________________________________________________________________________________ /* remember: if you don't want to recieve forwards from a specific mailing list, simply mailto:majordomo@rolux.org with "" as subject line and "filter [name of the list]" as message body. - moderator@rolux.org */ MICROSOFT FINANCIAL FRAUD Conclusion: Updated 11/5/99 2:00 PM with Response to Mary Jo Foley ZD Net Interview We are living in extraordinary economic times here in the U.S. and this success could ignite a whole new cycle of economic prosperity. We must first, however, take a hard look at what is occurring at Microsoft. Microsoft is a great company with terrific employees who have achieved great success. Sadly, many of these brilliant people have been blinded by the stock price and unable to see that they have also become the key architect of the greatest financial fraud/pyramid scheme this century. It is not uncommon for participants in pyramid schemes to lose their emotional bearings. My close friends who work at Microsoft are particularly upset over my work and it is possible that even Bill Gates and Steve Ballmer do not realize the implications of their financial practices. If you see anything in this analysis that is not clear please challenge me via email so that I might clarify the facts. The stakes are too high for all of us and let's also be practical and respect the notion that Microsoft does have a certain level of media influence that will undoubtedly be shaped to discredit my findings. The fundamental problem is that Microsoft is incurring massive losses and only by accounting illusions are they able to show a profit. Specifically, Microsoft is granting excessive amounts of stock options that are allowing the company to understate its costs. You might ask yourself, what would happen to Microsoft's stock price if the public suddenly realized that they lost $10 billion in 1999 rather than earning the reported $7.8 billion? If 80 percent of its stock value or roughly $400 billion is the result of a pyramid scheme, one might also ask what kind of effect this could have on the retirement system. It is also important to note that this is a relatively new situation that did not occur before 1995. Microsoft has always been a highly valued stock and that might have been justified prior to 1995. An Overview of Financial Fraud at Microsoft [msbargraph699.gif] This situation is not about stock valuation, product quality or whether or not Microsoft has monopoly power in its markets. Nor is it part of a pro or anti-Microsoft movement. This situation is instead a shining example of financial fraud and corruption enabled by bad government policy. If not quickly and aggressively addressed, we will all be losers as credibility in our financial markets is destroyed. This fraud accelerated greatly during the quarter ending 9/30/99. One need only examine the State Teachers Retirement System of California to see the impact. This one system now owns more than 16 million Microsoft shares with a current market value of $1.4 billion due to its commitment of indexing based upon the S&P 500. If 80 percent of this value is the result of a pyramid scheme, based upon manipulating a breakdown in the accounting rules, that would imply a future loss of $1.1 billion to the teachers of California. It is unfortunate that teachers will bear this loss when they are already struggling to keep pace with inflation. To confirm this amount one need only contact James Wollman, CEO of the California State Teachers Retirement System. This is just one public retirement plan in one state. Other recent significant events include Microsoft's addition to the Dow Index, Deloitte and Touches issuance of a clean audit opinion, Fidelity Investments response, a proposal for adding John Bogle to the Federal Reserve Board and other matters. Each will be discussed further in this report. A common criticism of this study is its inadequate attention to the raw data. Please do study this simple one page spreadsheet which contains data derived from the SEC Edgar Database. Foreign readers should note that the SEC is a government agency that monitors our financial system and that misrepresenting this information can result in severe sanctions. Right-click to download a Simplified Spreadsheet (Excel 95 format), with supporting data and charts. If you download using Netscape and can't open the spreadsheet, send e-mail to bill@billparish.com requesting it as a file attachment. In July I met SEC Chairman Arthur Levitt here in Portland, Oregon, and provided him a complete summary of findings. This summary has also been provided to Robert Parry and Alan Greenspan of the Federal Reserve, Treasury Secretary Summers, Secretary of Labor Alexis Herman and both Joel Klein and Phil Malone of the Department of Justice. In addition, the largest public pension funds, their investment advisors, state budget officers and representatives from leading bond rating agencies, including Duff and Phelps, now have the report. These pension managers were specifically asked to remove Microsoft from their indexed portfolios based upon