Business 2.0,  July 10, 2001               

                                                                                          

Thinking �Outside the Box�

Bob Gordon was climbing to the top at Cisco. Which makes his unorthodox methods all the more difficult to understand 

By KARL SCHOENBERGER 

 

B

OB GORDON was a high-powered Internet economy deal-maker of a different stripe. His quiet, relaxed and unassuming manner set him apart in a financial game where unvarnished arrogance can be the hallmark of success. Business associates describe him as the proverbial nice guy, someone they instinctively trusted. This Stanford Law School graduate thrived in Silicon Valley firmament, rising to the position of vice president for business development at Cisco Systems, for a time the most valuable company in the Unites States.  

 Gordon was right in the middle of the boom as the company swallowed more than 65 companies in six years. Through it all, he remained the proverbial nice guy, someone business associates instinctively trusted. He assiduously avoided the limelight of the Valley�s business elite. �It�s not my style to go after the social scene,� explained Gordon, who is 42 and, according to an old school chum, divorced. �Basically I�ve just been working 14 hours a day.� 

 His name was never plastered across the Web as a Valley celebrity and it did not appear in the press�at least not until late April, when the FBI arrested him on suspicion of fraud. Gordon is charged with bilking Cisco out of $15 million in cash and embezzling more than $11 million worth of securities in a cheeky financial scam.  

The Federal bureau of Investigation claims Gordon used his corporate authority to illicitly transfer millions securities owned by Cisco to an offshore dummy company he created in the Bahamas. The FBI says he used financial sleight of hand to trick a cash-strapped software company affiliated with Cisco into series of transactions that netted him a tidy profit of $5 million.  Gordon, who faces up to 10 years in prison if convicted on two counts of interstate wire fraud, has pleaded not guilty.  

Why would someone riding so high in the New Economy squander his reputation and destroy his career for what, in the larger scheme of things, amounted to mere chump change? He was reported to have accumulated $36 million by legitimate means. Was the $1.6 million house he owns in Palo Alto�and posted as collateral for his bail bond �too small?  Or was the workaholic Gordon a symptom of the anything-goes years in Silicon Valley, a period notably marked by companies fudging to make their quarterly financials look good?


             Evidently Gordon believed he was acting in the best interests of his employer by bending the rules of internal financial controls to invest Cisco�s cash more quickly and efficiently, according to the FBI�s criminal complaint. In explaining his actions to a company security official, Gordon reportedly said he was simply �thinking outside of the box.� 

That Gordon could use a little consultant speak and expect it to serve as vindication suggests how deeply enmeshed he was in the ethos of the boom. It will be up to a jury to decide whether there was criminal intent involved or whether Gordon was caught up innocently in the legal gray areas of the Internet economy�s fast and loose financial culture. Gordon, a slender, brown-haired and bespectacled man who is disarmingly courteous, would not talk about his legal troubles and declined to share details of his personal life. But as facts in his case unravel in federal court in San Jose, this enigmatic character is emerging as a symbol of the ethical vacuum at the heart of the speculative bubble that warped high tech business practices in recent years.  

Federal authorities say they are investigating and prosecuting an increasing number of cases of white collar crime in the industry, including other notable incidents that came to light at Cisco alone in the past six months. It can�t be declared a crime wave yet, because the number of cases may reflect the fact that federal agencies have been adding staff to their enforcement teams and turning over more rocks to find the scoundrels. The most alarming trend is in these cases, they say, involves corporate financial officers misrepresenting revenues through shady accounting methods�or �cooking the books��to deceive investors.  

The illusion of steady sales growth sustained by such practices has come crashing down now, along with the stock market meltdown. But with inexorable competitive pressure on tech companies to please Wall Street with bigger and bigger quarterly results during the boom years,  the lines between legitimate financial practices, irresponsible hyperbole and criminal misconduct became blurred. The cynical view is that the New Economy was one big Ponzi scheme, perfectly legal but with gullible investors left with nothing. Dennis Moberg, a business ethicist specializing in the technology industry at the University of Santa Clara�s Markkula Center for Applied Ethics, is an admirer of Cisco and a proponent of the �bad apple� theory of criminality.. �Scoundrels are scoundrels, and I don�t think white collar crime is any different,� he said. �San Quentin is full of people who think outside of the box. �


 

Robert Stanley Gordon admits to growing up in the city of Chicago, but that�s about the extent of the information that�s publicly available about his formative years. He evidently was a gifted student, graduating with high honors in General Engineering from the  University of Illinois at Urbana-Champaign in 1980, where he merited the school�s hoary Bronze Tablet Award for �consistent academic achievement.�  At Stanford, Gordon distinguished himself as a quiet but serious scholar of the law, earning a prestigious  appointment as associate managing editor of the Law Review. Law school classmates who knew Gordon express alarm and disbelief on hearing he has been indicted for fraud. �I liked and respected him,� said Bernard A Burk, who graduated with Gordon in 1983 and now practices law in San Francisco. �I�m very surprised that it�s alleged he did these things. I hope it�s not true.� 

