ENFORCEMENT ACTIONS AGAINST IN-HOUSE COUNSEL …enforcement agencies investigate computer-aided crimes, and spearheaded the ... Mark Hair is a certified public accountant and a Partner

ENFORCEMENT ACTIONS AGAINST IN-HOUSE COUNSEL FOR OPTIONS BACKDATING

Written by:

PAUL E. COGGINS Fish and Richardson, PC

Dallas

Presented by:

PAUL E. COGGINS

and

MARK L. HAIR StoneTurn Group LLP

San Francisco

State Bar of Texas 7TH ANNUAL

ADVANCED IN-HOUSE COUNSEL COURSE July 24-25, 2008

Dallas

CHAPTER 1

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3DXO�(��&RJJLQV� Practice Areas Complex Litigation Business Litigation White Collar Criminal Defense Education Yale University B.A. Political Science 1973 summa cum laude with Departmental Distinction, Phi Beta Kappa Oxford University B.A. 1975 First Class Honours, Diploma in Law 1977 Rhodes Scholar Harvard Law School J.D. 1978 cum laude Harvard Civil Rights - Civil Liberties Law Review

Professional experience Paul Coggins is a Principal in the Dallas office of Fish & Richardson P.C. He is a member of the firm’s White-Collar, Government, and Securities Litigation Section. His practice emphasizes complex litigation, business litigation, and white collar criminal defense. He has represented, before federal courts and the SEC, a number of Fortune 500 corporations and public agencies and has conducted internal investigations involving a wide array of issues, including alleged tax, fraud and securities violations. He also assists corporations and other business entities in developing compliance and ethics programs. With his extensive federal, state, and private experience, Mr. Coggins has been consistently recognized by Texas Monthly and D Magazine as among the best in his field. Mr. Coggins was appointed by the President to serve as the U.S. Attorney for the Northern District of Texas from 1993-2001. Among the cases he prosecuted were the nation’s first anthrax hoax in 1998, copycat bomb scares following Oklahoma City, the first "three strikes" case in Texas (which was based solely on forensic evidence), and some of the earliest cybercrime cases in the United States. He led efforts to establish a regional computer forensics lab in Dallas to help law enforcement agencies investigate computer-aided crimes, and spearheaded the creation of the Cyber Crimes Task Force. He also helped establish a high-tech crime lab, the North Texas Regional Computer Forensics Lab, a collaborative effort between his office and the FBI. Mr. Coggins also served as an Assistant United States Attorney for the Northern District of Texas (1980-1983). He was twice selected to serve on the U.S. Attorney General’s Advisory Committee (1994-1995 and 1997-1999), where he formed relationships with law enforcement officials around the country. He was the committee’s vice chair from 1998-1999. Earlier, he served as Texas Special Assistant Attorney General (1991-1993).

In 1994, while U.S. Attorney for North Texas, Mr. Coggins brought together federal, state, and local regulators and agents to build one of the nation’s first healthcare fraud task forces. He has twice been called upon by the Texas Attorney General to represent the State of Texas - once in an investigation involving a redistricting scandal and again in a massive 20-year-old class action lawsuit that he helped bring to a successful settlement.

Selected publications Mr. Coggins is a published author and a regular contributor to Texas Lawyer. His publications include: The Lady Is the Tiger(Avon 1987), Out of Bounds, co-authored with Congressman Tom McMillen (Simon & Schuster 1992), "A Big House or the Big House?" Executive Legal Advisor (2005), "RICO Versus Organized Crime in the United States," United States-Mexico Law Journal, Vol. II (2003), "The Regulator's Response to "Bank Fraud": The United States Perspective," co-authored chapter with Joseph E. Norton, Banks: Fraud and Crime (Lloyds of London Press Ltd. 1994).

Bar admissions Admitted to the state bar of Texas, the United States Court of Appeals for the Federal Circuit, the United States District Court for the Northern, Eastern, Southern, and Western Districts of Texas.

Additional information Mr. Coggins is a former host of Legal Eagles, a weekend radio call-in show on KRLD News Radio, and a frequent speaker for the State Bar of Texas and local organizations and corporations. He is involved in numerous public service organizations, including the Boards of Dallas CASA (Court Appointed Special Advocates) (President, 2005), North Texas Crime Commission (Chair, 2004), Dallas County Historical Foundation (Chair, 2008), Institute for Law & Technology, and Texas Book Festival. He is a member of SMU's Town & Gown (President, 2003-04), Patrick Higginbotham Inn of Court, American Bar Association, Dallas Bar Association, Texas Bar Foundation, and a founder of the Southwest Section of the American Bar Association’s Committee for White Collar Crime. In 2005, Mr. Coggins was listed as a "Texas Super Lawyer" by Texas Monthly and was named among 2005 and 2008's "Best Lawyers in Dallas" by D Magazine, citing his work in white collar criminal defense; 2007 and 2008 Best Lawyers in America in Litigation and White-Collar Criminal Defense.

MARK HAIR Mark Hair is a certified public accountant and a Partner in StoneTurn’s Forensic Accounting and Forensic Technology practice areas in San Francisco. A former auditor, Mark has experience in forensic accounting matters, corporate investigations and securities litigation consulting. Prior to joining StoneTurn, Mark was working in the National Office of a Big 4 accounting firm leading a program to enhance financial statement audit procedures through the use of forensic techniques. He has provided financial consulting services in engagements involving stock option backdating, restatements, forensic accounting investigations, Rule 10b-5 securities claims, purchase price disputes, royalty audits, and breach of contract damages. Mark has experience in a variety of industries including software, hardware, medical technology, telecommunications, manufacturing, entertainment, and distribution. He has a B.S. and Masters Degree in Accounting from Brigham Young University.

Enforcement Actions Against In-House Counsel for Options Backdating Chapter 1

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TABLE OF CONTENTS

I. INTRODUCTION.................................................................................................................................................. 2

A. THE BASICS..................................................................................................................................................................2 1. The Old Regime ...................................................................................................................................................2 2. The New Rules .....................................................................................................................................................2

B. MEDIA SENSATIONALISM...........................................................................................................................................3 C. PARALLEL INVESTIGATIONS......................................................................................................................................3

II. THE SCOPE OF THE INVESTIGATION ............................................................................................................ 3 A. WHAT THE GOVERNMENT MUST PROVE .................................................................................................................3 B. BACKDATING CASES THUS FAR—BRIEF SYNOPSIS ..............................................................................................4

1. Brocade Communications Systems, Inc. ..........................................................................................................4 2. Comverse Technologies, Inc. .............................................................................................................................4 3. Engineered Support Systems, Inc......................................................................................................................4 4. Take-Two Interactive Software, Inc..................................................................................................................4 5. Monster Worldwide, Inc .....................................................................................................................................4 6. McAfee, Inc ..........................................................................................................................................................5 7. Apple, Inc..............................................................................................................................................................5 8. Mercury Interactive, L.L.C.................................................................................................................................5 9. Juniper Networks, Inc. ............................................................................................................................................4 10. Broadcom Corporation .........................................................................................................................................4