the S&P 500 as a step toward demonstrating their fiduciary responsibility to plan participants. Historical Perspectives Two other situations this century involving similar techniques include those of Charles Keating, who first destabilized and then later plundered the Savings and Loan system and Samuel Insull who was President of Edison Electric, the great technology company of the 1920's. Insull was a national hero in the 20's yet came to be recognized as a symbol for what caused the great depression in the 1930's. Sadly, his good intentions and significant charitable and civic causes did not include ensuring the financial integrity of his company. He died of a heart attack in 1938, penniless, in a Paris subway station, exhausted from years of fighting lawsuits for fraud. Interestingly, he was never convicted. Many believe that the stock market crash of 1929 caused the Great Depression yet history clearly shows that it was instead simply bad government policy that was manipulated by leaders such as Insull. The link to the Keating Savings and Loan debacle was clearly outlined in the original study in October 1998. Keating used junk bonds to pilfer Savings and Loan banks and this time pension funds are being plundered by junk stock as it is leveraged into the pension funds by an over reliance on unmonitored passive indexes, most notably the S&P 500. Index based investment is an ideal strategy for pensions, yet the fraud and corruption should be removed when of this magnitude. The Original Purpose of My Study In the summer of 1998 the rapid movement of global capital flows began to have a crushing effect on developing countries. While everyone was analyzing the speed at which capital moved, no one was trying to answer the basic question, where did it end up? A closer look revealed that a primary contributor to global economic instability was an elaborate financial pyramid scheme being utilized by the Microsoft Corporation, which others are now rapidly seeking to emulate. Frankly, I was astonished myself and contacted Steve Ballmer's assistant several times along with other Microsoft representatives, including the editor of their Slate magazine, before publishing the results of my study in a press release on PR Newswire. The Independent, a major UK Newspaper, based their story on this study and shocked many readers. The study also included projecting that Microsoft would begin issuing "watered stock" in an effort to disguise and diffuse the pyramid. Watered Stock On 9/23/99, the same day Steve Ballmer, for whom I have tremendous respect for his honesty and integrity, publicly said that Microsoft's stock price was absurd and "false", the company also filed a registration with the SEC to make Expedia a separate company. This is a dramatic watershed event in the history of our financial markets. Either the SEC, Federal Reserve or Treasury department step up and cancel this registration statement or we begin aggressively moving toward a full scale economic meltdown for the following reasons. Disclaimer: Due to the dramatic implications of the study results and potential legal ramifications for Microsoft, let's focus on the hard financial facts and leave the conspiracy theories and hyperbole to others. Expedia is a company with $38 million in sales for which it incurred a loss of almost $20 million for the fiscal year ended June 30, 1999. What Microsoft is also doing is loading Expedia up with $150 million in stock option debt, making Expedia a "watered stock," and requiring employees that transfer to Expedia to exchange unvested Microsoft stock options for new Expedia options. What these employees may not realize is that Microsoft will also charge this option expense to earnings as they become vested, creating an expense of $150 million. This is remarkable because Microsoft does not charge its own income statement for such vesting options. Imagine how the Expedia employees might feel if within 6 months their options are the equivalent of worthless paper due to this staggering expense overhang. For this reason and several others noted in a letter to Arthur Levitt, Chairman of the SEC, I have asked that the Expedia IPO be canceled. The fundamental challenge is that Microsoft itself is a "watered stock" and must be deflated by at least 50, perhaps 80 percent, to restore credibility to the financial markets as a matter of monetary policy. Reasons supporting this conclusion will be discussed later. To Steve Ballmer I would say, perhaps we could have a brief discussion regarding some ways to manage this situation. By now it should be clear that farming me off to your legal staff was not a good decision. You can only confuse people so long before they are fully armed with the facts and require you to be accountable for your actions. A Breakthrough With The Independent Editorial In October of 1998 a prominent British publication, the Independent newspaper, published a lead editorial, citing my study and concurring that Microsoft had erected a financial pyramid scheme in which employees were prepaying their own wages and the retirement system was being plundered. I