. After peaking with the dotcom bubble in 1999 at $58 shares, it’s fallen into a $30 slump ever since. In the last ten years, Microsoft’s stock is only up 69.8%.

Apple’s stock also fell in 2000 with the tech crash, but began ramping up in 2004 and has climbed dramatically since. In those same ten years, Apple’s stock has gone up 3440.9%.

AAPL finance

Microsoft presents little opportunity for stock manipulation. Even faced with the worst news, Microsoft is unlikely to go down, and even with record profits, it didn’t go up. Microsoft is a mature dinosaur; investors see little prospect for the company to dramatically grow into new businesses or to adapt with a changing climate. Apple, on the other hand, is closely watched by investors because it has delivered one major success after another.

In the last half decade, Apple has:

  • delivered a variety of iPods targeting different segments of the market.
  • set up a massive new business in online music sales.
  • rolled out its own popular and profitable retail stores.
  • released a series of major new hit applications for professionals
  • turned its stagnant Mac sales into a highly differentiated product that is outgrowing sales of profitless PCs.

What company is the most effective for stock manipulators to work over? The Street doesn’t invent Microsoft products or set unrealistic expectations for Xbox uptake. The only reason for covering the Zune at all is to create fear, uncertainty, and doubt about Apple’s iPod business. Nobody cares about Microsoft’s stock price; the company can’t even goose it itself. It’s dead, and no amount of fake information will cause it to dance up and down in ways that short term speculators can exploit.

”Crazy“ Jim Cramer’s entire business is to create false information to invoke a calculated reaction, then profit from others’ fear or credulity. It’s not a closely held secret.

The floating news items picked up by rumor sites, reports based on scraps of papers found on trading floors, and all of those ghosts whispering news that pretends to be of great import for Apple’s stock price are all lies generated by a few sources, intended to exploit the trust of investors and get them to sell off or buy up stock.

[More Absurd iPhone Myths: iSuppli, Subsidies, and Pricing]

Iphone-5

Unprofitably Scandalous News.
This explains why nobody reports on Microsoft’s six billion dollars of losses in consumer electronics, or its inability to expand into new markets. That information can’t be used to manipulate stock prices and subsequently make a profit on it, because Microsoft’s stock is stuck in a rut.

It explains why Microsoft’s president of its Entertainment and Devices division, Robbie Bach, could dump $6.2 million of stock just before announcing another billion dollar loss related to Xbox failures, but not face any media coverage regarding his insider trading. The news was only a minor curiosity because Microsoft’s stock is as flat as a frozen lake.

Robbie Bach

Any news–or conjecture–related to Apple is not only extensively reported, but frequently exaggerated to absurd levels. This isn’t because more people are interested in bad news about Apple, but because enough people are able to make money floating false information about Apple to continue to do it.

[Microsoft’s Xbox exec sold stock as problems surfaced – MarketWatch]

Green, Eggs, and Spam.
The Street is a sophisticated spam operation, and enough investors are being duped into clicking on the links promising a greater endowment to ensure that it won’t ever quit. Other news outlets are simply so clueless–like Fox’s Cavuto–or so desperately sensationalist–like the Register–that they need to feast on these fake scandals just to have something to fall out of their mouths.

There are also those whose motives are hard to pin down, like yesterday’s Troy Wolverton. He’s part of the Street’s spam operation, but also scrounges up desperately sensationalist content for CNET.

At the same time, he also comes off as a Fox-like idiot anchor for the San Jose Mercury News, where he dishes out bowls of hopelessly mistaken information. Is Wolverton for real?

[10 FAS: 8 – San Jose Mercury News’ False Apple Scandal]

SJ Mercury News Scandal

The Wolverton Illusion.
Wolverton also happens to be the name of a constituent town of Milton Keynes, in Buckinghamshire, England. The town hosts–and I’m not making any of this up–the Wolverton Apple Weekend festival, which involves a ”how low can you go“ round of Apple Limbo and a ”pin the maggot on the apple“ contest.

It’s tempting to think that Troy Wolverton is simply a made up avatar the Street invented as a humorous allusion to a small town apple festival. Unlike the veiled identity of Fake Steve Jobs, nobody seems to question who Wolverton actually is. This makes such an elaborate joke unlikely to be true.

Troy Wolverton

A less entertaining alternative possibility is that Wolverton is actually a pawn of the Street used to disseminate false information to exploit Apple investors who might believe things written in an actual newspaper like the San Jose Mercury News, despite his shoddy accuracy and the consistently wrong outlook he presents.

Wolverton helped to lead the press investigation of Steve Jobs and his role in Apple’s backdating. Was that because it was a good story the public needed to know, or because the Street wanted to plant seeds of panic in order to exploit Apple investors so it could profit?

Unfortunately, we can’t assume anything about Wolverton’s professional ethics because he has blown his credibility as a journalist by publishing so much shockingly false information for so long. His current coverage of the iPhone makes it appear that he owes more to the Street than he does to the readers of the Mercury News.

When the Market Fails.
That’s the problem with market based journalism. Once regarded as an esteemed ”Fourth Estate,“ wholly independent from the three realms of religious, political, and merchant power, the press has now become a commodity that has been auctioned off to the highest bidder. The highest bidder is never the reader, and rarely has the reader’s interests in mind.

A market-based police force is called a mob. A market-based soldier is called a mercenary. A market-based artist is called a sellout. A market-based journalist is a liar.

10 Fake Apple Scandals: 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

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