C. GENERAL COUNSEL IN TROUBLE..............................................................................................................................5 1. Why?......................................................................................................................................................................5 2. Who?......................................................................................................................................................................6

a. William Sorin ............................................................................................................................................................... 6 b. Myron Olesnyckyj ...................................................................................................................................................... 7 c. Kent Roberts................................................................................................................................................................. 8 d. Nancy Heinen............................................................................................................................................................... 9 e. Susan Skaer................................................................................................................................................................. 10 f. Lisa Berry.......................................................................................................................................................................... 9 g. David Dull....................................................................................................................................................................... 10

3. Patterns ................................................................................................................................................................12 III. RECOMMENDED COURSES OF ACTION ................................................................................................. 12 IV. CONCLUSION................................................................................................................................................ 13

Table 1. Companies involved in options backdating ......................................................................................................... 14


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ENFORCEMENT ACTIONS AGAINST IN-HOUSE COUNSEL FOR THE BACKDATING OF STOCK I. INTRODUCTION The stock option backdating scandal has seen a recent flurry of enforcement activity after years of passive investigation. Despite the current focus on the credit crisis, the Securities and Exchange Commission and the Department of Justice remain focused on backdating. Although high level officers and directors have been targeted, in-house counsel have recently come under increasing scrutiny. This article analyzes the cases against in-house counsel brought thus far and outlines steps counsel may take to protect themselves against such charges in the future. A. The Basics Traditionally, the purpose of an employee stock option plan is to provide management with financial incentives that coincide with the interests of a company’s shareholders. If the company’s stock rises, employees that have been granted stock options receive a financial benefit from the stock’s performance. If issued properly, stock options also help retain valued employees. Options, which usually have no value as of their grant date (granted “at-the-money”), often increase in value with the passage of time—during which management will work to maximize the value of the company’s shares and, as a result, their own stock options.1 Backdating arguably thwarts this purpose by compensating employees with stock options that are already valuable. Backdating refers to instances where the reported grant date for an employee stock option is earlier than the date on which the grant was actually made. The value of options granted in such a manner is said to be “in-the-money”—the underlying price is already above the strike price, thus giving the option immediate intrinsic value.2 Similar practices have been grouped, though perhaps incorrectly, under the heading of backdating. “Spring-loading” refers to the practice of scheduling option grants before positive news regarding the corporation is announced. Since the stock price can be expected to rise following such announcements the option could be expected to have positive intrinsic value shortly after the grant despite being issued at-the-money. “Bullet-dodging” refers to the practice of scheduling option grants shortly after negative news regarding the firm is to be announced. Because the stock price can be expected to fall following such announcements, the company avoids issuing options that are likely to be out-of-the-money.3

1. The Old Regime Prior to the enactment of the Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act4 in the wake of the Enron and Worldcom scandals, SEC rules allowed companies up to a year and forty-five days to report certain stock option grants.5 This lapse in time provided companies with a large window in which they could backdate grants to favorable dates in the prior fiscal year. In addition, the Generally Accepted Accounting Principles (GAAP) provided attractive features for the accounting of stock options; companies could use at-the-money options to pay their employees without having to record them as a compensation expense.6 Conversely, in-the-money options should have been recorded as compensation expenses.7 To sweeten the pot further, numerous tax benefits were also in place.8 Namely, the $1 million cap on the deductibility of executive compensation did not apply to options granted at fair market value.9 All these factors contributed to the now-widespread use of stock options as compensation, but they also increased the potential for abuse. Between 1997 and 2002, numerous companies took advantage of both the tax and accounting benefits given to at-the-money grants. The practice of backdating grants to provide employees with immediate incentives while still reaping the accounting and tax benefits of at-the-money options was common. It was particularly common in the Silicon Valley where high tech start-ups, which were short on capital, needed immediate incentives to attract experienced and high-quality management.10 Even if backdating was driven in some cases by the needs of their business and, in the end, for the benefit of their shareholders, the practice still improperly used accounting and tax benefits reserved solely for at-the-money grants. In addition, an in-the-money grant also raises disclosure issues. Such grants may result in the inaccurate reporting of employee compensation. Moreover, the stock option plans for numerous companies require that options be granted at no less than fair market value on the date of the grant. Any disclosures, which stated that the company had granted option in accordance with the terms of its option plan, may have been inaccurate.11 As a result, the overwhelming majority of backdated/in-the-money options granted between 1997 and 2002 were not properly accounted for, not properly taxed, and not properly disclosed. 2. The New Rules In 2002, Sarbanes-Oxley began to rein in this practice by tightening the reporting requirements for stock option grants. In particular, the Act required real-


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time disclosure of option grants.12 Shortly thereafter, the SEC issued rules requiring that officers and directors disclose any such grants within two business days.13 The following year, the SEC approved changes to the listing standards on both the New York Stock Exchange and the Nasdaq Stock Market requiring shareholder approval of almost all equity compensation plans.14 These disclosures must include the terms on which options will be granted—namely, whether the plan permits options to be granted in-the-money.15 In late 2004, the Financial Accounting Standards Board (FASB) issued a new rule, which effectively eliminated the prior accounting advantages for at-the-money grants. All stock options granted to employees, whether at-the-money or in-the-money, must now be recorded as expenses.16 B. Media Sensationalism Though these reforms have effectively curtailed the practice of option backdating, the practice was prevalent enough prior to 2002 that it aroused the ire of the SEC. Several years ago, the Commission began to investigate backdating practices by collaborating with academics to analyze market data.17 One such academic, Professor Erik Lie of the University of Iowa published his findings, which showed compelling circumstantial evidence of purposeful and fraudulent backdating.18 Professor Lie’s findings prompted a Wall Street Journal front-page article entitled “The Perfect Payday.”19 The article identified multiple companies that granted their employees suspiciously fortunate stock options—reporting, in one instance, that the odds of a certain company’s fortunate grants occurring randomly was a mere 1 in 300 billion. Although the validity of Professor Lie’s methods has recently been questioned,20 the damage had already been done. With the Enron and Worldcom scandals fresh in mind, the public has seized on the news. In response, the government’s own investigations have increased dramatically.21 C. Parallel Investigations In the wake of public outrage, the SEC began coordinating a nationwide investigation into over 100 companies.22 Linda Thomsen, the current Director of the SEC’s Enforcement Division, testified before the Senate that the companies involved were “located around the country” and were both “Fortune 500 companies and smaller cap issuers.”23 The Department of Justice has also joined the fray. In July of 2006, the United States Attorney for the Northern District of California announced the formation of a local stock options backdating task