can still remember the editor's voice who interviewed me and his startled realization that the study was credible. The study results and follow-up work were then sent to The Economist and several leading business publications here in the US, more than a dozen times, in addition to regularly calling once a month and leaving detailed messages. Another breakthrough could have occurred when CNBC scheduled a panel discussion on World Business Review with Caspar Weinberger yet the show was canceled due to the controversial nature of the content. The Economist Story Legitimizes My Study This is Bill Gates' favorite publication on finance and economics and generally believed to be the leading such publication in the world. In an 8/7/99 cover story, The Economist noted that a proper accounting at Microsoft would result in a loss of $18 billion for 1998 rather than the reported earnings of $4.5 billion. If you are not an accountant, don't waste the time pretending you are, trust The Economist, the earnings are not real. Don't let yourself be intimidated or deceived by financial analysts, TV commentators, bullies on Internet forums or Microsoft's elaborate public relations campaign. Bill Gates trusts The Economist and you should too. Abbey Joseph Cohen and Rick Sherlund of Goldman Sachs have been sent this material numerous times over a 9 month period and neither has publicly divulged this situation. Microsoft's Response to The Study Microsoft's perspective is best reflected by Bob Herbold, Chief Operating Officer, to whom the CFO reports. Bob very sincerely replied, "Bill, everyone is doing it." My response was that Microsoft is a leader and that others are now seeking to emulate these fraudulent practices they have legitimized. Naturally Bob was not pleased by this perspective and that was our final conversation. A second informal response came when Microsoft's asked PR Newswire's to stop issuing my press releases. Microsoft is PR Newswire's largest client. Pam Edstrom, director of Microsoft's public relations, Steven Holley, lead outside counsel with Sullivan and Cromwell and Bob Herbold are regularly called prior to releasing any new information on the study yet they no longer respond to inquiries, which is disappointing. Although confident of the findings, it would be nice if they could issue a formal statement or response. Why Deflating Microsoft's Stock Will Be Good for Microsoft and the Economy The media would like you to believe that what is good for Microsoft's stock is good for the country, yet that is false. One key impact of Microsoft's scheme is to suppress the stock values of many other companies, large and small, that are practicing honest accounting. Investors are less interested in these companies because compared to Microsoft they look less profitable. This artificial inefficiency progressively destabilizes the economy and the media fuels this by not disclosing Microsoft's real earnings. A good example might be Allstate Insurance, which recently announced earnings would be less than expectations and saw their stock drop sharply. Allstate is still significantly more profitable than Microsoft. A second reason is that investment managers have gotten lazy and been corrupted, narrowing their holdings to a few leaders like Microsoft, and focusing on fee generation rather than good investment management. On-line brokers are also earning massive fees due to the high trading volumes since they earn a spread on every transaction in addition to the nominal transaction fee. As John Bogle notes, even passive S&P 500 index based investors are being charged excessive fees. On a longer term basis, Microsoft might benefit somewhat in terms of product sales from deflating its stock as capital moves more equitably, both here in the U.S. and abroad, thereby stimulating a broader based economic growth and more vibrant markets for its products. They may also find recruitment easier as new employees perceive more growth potential in the stock value. Earnings will plummet however as margins rapidly decrease upon recognizing their true earnings.. It is also true that other tech companies will be affected from using similar practices, yet the effect at Microsoft dwarfs the others. In addition, most of these companies are much smaller than Microsoft and can grow out of the problem as they expand. Also unique to Microsoft is that roughly half of the stock is still owned by management and employees. That is why it is imperative that the SEC act quickly before more of this stock gets pushed into the retirement system. Tools Available to Deflate Microsoft's Stock - Please note that these are recommendations specific to Microsoft, not the overall market. 