Stephen D. Easton a law professor at the University of Missouri and a former U.S. Attorney in North Dakota, worked with Gordon on the Stanford Law Review as a fellow associate managing editor, said he admired him for his confident, low-key attitude toward school. �Bob wasn�t someone who fought for or sought the lime light,� Easton said. �He was a very good student, serious and fun to be around. But he didn�t call attention to himself.� 

Gordon wouldn�t say what he did immediately after law school, but explained in a brief courthouse interview that he was always more interested in doing business than practicing law, and saw his combination of undergraduate engineering studies and legal training as good preparation to work in the financial side of the high technology industry. A Stanford Alumni Association directory places him in Los Angeles in the mid-1990s, working for the investment bank Goldman Sachs. Gordon joined Cisco Systems at its San Jose headquarters in September 1995 as a director in the corporate finance department, according to the grand jury indictment. He rose quickly through the ranks, moving to the business development department in March 1999 and in November 2000 Cisco appointed him vice president and director of business development. 

Gordon quickly became a key player in Cisco�s aggressive acquisition of smaller technology firms. The company was building a formidable marketing machine through equity partnerships with its affiliates, mostly telecoms that used Cisco�s Internet switching equipment and software. Gordon was riding high and earning the respect of his colleagues.  Selby Wellman, the former head of Cisco�s Research Triangle Park facility in North Carolina, told the San Jose Mercury News that he considered Gordon �one of the brightest guys in the finance department.� Wellman described Gordon as very creative, very quiet,� and added: �I just considered him a very positive asset when we worked on projects together. Very friendly. That was pretty much his DNA at Cisco, which is why it's such a shock to see what's going on.� 

             One of the fledgling telecom start-up that Gordon, acting as a trusted player on the finance team,  recruited into Cisco�s orbit as an equity partner was Spanlink Communications, a Minneapolis maker of software that integrates telephone systems and call center databases. When Spanklink ran into financial difficulty at the end of 2000. that threatened its survival, Gordon came to the rescue with an emergency cash infusion�using what might be charitably called unorthodox methods. 

 

 The structure of the deal with Spanlink l seems fairly typical of how things worked at Cisco during its high-growth phase. Gordon negotiated a $45 million investment in Spanlink on behalf of Cisco. In turn, Spanlink refocused its business on selling and supporting Cisco software products. For Cisco, one of the big benefits of getting its financial tentacles into smaller Internet companies was acquiring top talent. Cisco plucked the best and brightest from the sector, and this included Spanlink chairman and co-founder, Brett Shockley, who joined Cisco as vice president and general manager for the customer service unit within Cisco�s Internet Communications Software Group in Lowell, Mass..  

Gordon, meanwhile, was highly regarded at Spanlink, and his authority was unquestioned. He was �very competent� and �a real nice guy,� said Tim Briggs, Spanlink�s chief financial officer. �He represented Cisco, and we had no reason to suspect him.�  In December 2000, Shockley contacted Gordon and told him that Spanlink needed a new round of financing within three weeks to stay afloat. Gordon replied that more funds were not immediately available from Cisco, but that he could quickly arrange a $5 million equity investment from a VC firm called Bay Star Capital. Gordon�s legal troubles pivot on the source of this highly expedient $5 million.  Briggs, Spanlink�s CFO, said he checked out the name Bay Star on the Internet and assumed he was dealing with the legitimate VC fund of the same name based in San Francisco. But Briggs said he didn�t bother to contact the firm directly, trusting in Gordon�s judgment. 

 �Bay Star's name was used fictitiously,�  said Steven M. Lamar, a principal at the firm, in an email. �We have not done any deals with Bob Gordon, Cisco Systems or Spanlink.�  The FBI agent investigating the case, Deborah Amrhein, wrote in an affidavit that Shockley himself was aware that the address used for Bay Star Capital was Gordon�s home address. That turned out to be an error, and a Cisco spokesman said Shockley did not notice the address. Shockley did not return phone calls.  

             The plot thickens when, in March of this year, Gordon allegedly persuaded Cisco to provide a $15 million loan to Spanlink. The indictment charges that Gordon told the unsuspecting Spanlink that Cisco wanted it to use $10 million from the loan to buy back Bay Star�s equity stake, and use the remaining $5 million as working capital. Acting on Gordon�s instructions, Spanlink obediently transferred $10 million to a bank account in Bermuda �in the name of an unknown entity,� according to the FBI affidavit.  