force “to determine the extent of the intent to mislead or defraud shareholders in the dating and awarding of stock option grants.”24 Deputy Attorney General Paul McNulty also testified before the Senate that the Department of Justice had made its own nationwide investigation into backdating “a top priority.”25 Lastly, several state attorneys general and some local district attorneys began their own investigations.26 II. THE SCOPE OF THE INVESTIGATION Stock option backdating was the SEC’s highest profile enforcement area in 2006. The scandal has provided both the SEC and DOJ with glossy headlines in the face of significant loses on other fronts.27 As a result, the fervor of the government’s investigation is not likely to diminish any time in the near future. As of the time this article was written, nearly 200 companies have been caught up in the backdating scandal. To date, the SEC and DOJ together have begun investigations into over 115 companies. More companies have found themselves party to a private suit—over 120 derivative suits and 25 class action suits have already been filed. In addition, nearly 175 companies have announced their own internal investigations.28 Of the 200 or so companies involved, 115 have already announced financial restatements or acknowledged the likelihood that such restatement may take place in the future. The estimated value represented by such restatements would be over $3.95 billion.29 Understandably, the government has not only sought reparations from the companies involved, but also has begun to prosecute and seek disgorgement from the individuals—at all levels—who personally profited from backdating practices. Yet, in order to do so, the government must prove knowing violations of the securities laws. As they make their way through this backdating quagmire, government investigators are trying to separate instances of innocent, or merely ignorant, bungling from those involving calculated malfeasance. A. What the Government Must Prove Grants of in-the-money options have substantial tax, accounting, and disclosure implications. But the existence of such implications does not necessarily translate into a successful prosecution for securities fraud. In order to successfully prosecute individuals for either civil or criminal securities fraud, the government must prove intent. For civil prosecutions under Section 10(b) of the Exchange Act or Rule 10b-5 thereunder,30 the government must prove that an individual acted knowingly and intentionally.31 Though some courts have held that this standard is met by a mere showing of


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recklessness,32 most would require a holding that a defendant selected favorable option dates in knowing violation of the GAAP and intentionally failed to make the appropriate disclosures.33 In the criminal context, the government must prove that the defendant acted willfully, which requires a showing of intentional and deliberate violations for some evil purpose.34 The requirement that the government prove this level of intent may explain why both the SEC and DOJ have taken their time in initiating option backdating cases. Though the investigation itself was in full swing during 2006, cases have been filed at a fairly consistent pace for the past year-and-a-half. B. Backdating Cases Thus Far—Brief Synopsis To date, the SEC, DOJ and local district attorneys have filed the following charges against executives of the following companies, or the companies themselves: 1. Brocade Communications Systems, Inc. In July 2006, both civil and criminal charges were brought against Gregory Reyes, Brocade’s former Chief Executive Officer, and Stephanie Jensen, its Vice President of Human Resources. Brocade’s former Chief Financial Officer, Antonio Canova, was also named in the civil complaint. The civil complaint alleged that all three caused in-the-money grants to be issued to new and current employees. The complaint charged all three defendants with securities violations: including fraud, falsification of books and records, lying to outside auditors, and filing false reports with the Commission.35 The criminal complaint charged both Reyes and Jensen with securities fraud.36 Reyes was found guilty on all criminal charges in August, 2007, and was later sentenced to twenty-one (21) months in prison. The SEC had also filed a civil action against Brocade itself; that action was settled for $7 million.37 2. Comverse Technologies, Inc. In August 2006, both civil and criminal charges were brought against Jacob Alexander, Comverse’s former Chief Executive Officer, David Kreinberg, former Chief Financial Officer, and William Sorin, former General Counsel. The complaints alleged that Alexander realized in-the-money gains of $6.4 million, while Kreinberg and Sorin each realized in-the-money gains of approximately $1 million. The civil complaint charged all three defendants with securities violations: including fraud, falsification of books and records, lying to outside auditors, and filing false reports with the Commission. The criminal complaint charged all three with conspiracy to commit securities fraud, wire fraud, and mail fraud.38

Both Kreinberg and Sorin have settled with the SEC and agreed to pay disgorgement.39 Additionally, both pled guilty to their respective criminal charges.40 As result, Sorin recently became the first individual to be sentenced to jail time as a result of the recent backdating scandal.41 Alexander is currently in Namibia awaiting extradition.42 3. Engineered Support Systems, Inc. In its first action of 2007, the SEC charged Gary Gerhardt, ESS’s former Chief Financial Officer, and Steven Landmann, its former Controller, with multiple securities violations: including fraud, falsification of books and records, lying to outside auditors, and filing false reports with the Commission. Allegedly both individuals named in the complaint personally profited from the backdating practice.43 Landmann has already consented to a permanent injunction, permanent bar from serving as an officer or director of a public company, and has consented to pay disgorgement of his profits plus interest, as well as a civil penalty, a total monetary fine of over $885,000.44 On March 26, 2007, a criminal indictment charging Gerhardt with ten counts of securities fraud was unsealed.45 4. Take-Two Interactive Software, Inc. On February 14, 2007, the Manhattan District Attorney and the SEC simultaneously filed actions against Ryan Brant, the former Chief Executive Officer of Take-Two, a video and computer game publisher. Brant became the first CEO to be convicted of backdating-related charges when he pled guilty in New York state court. Brant, however, avoided prison and received a sentence of five years probation. The SEC complaint alleged that Brant personally profited from an extensive backdating scheme. The SEC charged him with securities fraud, as well as filing false reports and proxy statements. These charges were recently settled; Brant agreed to a permanent injunction, permanent bar from serving as an officer or director of a public company, as well as a total civil penalty exceeding $6 million.46 5. Monster Worldwide, Inc Only a day after charges were filed against the CEO of Take-Two, criminal and civil charges were brought against Myron Olesnyckyj, Monster’s former General Counsel. Both complaints alleged that the backdating scheme at Monster had been orchestrated by Olesnyckyj and that he personally profited from the practice.47 Olesnyckyj has already settled the civil charges and pled guilty to the criminal charges.48 His sentencing in the criminal matter is currently set for August 25, 2008.


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6. McAfee, Inc Also in February, criminal and civil charges were brought against Kent Roberts, McAfee’s former General Counsel. Both complaints allege that he changed the grant date of stock options previously authorized to him in order to take advantage of McAfee’s then declining stock price. Roberts’s action allegedly increased the value of his options by nearly $200,000. He has pled not guilty.49 7. Apple, Inc. In the Spring of 2007, the SEC brought charges against Nancy Heinen, former General Counsel of Apple. The SEC also filed, and simultaneously settled, charges against Fred Anderson, Apple’s former Chief Financial Officer. The complaints alleged that Heinen and Anderson orchestrated a backdating scheme that caused Apple to, on one occasion, misstate compensation expenses by $18.9 million, and, on another occasion, misstate expenses by $20.3 million. Allegedly both Heinen and Anderson personally profited from the first set of grants.50 8. Mercury Interactive, L.L.C. The SEC brought, and quickly settled, civil fraud charges against Mercury itself. Under the terms of the settlement, Mercury agreed to permanent injunction as well as a civil penalty of $28 million.51 The Commission also brought charges against four former officers of the company: Amnon Landan, former Chairman and Chief Executive Officer, Sharlene Abrams and Douglas Smith, former Chief Financial Officers, and Susan Skaer, former General Counsel. The complaint alleged that all four individuals personally profited from a backdating practice that caused Mercury to fail to record over $258 million in compensation expenses. 9. Juniper Networks, Inc. On August 28, 2007, the SEC filed a settled enforcement action against Juniper itself. Juniper settled the charges without admitting or denying the allegations. Juniper consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws.52 In addition to filing the settled action against Juniper, the SEC filed an enforcement action against Lisa Berry, the former general counsel for Juniper and KLA-Tencor.53 10. Broadcom Corporation Most recently, the SEC initiated an enforcement action against four executives of Broadcom: Henry T. Nicholas III, Henry Samueli, William J. Ruehle, and David Dull. The complaint alleges that these officers, including Dull, the general counsel, “orchestrated and