1) Require restatement of earnings since 1995 to fully account for stock options, both on the income statement and balance sheet. History clearly shows that footnote disclosure is not adequate to deflate the stock. Microsoft has deceived the public into thinking that stock options are charged to earnings via the earnings per share calculation when exercised. That is false and we need also revisit our fourth grade math class and a lesson in basic fractions to prove how ridiculous that is. The calculation of earnings per share is a completely separate and independent issue from whether or not an item appears on the income statement as a revenue or expense. The earnings per share calculation comes after the income statement is prepared and earnings determined. Stock option wages are "never" charged to earnings, that is, they never appear on the income statement. They are however indirectly considered in the earnings per share calculation in the form of more shares outstanding. Let's now take a look at how earnings per share is calculated. Earnings per share is net earnings divided by shares outstanding. In math terms, the numerator is net earnings and the denominator is shares outstanding. Basic math tells us however that there is a fundamental difference in the outcomes derived by making changes to the numerator compared to making changes to the denominator. Nothing more than basic fractions. For example: If Microsoft's net earnings are 7.8 billion divided by 5 billion shares that gives us 1.56 as earnings per share According to Microsoft's position, if we add the 800 million shares in options that would result in 7.8/5.8 or 1.34 in earnings per share. This is what Microsoft calls "fully diluted" earnings per share. Don't be fooled by the term "fully diluted." What I am saying is that if the numerator is adjusted, that is, if earnings are actually charged for the cost, we would get something like -10 billion/5.8 billion or a loss if 1.72 per share. Can you now see the clear difference? The Q and A section will include a section on basic accounting theory to help furthur explain this. What seemed like the financial story of the decade might indeed be the basic math story of the decade. 2) Do not allow Microsoft to issue tracking stocks, spin-offs or "watered stock," an example of which is Expedia, for 10 years. This would be subsequent to the recommendation that the Department of Justice divide Microsoft into at least 3 companies, a position that will be explained later in this report. 3) Prohibit Microsoft from buying back its own stock, instituting stock splits or selling put contracts and engaging in other hedging activity for 10 years. These are tricks used to manipulate the stock price and have contributed greatly to building the financial pyramid. Stock buy backs and splits can be good tools for sound financial management yet Microsoft should be denied access to these tools. We wonder how we have come to being a market so laden with derivatives yet we need only look to the Nightly Business Report, which refuses to report this story. When told about the Independent article and Economist cover story, a senior producer replied that maybe it's just not that big of a story over here in the US. Did you ever consider that, they noted. Previously a New York Editor for the show noted that, we don't do stories like that. More than a year was spent in a very thoughtful progression, trying to get them to do the story, and it does seem troublesome that this show is using a public broadcasting channel with such attitudes. Also noteworthy is that the Bridge News Service, formerly the Commodity Research Bureau, specializes in information on futures and derivatives and is the primary source of business news for the Nightly Business Report. This is not some wacko conspiracy related assumption but rather a simple matter of fact. 4) Prohibit Microsoft from offering employee stock options or any employee based ownership program for 10 years. The truth is most people go to Microsoft for stock options. This will require paying more real wages and more accurate financial results and therefore deflate the pyramid and increase competition. It might also introduce more equity among their own employees; i.e., perhaps officially employing sub-contractors would be good for internal morale at Microsoft. 5) Ask to have Microsoft removed from your 401K, 403B or public pension retirement fund, including funds based on the S&P 500 and other indexes. Removing Microsoft from this index will greatly reduce demand for the stock and deflate the price. This would be rather simple for a large public pension fund. They could issue a statement to members saying their S&P 500 index has everything except Microsoft due to concerns over their financial practices. Sometimes we forget that for the system to work we must take action. One effect of the pyramid they are building is that it is using cash from the retirement system to sustain itself while the founders aggressively diversify, as noted in a recent cover story in Fortune magazine indicating Bill Gates alone has a non-Microsoft investment portfolio exceeding $12 billion. It is also likely that Social Security funds will be the next level or source of funds for the pyramid if reforms are not initiated. It seems that many pension plans have forgotten that they work for the participants, not investment consulting and management firms. Even the State of Oregon PERS and State Treasurer Jim Hill, after receiving the study results, appear to not