The ultimate beneficiary was �Cisco Systems Inc., Bahamas,� a bogus subsidiary that existed only on paper, and that Gordon allegedly set up without authorization by his superiors at Cisco. Prosecutors charge that Gordon used Cisco Bahamas to shelter some $11 million in securities he had embezzled from Cisco over a nine-month period starting in September 1999�including shares in Microsoft worth $2.3 million at the time.   Gordon�s alleged subterfuge was sloppy: On records for a bank account Gordon created for the entity, he Gordon changed the Bahamas address to his home address in Palo Alto, listing himself as secretary and vice president and also naming his housemate, Lyn Christensen, as a vice president. Gordon is accused of using cash generated from the sale of some of these diverted securities to fund the $5 million Bay Star investment that kept Spanlink solvent at the end of last year.  

             Gordon�s house of cards fell apart when Roger Biscay, Cisco�s treasury director, discovered in early April that the company could not account for 30,206 shares of Internet Securities Group, stock it had acquired in a pay out from a venture capital investment after the Atlanta based software vendor went public. Tracing the distribution of the stock certificates led Bob Dorsey, Cisco�s investigations securities manager, to Gordon and to the disclosure of his Cisco-Bahamas shell company.  

After Dorsey confronted him on April 4, Gordon wrote an 8-page letter to Cisco�s CEO John Chambers in his defense, saying his motivation was to help Cisco�s �ecosystem� partners in a pinch. He cut corners on company procedures to sell the ISS stock quickly because its share price was falling rapidly in March 2000 and he expected it would take months under normal practices, chasing signatures for approval. Dorsey ordered Gordon to turn over his laptop without deleting any files Dorsey later told the FBI that tests indicated 20% of the hard drive had been erased that day. Cisco fired Gordon on April 5, and turned his case over to federal authorities.

 

Is Cisco tightening  up its famously creative and decentralized business culture, where employees are empowered and encourages, as Gordon put it in his defense, to �think outside of the box�? A reliable source within the management ranks at Cisco told Business 2.0 that in an internal announcement in May the company said it planned new financial auditing controls. A top ranking executive predicted might make many employees feel unhappy. The company apparently has not decided to disclose this information to shareholders, however. Cisco has been under siege by unforgiving Wall Street analysts and investors, and doesn�t need any more bad news echoing around the markets. The company has been relatively resistant to the downturn in Silicon Valley; share prices had hovered at $40 range at the beginning of the year, but shares plummeted to as low as $13 in Aril after the company disclosed it has huge unsold inventories and conceded  its projections of unstoppable revenue growth had been a bit over-optimistic. Cisco announced in March it would lay off as many as 8,000 employees, or nearly 18 percent of its workforce.


             Steve Langdon, a Cisco public relations manager, said the company already had adequate financial controls in firmly in place at the time Gordon allegedly defrauded his lawyer. In fact, he says, Cisco officials were the ones who detected the alleged fraud and turned the case over to the FBI. 

Is Cisco going to clip the wings of its employees accustomed to a broad autonomy? That question evidently struck a chord for Langdon. �Empowerment is a key element of our culture at Cisco. We trust our employees very much,� Langdon says. �We understand that at time to time there will be individuals who will abuse that trust,  but their behavior doesn�t reflect the character of our employees. We�ll always work to improve preventive measures, but it�s na� to think that any system is impervious because there will always be individuals�whether there�s a culture of empowerment or not�who will abuse trust.� 

Integrity in financial controls is an extremely sensitive matter for any high technology firm, especially now that the bloom is off the rose and angry shareholders are complaining that their trust was betrayed by the promises of the companies they invested in. Langdon is correct in noting that two or three cases in a short period of time does not suggest system failure for a company with 44,000 employees (soon to be about 36,000) spread out across the globe. Cases of significant embezzlement and fraud remain relatively rare across the tech industry, experts say, partly because players in a position to exploit the weaknesses in the system have too much at stake,  

A class actions suit against Cisco alleging accounting irregularities is in its early states but must first be approved by a judge before going to trial. The bar is high, and Spencer A. Burkholz, an  attorney specializing in corporate accounting fraud for Milberg Weiss Bershad Hynes & Lerach, concedes that Cisco has formidable legal resources to fight the litigation. His firm�s complaint charges that Cisco distorted its  quarterly earnings results, using such means as extending high-risk loans to customers and affiliates allowing them to buy Cisco products, which in turn artificially inflated sales figures. Langdon, the Cisco spokesman, �says the lawsuit is without merit. 

Milberg Weiss lawyers are undoubtedly chortling that they could link their case to Gordon�s alleged handiwork with Spanlink Communications, where company officials ultimately did approve a $15 million loan to a company so recently on the verge of insolvency. After all, Spanlink proudly announced May 1 that it had received the Cisco Internet Communications Software Group�s National Partner of the Year Award. 
Spanlink executive Bob Bruce said in a news release, �Cisco is committed to helping its partners succeed by giving them the  resources necessary to take advantage of the unprecedented opportunities of the Internet Economy.�  

Karl Schoenberger is a Bay Area writer and author of a book about corporate social responsibility and economic globalization, Levi�s Children: Coming to Terms with Human Rights in the Global Marketplace, which is coming out in paperback by Grove Press in this month.