carried out” the backdating “scheme” from June 1998 through May, 2003.54 Broadcom, who had already settled an enforcement action, restated its financial results for 1998 through 2005 and reported “an additional $2.22 billion in net non-cash compensation expenses.55 C. General Counsel in Trouble A quick tally of these cases shows that of the numerous invididuals against whom charges have been brought, seven have been general counsel—Comverse’s William Sorin, Monster’s Myron Olesnyckyj, McAffee’s Kent Roberts, Apple’s Nancy Heinen, Mercury’s Susan Skaer, KLA-Tencor’s and Juniper’s Lisa Berry, and Broadcom’s David Dull . This outcome is part of a larger trend on the part of the government to hold in-house counsel responsible for their companies’ securities related violations. This trend should, and quite rightly. alarm in-house counsel. While the government may still view attorneys as partners in its mission, it has become increasingly willing to prosecute those who have crossed the line. 1. Why? Prior to the corporate scandals at the turn of the century and the passage of Sarbanes-Oxley, the SEC brought fewer and more selective actions against in-house counsel. From 1999-2001, the SEC brought 49 enforcement actions against attorneys.56 The majority of those charges involved areas in which attorneys have been getting into trouble for quite some time: insider trading and securities offerings.57 Since the enactment of Sarbanes-Oxley on July 30, 2002, the SEC’s focus has shifted. From mid-2002 to 2005, the SEC filed more than 76 actions against in-house attorneys.58 Those actions focused on the accused attorneys’ direct participation in securities fraud and/or failure to disclose material information to company management and auditors. Most of these actions have been settled, with attorneys consenting to officer-director bars and injunctions preventing them from practicing before the SEC.59 This shift is the result of the SEC’s attempts to implement what it views as Sarbanes-Oxley’s primary goal—the creation of standards by which “gatekeepers” can be measured.60 Gatekeepers can be understood as reputational intermediaries who provide verification and certification services to investors.61 Such services include those carried out by independent auditors when verifying financial statements, securities analysts when assessing business and financial prospects, and debt rating agencies when evaluating the credit of a company. Lawyers are also gatekeepers when they lend their professional reputations to transactions, thus giving the transactions an air of propriety.62


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It is in this heightened role as a gatekeeper that in-house counsel are being held to higher account. The SEC now expects that general counsel will not only advise their companies but also will, more importantly, help set the tone and culture of that company. In a recent speech entitled “Tone at the Top: Getting it Right,” Stephen Cutler, then Director of the SEC’s Enforcement Division, emphasized that securities violations are, in the SEC’s view, a product of both individual failings and deficient corporate culture.63 General counsel are, as a result of their trusted advisory roles, positioned to affect both individual minds and the larger corporate culture. As such, the Commission sees in-house counsel as a valid and rather proper target among its many civil enforcement objectives. In targeting attorneys, the SEC is engaging in a transparent scare-tactic. In the same speech, Cutler explained that the large civil penalties the SEC is presently seeking are designed not only to punish those in the wrong but also, perhaps more importantly, to provide motivation for upper-level managers to improve their company’s culture. In other words, the SEC is “trying to get the fundamentally honest, decent CEO or CFO or General Counsel—the one who wouldn’t break the law—to say to herself when she wakes up in the morning ‘I’m going to spend part of my day today worrying about, and doing something about the culture of my company. I’m going to make sure that others at the company don’t break the law, and don’t even come close to breaking the law.”64 The SEC hopes that general counsel will view its fines as significantly exceeding the proverbial cost-of-doing-business. What the SEC’s enforcement plan is “really targeting are the hearts and minds of senior executives.”65 2. Who? It is in this vein that the government can both make enforcement actions against in-house counsel a priority and still contend that it views “lawyers as critical partners in [its] mission.”66 In other words, the government realizes that general counsel, in providing legal advice to companies and self-reporting potential violations, serve a vital role in fostering the proper corporate culture. But it also realizes that self-conscious counsel, anxious after seeing their peers dragged across the coals, may serve that role more effectively. Within that role, the line between actionable and non-actionable conduct is not always bright. The Commission has repeatedly stated that it will not ordinarily “sanction lawyers under the securities law merely for giving bad advice, even if that advice is negligent, or perhaps worse.”67 The level of scienter that the SEC and DOJ are required to prove in

securities cases necessitates that they pursue only the most egregious violations on the part of in-house counsel—those violations were lawyers have “twisted themselves into pretzels to accommodate the wishes of company management, and failed in their responsibility to insist that the company comply with the law.”68 More particularly, the government can generally prove knowing or willful violation of the securities laws only where the general counsel involved has actually caused the violation and profited from it. The attorney must have “assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the company’s condition . . . [or helped] hide ongoing fraud, or taken actions to actively obstruct such investigations.”69 In the context of stock option backdating, the level of participation in the scheme necessary to demonstrate this requisite intent is similarly high. An examination of the facts underlying each of the seven backdating cases in which general counsel have been charged illustrates the line between actionable and non-actionable conduct. The ultimate question to be answered is what sets of facts lead enforcement agencies to believe they can prove the required level of intent? In general, attorneys who have already been charged have personally profited from the backdating practices in each case and were instrumental in the orchestration of the backdating, to the extent that each allegedly drafted or signed off on documents and/or disclosures that they knew to be false.

a. William Sorin In its second enforcement action

regarding the recent backdating scandal, the SEC and DOJ both brought charges against Comverse’s former CEO Jacob Alexander, former CFO David Kreinberg, and former General Counsel William Sorin.