have done nothing to address this situation. Jim Hill is a fine State Treasurer and the potential political cost of exposing this fraud is understandable, but it is the right thing to do. 6) Try to generate community discussions and dialogue via talk shows, radio and other media outlets. I would be glad to participate if that were of interest. Please do listen to the Jeff Rense radio interview as an example, a link to which is available at www.billparish.com You might also send the Web site link to friends and people of influence such as other business leaders, political leaders and journalists, both here in the U.S. and abroad. Let's create an information pyramid of our own in the true spirit of democracy to raise the dialogue here. If you have the email address for anyone in particular who might be important in this effort, they could be added to a once or twice a month update list. 7) Write a letter to your Congressman and local newspaper along with posting messages on Internet forums. Please include a link to the study update in all your communications. My site contains no advertising other than that for the investment management business, no cookies and access data is not sold to anyone for any reason. Listening to the Jeff Rense interview, which can be linked to from the site, could also be very helpful. The McCain, Gore, Bush and Bradley presidential campaigns, in addition to the staff of both US Senators in Oregon, Gordon Smith and Ron Wyden, have now received the study results. Of the four presidential candidates, the only one who has had the courage to speak out on this issue is John McCain. McCain actually introduced legislation to prevent this situation in 1995. He wanted to require that if companies took a tax deduction for stock option wages, then those wages must be charged to earnings. McCain was defeated which is ironic given that he was a central figure in the Savings and Loan debacle, one of the original Keating 5, and this time tried to do the right thing. Bill Bradley's primary funding base is Wall Street and George W. Bush is similarly closely aligned with Wall Street investment and legal firms. Al Gore would seem the most likely to speak out on this, especially given his endorsement by the major unions, yet he might be fearful of a further backlash from technology firms. Gore has done nothing thus far.. Steve Forbes has not received the study. Most disturbing is that Microsoft, via Slade Gorton, does appear to be aggressively supporting George W. Bush. Microsoft is also using and corrupting well meaning public interest groups like the Citizens for a Sound Economy, which is appearing more and more like a special lobbying group designed to avert potential soft money campaign spending limits, if enacted. Department of Justice Case Breaking up Microsoft, setting product limitations and other such measures will simply not work unless the financial side is addressed. AT&T and Standard Oil had real assets while Microsoft has smart dedicated people and a pyramid scheme of which the public is completely unaware. They also have good products and patents but any technologist knows that the speed of change subjects them to rapidly becoming obsolete. When these people leave, the assets are gone and they are now leaving in large numbers. Perhaps it is time that the Department of Justice focus on the real product issue and the product is not Windows but rather Microsoft's stock itself. Deflating Microsoft's stock price 50-80 percent will help greatly in resolving concerns over Microsoft's perceived monopoly. Most remarkable is that it could be done if the DOJ engaged in several high profile public disclosures. How would the public feel, for example, upon knowing that Microsoft took a tax deduction of $9 billion in 1999 for wage expense that is not charged to earnings. This could be the greatest example of corporate pork this century, from a company that prides itself on seeking the "freedom to innovate." Sure other companies do the same thing yet the magnitude of what is occurring at Microsoft makes its case unique. Originally it was recommended that the Department of Justice case be dismissed for fear that a breakup could further fuel its financial pyramid by creating several smaller pyramids and disguising the fraud. Having been a strong and loyal Microsoft supporter since Windows 2.0, it is also difficult to take an official stand here against the company and criticism will result regardless of what that stand is. The study, however, will now incorporate the following official position regarding the DOJ case. Microsoft has violated our trust, contributed greatly to corrupting our financial, governmental and legal systems and should be first broken up and then allowed to be liquidated by free market forces as the extent and impact of their massive fraud is unraveled and disclosed. This will obviously be a disaster for shareholders but a great opportunity for their solution providers and probably result in a services intensive business model, not unlike what Linux supporters are attempting to create. Leading investment firms, most notably Fidelity Investments and Janus, may also have significant legal exposure here. The Department of Justice might consider a minimum of three companies as follows. A key objective should be to separate the SQL, Frontpage, Excel and Word applications from the operating system. It is also important to separate Windows CE from Windows NT and deny the Windows and Windows NT business the capacity to offer content or data storage services. One practical approach might include the following three businesses: 1) Windows and Windows NT (No content or storage services based businesses) 2) Applications: Excel, Word, Frontpage, SQL 3) Internet: Windows CE, MS Explorer, MSN, etc. Giving the applications and Internet activities an incentive to talk to other operating systems such as Linux and new operating systems not yet developed should help stimulate competition and innovation. Once divided up, and the pyramid exposed, the pyramid will quickly deflate and it is not an unrealistic possibility that the company could be liquidated due to significant lawsuits from retirement plans. It will be a very sad day if that does occur yet Microsoft has clearly told us, whether we like their products or not, that they can not be trusted. Financial Pyramid Building Techniques Being Used by Microsoft: Stock option programs are a big benefit and many companies use them responsibly. At Microsoft, however, stock option accounting is only one of its many pyramid building techniques, what could be called a cash generating component. Additional pyramid building techniques include the following. It is important to note that the genius of the pyramid scheme is to leverage share growth from investors using a passive investment approach based upon indexing to the S&P 500. Most smaller and mid size technology firms are not in the S&P 500 and therefore are locked out of this key aspect of the pyramid from the beginning. 1) Earnings Management: The first and most important tool Microsoft uses is the manipulation of earnings to ensure analysts expectations are met. According to an ABC News 1/22/99 article by Michael Martinez, Microsofts own internal auditor, a respected 30 year veteran and former partner of Deloitte and Touche, was fired in 1996 after informing management that their earnings manipulations were illegal and violations of the SEC and FASB laws. He was given the option to resign or be fired and later settled for $4 million after suing under the Federal Whistle Blowers Act. 2) Speculating on Their Own Stock: Microsoft issues a massive amount of put options. During the same quarter ended 3/31/99, Microsoft sold put contracts on their own stock for $400 million, basically betting that the stock will not decline. They need not worry because they are allowed to cook the books. Of Microsofts significant cash balance, it is also a financial fact that more than 65 percent of that cash did not originate from product sales but rather from tax benefits associated with the exercise of stock options, employees prepaying their own wages, and the sale of put contracts on its own stock. Microsoft's financial innovation is making a mockery of financial integrity, ethics, and the securities laws, just as Insull did in the 1920's. 3) Convincing Employees to Take Less Real Wages: Microsoft aggressively markets stock options to new employees in an effort to take wage expenses off the books. They also know that they can pocket the exercise price employees will be required to pay to take ownership of the stock. What also seems clear is that Microsoft is still aggressively marketing its stock option program to new recruits. To quote an email received, I am about to begin employment at Microsoft and the stock option was the selling factor. Does your article overall state that it will be bad for me and will fail me in my retirement planning? Is Microsoft fulfilling its disclosure obligations to its own employees, especially those that have put their entire 401K balance in Microsoft stock? This explains how 22 percent of Microsoft's massive cash balance has actually come from its own employees in the form of them prepaying their own wages through stock option exercise prices. 4) Publicly touting the stock: In a recent earnings release, CFO Greg Maffei jokingly cited 10 reasons why Microsoft is a $1 trillion company. A common strategy here is to have top executives issue conflicting statements, one talking up the stock and the other talking it down and then within a few days financial analysts all come out with buy recommendations on the stock due to a small decline. They are making a mockery of financial integrity, ethics, and the securities laws. 5) Controlling the media. After issuing several press releases on PR Newswire, Microsoft told the service to stop issuing my press releases. Microsoft is PR Newswire's largest client. PR Newswire is owned by Miller Freeman of the UK, a large media company that publishes many computer related publications including Information Week in addition to Microsoft focused journals such as the Windows System Developer. Miller Freeman does indeed function as if it were a department of Microsoft itself. 