In the criminal proceeding, the United States Attorney’s Office for the Eastern District of New York charged all three individuals with one count of conspiracy to commit securities fraud, wire fraud, and mail fraud.70 The parallel SEC complaint alleged such violations as fraudulent stock sales; securities fraud; false and misleading proxy disclosures; falsification of accounting records; false and misleading statements to the company’s accountants; false, misleading, and in some cases missed, filings of beneficial ownership reports; and aiding and abetting the company’s violations of its Exchange Act disclosure, record keeping, and internal control obligations.71

According to the government’s allegations in both its civil and criminal cases,


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Alexander, beginning in 1991, repeatedly used hindsight to select a date when the closing price of Comverse’s stock was at or very near its quarterly or annual low. Alexander would then communicate this date and closing price to his general counsel, Sorin. Sorin would then create company records that falsely indicated that a committee of Comverse’s board of directors had actually approved the option grant on Alexander’s chosen date. As the liaison to the company’s Compensation Committee on option grants, Sorin allegedly knew, or was reckless in not knowing, that no corporate action had taken place on the date selected by Alexander. Sorin would have known that the Committee had not received (much less signed) the unanimous written consent forms, which Sorin later drafted, on or before Alexander’s chosen date.72

The complaint alleges that Sorin benefited immensely from the scheme. Sorin received 434,500 options, all of which had been backdated and carried an exercise price below the fair market value at the time of the grant. In some instances, these grants were immediately exercisable. All told, Sorin realized more than $14 million from the sale of the stock underlying these options, with approximately $1 million of that profit representing the in-the-money portion at the time of the grant.73

Comverse never recorded any of these grants as compensation expenses and reported, in its proxy statements and annual and quarterly reports, that the exercise prices were equal to the fair market value of the underlying shares on the grant dates. The complaint alleges that Sorin knowingly drafted and signed such statements and reports. Sorin also allegedly misled the company’s outside auditors.74

Furthermore, the complaint alleges that Sorin aided Kreinberg in implementing and carrying out a similar backdating scheme at Ulticom, Inc., a subsidiary of Comverse.75

To add to the scandal, the government alleged that Alexander and Kreinberg created a “slush fund” of backdated Comverse options by inserting fictitious names into grantee lists that were submitted to the Compensation Committee. The two named the slush fund “I.M. Fantom,” based on the popular musical “Phantom of the Opera,” because the scheme involved the creation of phantom employees. The name

was eventually changed to the slightly less transparent “Fargo,” after the Cohen Brothers’ movie by the same name.76 Though Sorin was allegedly not involved in this slush fund scheme, this evidence painted a bleak picture of the individuals with whom he allegedly conspired.

On January 10, 2007, Sorin settled all civil charges brought by the SEC. Without admitting or denying any of the Commission’s allegations, Sorin consented to the entry of a final judgment permanently enjoining him from further violations of the Exchange Act and the entry of an order permanently prohibiting him from acting as an officer or director of any public company. In addition, in an administrative proceeding, the SEC permanently suspended Sorin from practicing before it as an attorney. Lastly, Sorin was required to pay $1,670,915 in disgorgement, $817,509 in prejudgment interest, and a civil penalty of $600,000—for a total of $3,088,424.77

Sorin also pled guilty to all criminal charges. He was sentenced to one-year-and-one-day in prison, plus three years’ supervised release. The sentencing judge, the Honorable Nicholas Garaufis recognized that though Sorin was not “the grand Wizard of Oz” who was orchestrating the entire scheme, but “he [had] facilitated a portion of it with his actions.”78

b. Myron Olesnyckyj On February 15, 2007, both the SEC and

DOJ brought charges against Myron Olesnyckyj, the former General Counsel of Monster Worldwide, Inc., the well-known online job-search site. Though Monster’s CEO and Chairman, Andrew McKelvey, resigned from the company back in 2006, Olesnyckyj has been the only individual at Monster charged in the backdating scandal thus far.

In the criminal proceeding, the United States Attorney’s Office for the Southern District of New York charged Olesnyckyj with one count of conspiracy to commit securities fraud and to make false statements in SEC filings, to auditors, and in the corporate books and records; and one substantive count of securities fraud. The total maximum penalty for these violations is 25 years’ imprisonment.79 The parallel SEC complaint alleged such violations as fraudulent stock sales; securities fraud; false


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and misleading proxy disclosures; falsification of accounting records; false and misleading statement to the company’s accountants; false and misleading filings of beneficial ownership reports; and aiding and abetting the company’s violations of its Exchange Act disclosure, record keeping, and internal control obligations.80

According to the government’s allegation, in both its civil and criminal cases, Olesnyckyj joined Monster in 1994 and, at various times, held the positions of senior vice president, secretary, and general counsel. From 1996 to 2003, Monster’s option grants fell into two main categories: grants to a large number of recipients, including rank and file employees; and grants to new employees or current employees the company was seeking to promote or retain. During the period in question, Monster’s Compensation Committee approved most grants through the use of unanimous written consent. The complaint alleges that Olesnyckyj would receive lists of employees to be granted options (of either type) and the price at which unidentified senior management wished the option to be granted. Olesnyckyj or personnel in Human Resources would then identify a previous date at which Monster’s stock price was at or near the desired price. Olesnyckyj would then draft the requisite written consents, sometimes days, weeks, or months after the purported grant date. These consents were then approved by the Compensation Committee.81

To conceal the backdating practice, Olesnyckyj would occasionally discard certain records reflecting the actual option grant process in an attempt to mislead Monster’s auditors. For example, in the event that the Compensation Committee was provided a unanimous written consent with a Schedule A attached, Olesnyckyj would occasionally destroy the Schedule A rather than place it in the minute book.82

In addition, although his role in preparing and reviewing filings varied, Olesnyckyj did participate in the drafting of various quarter and annual reports in which Monster materially understated its compensation expenses. Olesnyckyj also prepared proxy statements from 1996 through 2003, and signed such statements as secretary from 2001 to 2003. Finally,

Olesnyckyj drafted or knew of false or misleading registration statements and misleading representations made to outside auditors.83

In order to prove the requisite scienter, the complaint avers that throughout the relevant period, Olesnyckyj understood that the backdating of stock option grants was, in fact, improper. In addition, Olesnyckyj allegedly also understood the accounting, tax, and disclosure consequences of in-the-money grants. Finally, due to his involvement in either drafting, or directing others to draft, documentation for Monster’s Compensation Committee, Olesnyckyj allegedly knew or should have known that the written consents were false because the “as of” dates therein did not represent the true option grant dates. Olesnyckyj would or should have known that the Compensation Committee had not authorized option grants on the dates identified in documents he drafted.84

Allegedly, Olesnyckyj was personally granted six sets of backdated options, of which four were exercised and sold.85 Though the amount of profit reaped by Olesnyckyj is unknown, the entire backdating practice at Monster required the company to make financial restatements of approximately $340 million.86

On March 27, 2007, Olesnyckyj settled all civil charges brought by the SEC. Without admitting or denying the Commission’s allegations, Sorin consented to the entry of a final judgment permanently enjoining him from further violations of the Exchange Act and the entry of an order permanently prohibiting him from acting as an officer or director of any public company. In addition, in an administrative proceeding, the SEC permanently suspended Olesnyckyj from practicing before it as an attorney. Olesnyckyj also pled guilty to all criminal charges and has agreed to pay a forfeiture of $381,000.87 His sentencing hearing is currently set for August 28, 2008.

c. Kent Roberts

On February 27, 2007, the DOJ brought criminal charges against Kent Roberts, of Dallas, former General Counsel of McAfee, Inc.. The SEC followed with civil charges one day later. While other executives, namely the President and CEO, were released from McAfee in relation to the backdating scandal, only Roberts has been charged thus far.