6) Stock Option Accounting: It is important to note that any discussion of stock option accounting must address two completely different and independent situations. The first is to analyze the impact of options exercised and already retired and the second is to analyze the remaining options debt outstanding. This study focused on both whereas most media coverage only focuses on the remaining options debt outstanding. Options Exercised and Retired: When stock options are exercised, the options are retired as the employee takes ownership of the stock. The value of these retired options should not be a subject of debate. Upon exercise, the options are valued at the market price of the stock less the exercise price and the employee pays W-2 taxes on this gain, even if the stock is not sold. The company then takes a tax deduction for wage expense for the same amount. What is surprising is that not a dime of this expense is charged to earnings at Microsoft, which they could voluntarily do. This amount alone for 1999 should exceed $9 billion even though net income is only $7.8 billion. Remaining Options Debt Outstanding: The remaining unexercised stock option liability is a completely separate issue and a debt just as real as the current stock quote, especially if half of the options are currently vested and exercisable. We all know that stocks can be over and under valued yet the market gives us a price on any given day and that is the price. The Black Scholes and related footnote disclosure is a great mathematical model yet has become nothing but a Trojan Horse for plundering the retirement system. What the Treasury Department and Federal Reserve might concern itself with is that this debt, $60 billion at Microsoft, has no interest cost that hits the income statement and increases $800 million with each $1 increase in the stock price. Simply put, Microsoft is somewhat immune to Federal Reserve interest rate hikes, which explains why the stock is increasing as the Fed raises rates and continues creating a Long Term Capital like debt pyramid. 7) Purchasing future sales via equity investments: Another earnings management tool being used by Microsoft is the purchase of future sales via equity investments in other companies. Here is my understanding of how that works. I could be wrong on this and therefore the best thing to do would be confirm these claims with their CFO, Greg Maffei. First of all, Microsoft makes a $250 million investment in WebMD for an 11 percent equity stake and part of the deal is that WebMD commits to $100 million of advertising on MSN network. At the same time, Microsoft agrees to subsidize an equal amount in medical prescriptions for people using WebMD. Of course there are a few other interesting aspects of this transaction which wont be addresed in this report. You have basically bartered a purely paper transaction and current accounting rules will allow you to recognize the entire $100 million as revenues for MSN network, even though you are just trading checks. That is, you are trading subscription subsidies for advertising revenues. Advertising revenues are indeed the political currency of the 1990s. Keating spent his dollars buying influence in Washington D.C. Microsoft is buying influence on Madison Avenue. 8) Managing the financial analyst community. Another excellent earnings management technique is the management of the analyst community. This can be done by directing investment banking business associated with acquisitions to a variety of firms based upon their opinion of the stock. Microsoft purchased more than 33 companies in 1998. A good example here might be Rick Sherlund of Goldman Sachs, often noted as the guy who can move tech stocks. One might ask why Mr. Sherlund refers to Microsoft as a company with no debt when they clearly have a contractual obligation, just as real as todays stock price, of $60 billion to their employees. Fidelity Investments, one of Microsofts largest shareholders and also provider of their 401K retirement plan, has been silent on this issue. 9) Trying to Discredit Those Seeking to Expose the Scheme: Microsoft fired its internal auditor, regularly bullies reporters and has told numerous publications that I am an extremist. This might explain why reporters are afraid to print the facts, for instance that Microsoft took a $9 billion tax deduction for wages in 1999 and didn't charge a dime of this amount against earnings. 10) Money Laundering: Microsoft has been aggressively investing cash pilfered from the retirement system in a variety of new businesses, many outside the U.S., including cable investments in Brazil and England. We read about the Russian government robbing its citizens of $10 billion in IMF loans. What about the impact of the retirement system being pilfered and being set up for a Savings and Loan like debacle? 