9

In the criminal proceeding, the United States Attorney’s Office for the Northern District of California, home to the Stock Options Backdating Task Force, charged Roberts in a seven-count indictment including two counts of mail fraud; one count of wire fraud; three counts of making false SEC filings; and one count of falsifying books, records, and accounts. The total maximum penalty for each of these violations is 20 years’ imprisonment.88 The parallel SEC complaint alleges such violations as securities fraud; falsification of books, records, or accounts; false and misleading proxy disclosures; false and misleading filings of beneficial ownership reports; and aiding and abetting the company’s violations of its Exchange Act disclosure, record keeping, and internal control obligations.89

According to the government’s allegations, in both its civil and criminal cases, Roberts joined McAfee, Inc. (or its equivalent predecessor in name) on April 13, 1998 as Director of Legal Affairs. In 2000, Roberts served as VP of Legal Affairs, and was promoted, on January 2001, to General Counsel and Secretary. He served in that capacity until July 2001, when he was promoted again to become one of McAfee’s Executive Vice Presidents.90

On February 14, 2000, before Roberts began to serve as General Counsel, McAfee’s Compensation Committee awarded him an option to purchase 20,000 shares of McAfee common stock at $29.63 per share—McAfee’s actual closing price that day. Later that year, when McAfee’s stock price had fallen below that exercise price, Roberts allegedly accessed McAfee’s computerized system for its employee stock option program and changed the date of his grant to April 14 and lowered the exercise price accordingly. The change potentially increased Roberts’s stock-based compensation by nearly $200,000. In addition, Roberts filed with the SEC an Initial Statement of Beneficial Ownership (Form 3) falsely reporting an exercise price as of April 14, 2000 and an expiration date of April 14, 2010.91

Moreover, Roberts allegedly re-priced a 420,000 share grant to McAfee’s CEO in order to take advantage of a lower stock price one day after the actual grant. The Compensation Committee had approved the

grant on January 15, 2005. When McAfee’s stock underperformed the next day, Roberts wrote to the CEO stating “Let’s price the 420,000 option share at today’s closing price of $25.43.” He then prepared minutes from the January 15 Compensation Committee meeting reflecting the change.92

Finally, Roberts helped prepare and signed proxy statements that contained misleading representations relating to executive compensation—including those regarding the 20,000 share grant he received as well as the 420,000 share grant.93

In March 2007, Roberts pleaded not guilty to all charges.94 Both the civil and criminal cases remain pending.

d. Nancy Heinen On April 24, 2007, the SEC brought an

enforcement action against Nancy Heinen, the former General Counsel of Apple, Inc.. That same day, the Commission filed and simultaneously settled an action against Apple’s former CFO, Fred Anderson, wherein Anderson agreed to a permanent injunction and a total monetary penalty of approximately $3.5 million.95 As of yet, no criminal charges have been brought.

The SEC complaint alleges such violations as fraudulent stock sales; securities fraud; false and misleading proxy disclosures; falsification of accounting records; false and misleading statement to the company’s accountants; false and misleading filings of beneficial ownership reports; and aiding and abetting the company’s violations of its Exchange Act disclosure, record keeping, and internal control obligations.96

According to the government’s allegations, at the time of the events in question, Heinen was Senior Vice President, General Counsel, and Corporate Secretary at Apple, Inc.. She had the responsibility of overseeing Apple’s legal group, as well as preparing and certifying the minutes of Apple’s Board and committee meetings.

Like most in the technology sector, Apple made liberal use of stock option plans as a form of employee compensation. But at issue in this case are only two of the multitude of grants made by Apple during the late 1990’s and early 2000’s. The first questionable grant was supposedly made on January 17, 2001 to the entire Executive Team, which included Heinen. The second


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grant in question was made on October 19, 2001 to Steve Jobs.97

The first grant in question was finalized in early 2001; it included 4.8 million options to six members of Apple’s Executive team, including 400,000 stock options for Heinen. The Board had begun considering the possibility for such a grant in late 2000. On January 30, 2001, Heinen wrote to Jobs that to “avoid any perception that the Board was acting in appropriately [sic] for insiders prior to Macworld announcements, I suggest we use Jan. 10, the day after your Macworld keynote, at $16.563. That was one of the lowest closes of the month . . . .” The next day Heinen revised her recommendations, suggesting that January 17 or January 22 be used instead. After Anderson and Jobs had agreed to the date, Heinen prepared false reports to be submitted to the Board for their approval. She directed Apple’s Legal Department to draft a unanimous written consent for Board members to sign; the consents contained a grant date of January 17 and a strike price of $16.813. Heinen allegedly knew that no such Board action was actually taken on that date. The Executive Team received their options on February 7, 2001 when Apple’s stock closed at $20.75. As a result of Heinen’s actions the Executive Team received 4.8 million options that were in-the-money by approximately $3.94 per share.98

The second grant in question was given only to Steve Jobs. On August 29, 2001, Apple’s Board granted Jobs 7.5 million stock options. Shortly thereafter, Jobs became dissatisfied with the vesting schedule. As a result, Apple missed its Form 4 filing deadline and, as of the close of its fiscal year in September, had not yet disclosed the grant to its auditors. To circumvent this problem, the options were re-granted. On December 17, Heinen forwarded a spreadsheet to Apple’s Compensation Committee detailing the prior three months of closing prices and recommending certain dates to which Jobs’s grant could be backdated. On December 18, an agreement was reached between Jobs and the Compensation Committee—whereby the grant date would be reported as of October 19. To substantiate the October grant date, Heinen had fictitious minutes for a “Special Meeting” of the Board of Directors prepared. Heinen reviewed and signed the

minutes as Corporate Secretary, certifying that they were accurate. As a result, Apple underreported its executive compensation to Jobs by approximately $20.3 million.99

In addition to preparing false reports and minutes, Heinen allowed Apple’s quarter and annual reports to falsely report its executive compensation. Similarly, misleading and false statements were made in Apple’s proxy solicitations and in representations to Apple’s outside auditors.100

In order to prove the requisite scienter, the complaint avers that, throughout the relevant period, Heinen understood the accounting and disclosure implications of in-the-money options. In addition, Heinen personally profited from the first backdated transaction, reaping approximately $1.6 million in in-the-money grants.101

Heinen denies all charges brought by the SEC. And while Jobs has admitted to being aware that favorable grant dates were being selected, he has denied understanding the implications of such.

e. Susan Skaer The SEC has also brought charges

against Susan Skaer, former General Counsel of Mercury Interactive, L.L.C., a market leader in automated software quality assurance and, due to a recent acquisition, a subsidiary of Hewlett-Packard. The SEC also brought charges against the company itself, former Chairman and CEO Amnon Landan, and former CFOs Sharlene Abrams and Douglas Smith. The company has recently reached a settlement, in which it agreed to a permanent injunction and a civil penalty of $28 million.102

The complaint, filed in the Northern District of California on May 31, 2007, alleges that the company, acting through its senior officers, backdated 45 different stock option grants. Of those grants, 21 were approved by the company’s Compensation Committee at the recommendation or with the direct participation of Skaer. The complaint alleges such violations as securities fraud; falsification of books, records, or accounts; false and misleading statement to the company’s accountants; false and misleading proxy disclosures; false and misleading filings of beneficial ownership reports; and aiding and abetting the company’s violations of its Exchange Act disclosure, record keeping, and internal control obligations.103


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According to the government’s allegations, Mercury, like many technology start-ups in the 90’s, experienced substantial growth after its initial public offering in October of 1993. As part of its employee retention plan, it granted employee and executive stock options approximately once a year from 1998 to 2005. The company also made numerous grants to new employees throughout those years. The complaint alleges that Skaer exerted substantial influence over the pricing of all such options. Skaer not only assisted the company’s CFOs in selecting favorable historic dates for the backdated grants, but also prepared false documentation memorializing such grants. The documents Skaer prepared included falsified unanimous written consents and meeting minutes; false Forms 4 reporting the grants to the Commission; and proxy statements, annual, and quarterly reports, which made false disclosures associated with the backdating.104

One particular grant illustrates Skaer’s role in the scheme. Executives, including Skaer, initially targeted December 3, 2001 as the grant date for an employee grant being assembled for late December or early January. Documents memorializing consents to such a grant were created on January 7. Yet a down-turn in the company’s stock on January 19, followed by a sharp up-tick four day later, led Smith and Landan to reconsider the grant date. The next day, Skaer told the company’s HR department that “the word is that they have ‘locked’ on yesterday’s closing price for the employees and execs . . . I think we should wait and see at least until the board meeting.” Skaer wanted to wait and see because she “really didn’t want [the stock option committee] to have to redo this all a third time.” The grant was actually approved by the board on February 12, 2002, yet the minutes of the meeting do not reflect such. The next day Skaer prepared and circulated written consents containing a grant date of January 22, 2002. Filings to the SEC representing the January grant date were also prepared at her direction.105

In order to prove the requisite scienter, the complaint avers that, throughout the relevant period, Skaer understood the accounting and disclosure implications of awarding in-the-money options. In particular, the complaint

alleges that, in connection with two merger transactions in 2001 and 2003, where Mercury acquired smaller companies, Skaer explained to other broad member that the granting of in-the-money options to new employees would incur compensation expenses for the company. Nonetheless, Skaer either helped effectuate and prepared misleading documents for a total of 45 option grants to executives and employees—every one having been backdated to a relative low point in the company’s stock and many issued to Skaer herself.106

f. Lisa Berry More recently, the SEC initiated an

enforcement action against Lisa C. Berry, former general counsel to two companies under investigation for option backdating: KLA-Tencor Corporation and Juniper Networks. The SEC has alleged that “Ms. Berry ‘devised’ the backdating practice at KLA, and then took the practice to Juniper.107

In its press release relating to this action, the SEC indicated that general counsel are primary targets of the Commission’s investigations: “‘The Commission's action today confirms that attorneys are no less bound by the securities laws than other public company executives,’ said Linda Chatman Thomsen, the SEC's Director of Enforcement. ‘At both KLA and Juniper, Ms. Berry was in a unique position to insure that the companies accurately disclosed their stock option expenses; instead, she facilitated their fraud on investors.’”108

The SEC alleges that Berry profited from backdated options and violated, or aided and abetted in the violation, of Exchange Act sections 10(b), 14(a) and other provision.109 Berry moved to dismiss the claims based upon statutes of repose as to certain claims and the Commission’s failure to adequately plead scienter.110 Berry was successful on her repose arguments, but the court recognized that the SEC has a lesser burden of pleading scienter than does a private plaintiff.111 The court granted the motion in part and denied in part, giving the SEC an opportunity to amend to cure any defects in its complaint.112

g. David Dull On May 14, 2008, in its most recent

action against a general counsel, the SEC alleges that Dull, general counsel of Broadcom, “knew and participated in the


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fraud,” and that he “instructed his subordinate to prepare, and reviewed and approved false board and compensation committee documents to conceal two backdated grants in 2001.”113

The SEC alleged that Dull personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $1.8 million. Like Berry and other general counsel, the SEC claims that Dull’s conduct gives rise to claims under sections 10(b), 14(a) and other provisions of the Exchange Act.

3. Patterns Due to the level of scienter the government must prove for securities violations, the SEC and DOJ have thus far brought actions only where they believe the facts clearly demonstrate such intent. Perhaps most importantly, the seven general counsel who have been charged to date all personally profited from the backdating schemes in question. The majority of these individuals received multiple grants over a broad span in time. Nancy Heinen received a single, but substantial, backdated grant. Lastly, for his own profit Kent Roberts backdated an at-the-money grant that had previously been issued to him. All seven individuals also prepared, or directed another to prepare, false or misleading documents regarding backdated options. While these actions are generally assumed to be part of general counsels’ normal duties, it is important to note that individuals will be held accountable for such actions only when they knew, or should have known, that the information contained in such documents was false. This requirement is easily met in connection to Form 4 filings, unanimous written consents, and minutes, where general counsel knew that the grant date contained therein was not accurate. But the government will likely have a much more difficult time proving that the information contained in proxy statements, quarter and annual reports, and other SEC filings was also intentionally misleading. In order to establish such, the government will have to show that an individual was aware of the accounting, tax, and disclosure consequences of in-the-money options; an averment that the government has made explicit in its more recent actions against Myron Olesnyckyj, Nancy Heinen, Susan Skaer, Lisa Berry, and David Dull. Yet these individuals can argue, perhaps persuasively, that the prevalence of backdating during the years in question gave the practice an air of propriety. The lack of SEC action on this issue—arguable acquiescence to the practice—may have