11) Corruption of Higher Education: Microsoft is making massive cash infusions to leading Universities and impairing the system's independence. In the last year alone Microsoft has given MIT more than $50 million in grants, focusing on key growth areas including storage services and software to provide course instruction over the Internet. In the past we were able to rely on these Universities to stimulate key debates yet now they are silent on this pyramid issue. Two Universities that should be ashamed of themselves for not only not disclosing this situation yet also fostering its development are Harvard and Stanford. They are contributing greatly to the complete corruption of our financial markets. 12) Manipulating Investors Who Use a Passive Approach Relying on Indexes Such as the S&P 500. In an effort to reduce investment fees and provide solid diversification, investment based upon mirroring the S&P 500 has become the most significant component of large public pension plans. Since Microsoft represents more than 4 percent of the S&P 500, Microsoft knows that four cents of every dollar going to stock purchases will go toward the purchase of Microsoft stock. Again, this situation has developed because Microsoft has inflated its earnings to such an extent that it looks much more profitable than it really is, fueling interest in the stock and resulting in a market value of close to half a trillion dollars. It is admirable to stick to an investment strategy using passive indexes based upon the S&P 500, yet this is not about investment strategy but rather fraud management. For this reason a letter was sent to the top 100 teachers unions in the country, encouraging them to effect a policy change designed to combat this fraud and have Microsoft removed from their portfolios. California State Controller Kathleen Connell, who sits on the board of the California Teachers Pension, has also been sent a summary of findings in the hope that she will help address this issue. Another good question might be, why haven't the State Teachers fund advisors initiated this effort on their own, that is, to modify the index in order to protect participants and meet their fiduciary responsibility? Is it not also ironic that Judge Penfield Jackson is trying to determine whether or not Microsoft has monopoly power and meanwhile his pension is most likely being plundered by Microsoft in the most significant financial fraud this century? Federal Pensions rely heavily on an S&P 500 index fund. In October the Dow Jones Corporation decided to add Microsoft to the Dow Index. On a market cap basis, Microsoft will now account for more than 15 percent of the entire index given that its market capitalization and stock option debt exceed $540 billion. Microsoft now also has 5.2 billion shares outstanding, not including an additional 800 million shares committed and outstanding to employees for stock options. This means that a $1 change in the stock price creates a change in their market cap of $6 billion. Gross annual sales are only $20 billion, an amount on which significant losses occurred. Sadly, the Dow Jones Corporation, parent to Barons and the Wall Street Journal, has also unknowingly become a key contributor to this massive financial fraud at Microsoft. In the last 6 months the Dow Jones Corporation, which earns licensing fees from these indexes, has initiated two new indexes which will allow Microsoft to accelerate its plundering of the retirement system. These are the Global Titan Index and secondly the revised Dow Index. Both could result in significant new demand for Microsoft stock and leave investors holding inflated paper just as Savings and Loan investors were left holding junk bonds. Given that Microsoft may be the largest advertiser to the Wall Street Journal, perhaps they should make an outright offer to purchase the Dow Jones Corporation. This would provide more clarity regarding constituencies and the Wall Street Journal could be added to the MSN lineup. Rather than disclose this situation, the Wall Street Journal has instead focused on trivial items regarding Microsoft's financial practices, most recently how deferred revenue is recognized. It is astonishing that the Wall Street Journal refuses to report this story. A new risk to the market effective November 1, 1999 could be a global panic triggered by volatility not typical of the Dow. Parish & Company believes that such a panic is now unavoidable yet is also very optimistic that the broad market will recover quickly, even though Microsoft should experience a long-term decline of 50-80 percent. If such a situation does occur, it will be a true test of the Federal Reserve. Will they be able to resist lowering rates which would simply reinflate Microsoft's stock? It may seem hard to accept, yet the net effect of the Federal Reserve's interest rate reductions in 1998 on the stock market today was to result in 5 technology companies' stock values accounting for 77 percent of the entire gain in the S&P 500 year to date, according to USA Today. Microsoft's stock has doubled during the last year. Since there is no interest cost on their stock option debt booked to the income statement, subsequent interest rate hikes have not affected their reported profits. Microsoft is a Cash Machine but Where Does the Cash Come From? [mspiegraph699.gif]