convinced some that backdating was not, in the eyes of the government, improper. These arguments will likely surface for the first time in the trial of Brocade’s CEO Gregory Reyes. Whether or not courts buy into argument’s premise is something that will need to be monitored. Lastly, it might be important to note that five of the seven attorneys charged thus far have also served their respective companies in positions other than general counsel. Much of Sorin’s problematic activities resulted from his role as a liaison to Comverse’s Compensation Committee. During the time frame in question, Olesnyckyj served as general counsel, secretary, and vice president. Both Heinen and Roberts similarly served as Corporate Secretary. While these facts may not be the most probative, the added responsibility taken on by in-house counsel, beyond their traditional roles as gatekeepers, may have an effect on the manner in which government enforcement agencies view such individuals. Based on the above similarities, the line between actionable and non-actionable conduct would seem to be two-fold. First, culpable general counsel must have been acting partially for their own monetary benefit. Second, culpable individuals—whether in their role as general counsel or in the combined role of general counsel and officer—must have intentionally created false documentation. Absent these two elements, it seems unlikely that enforcement agencies will waste time and effort on a case in which intent may be difficult to prove. III. RECOMMENDED COURSES OF ACTION Even if one is not worried about potential government action in-house counsel must be concerned over the spate of shareholder suit filed for alleged backdating. There are steps that current general counsel can take to protect both themselves and their companies from the fallout of this scandal. First and foremost, it is imperative that corporate counsel recognize the heightened level of scrutiny that enforcement agencies are now placing upon them, both in connection with stock option backdating and in much broader contexts. As mentioned above, the SEC now views attorneys not only as gatekeepers—individuals lending their professional gravitas to transactions and providing legitimacy for investors—but also as individuals in a position to affect, for better or worse, the culture of their respective companies. Where in-house counsel has affected that culture for the worse, enforcement agencies will take action. In the backdating context, cooperation is key. Most of companies involved have self-reported their violations and those who have done so have and will continue to receive measured leniency from the government. To that end, it is important to review your


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company’s past and present policies and procedures regarding stock option grants. First determine who has the authority to issue such grants: the board of directors, a compensation committee, and/or an executive officer. Next, determine when options can be granted: are they limited to certain times in the year or to certain points in the employment cycle? Also determine what exact procedures must be followed. Finally, to the extent that any of the company’s policies or procedures lend themselves to abuse, recommend changes. It is of paramount importance that past stock option grants be investigated. The period of most concern is from the mid-1990s to 2002. Be sure to review all documentation on such grants and compare the recorded grant dates to the company’s market performance at and around those dates. If options were granted at or near market lows, further action may be required. Also consider whether the stock climbed precipitously immediately after the grant date. Such evidence could point to a potential spring-loading practice. Though government agencies have not yet brought any enforcement actions on a spring-loading theory—due largely to the difficulty of proving intentional malfeasance given the multitude of factors that surround the announcement of beneficial news—such actions may be forthcoming. If questionable grants have been identified report the problem to the company’s Board and if the grants were “material,’ report them to the SEC and DOJ. Finally, properly account for an in-the-money grants by issuing financial restatements and determine whether back taxes are owed on executive compensation. IV. CONCLUSION Since the options backdating scandal broke in 2006, government enforcement agencies have spent the majority of their time and resources merely investigating the practice. Yet, the pace at which charges have been brought against both companies and individuals has remained constant over the past two years. To date, seven separate enforcement actions have been brought against general counsel for their part in the scandal. Although seven is too small a sample for a comprehensive study, some similarities do exist between those actions brought against in-house counsel thus far. First, in-house counsel charged to date have all profited from their respective companies’ backdating practices. Second, all seven attorneys involved personally participated in the preparation of documents that contained false or misleading representations. Finally, in addition to their roles as general counsel, most of those in-house counsel

caught up in the scandal also held other positions in their companies. While these similarities do not necessarily create a bright line between actionable and non-actionable conduct, they help illustrate the types of action that enforcement agencies believe can be successfully prosecuted given the level of intent that must be proven. Yet even if one’s past actions do not rise to this level of culpability, steps can and should be taken to protect companies from future damage from the backdating scandal, namely self-investigation and disclosure.


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Table 1. Companies involved in options backdating114 Company

Value of In-The-Money

Option115

Class Action

Suit

Derivative Suit

SEC or DOJ Investigation

Restatement of Financials

Internal Investigation

Executive Departure

1. Able Energy x x 2. Actel 7.84 x x x x x 3. Active Power x x x 4. Activision 66.45 x x x x 5. Adobe System 56.51 x x 6. Affiliated Computer Systems 46.84 x x x x x 7. Affymetrix x x x 8. Agile Software x x x 9. Alkermes x x x x 10. Altera 86.62 x x x x x 11. American Technology x x 12. American Tower 13. Amkor Technology x x x x x 14. Analog Devices 99.96 x x 15. Apollo Group 41.36 x x x x x x 16. Apple 48.45 x x x x x x 17. Applied Micro Circuits 114.52 x x x x 18. Applied Signal Technology x x 19. Arbinet x x 20. Arthrocare 11.24 x x 21. Aspen Technology 11.76 x x x x 22. Asyst Technologies x x x x 23. Atmel 8.55 x x x x 24. Autodesk 33.40 x x x x 25. Barnes & Noble 73.32 x x x 26. BEA Systems x 27. Bed, Bath & Beyond 88.74 x x x x 28. Biomet 3.27 x 29. Black Box 35.07 x x 30. Blue Coat Systems x x x x 31. Boston Communications Group 5.91 x x x x 32. Broadcom 170.26 x x x x x 33. Brocade Communications

Systems 119.78 x x x x x x 34. Brooks Automation 3.83 x x x x x x 35. CA 340.65 x x x 36. Cablevision x x x x 37. Cardinal Health 87.05 x 38. Caremark Rx 68.98 x x 39. CEC Entertainment 16.61 x x x 40. Ceradyne 0.37 x x x x 41. Children’s Place 4.32 x 42. Chordiant Software x x x 43. Cirrius Logic 4.04 x x x x 44. Cisco Systems 677.83 x 45. Citrix 67.33 x 46. Clorox 60.54 x x x 47. CNET Networks x x x x x 48. Coherent, Inc. 8.06 x x 49. Computer Sciences 46.97 x x x 50. Comverse Technology 208.80 x x x x x x 51. Corinthian Colleges 16.10 x x x 52. Costco Wholesale 51.82 x x 53. Crown Castle Int’l x x x 54. Cyberonics 12.16 x x x x x 55. Dean Foods 19.88 x x 56. Delta Petroleum x x x 57. Digital River x x x x 58. Ditech Networks .86 x x 59. Dot Hill Systems x 60. Electronic Arts 94.00 x x x 61. Electronics for Imaging x x x x 62. Embarcadero Technologies x x x 63. Emcore x x x 64. Endocare x x


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Company

Value of In-The-Money Option

Class Action

Suit

Derivative Suit




Executive Departure

65. Engineered Support Systems x 66. EPIX Pharmaceuticals x 67. EPlus x x 68. Equinix x x x 69. Exar 20.42 x 70. Extreme Networks 51.08 x x 71. F5 Networks 1.13 x x x x 72. Family Dollas 14.51 x x x 73. Finisar x x 74. First American 7.53 x x x 75. Forrester Research x x 76. Fossil 3.65 x x x 77. Foundry Networks x x x x 78. GAP 444.47 x 79. Getty Images x x 80. GlenAyre x x 81. Hansen Natural 0.76 x x x 82. HealthSouth 136.09 83. HCC Insurance Holdings 11.00 x x x x 84. Home Depot 44.79 x x x x 85. Hot Topic 11.82 x 86. Hovnanian Enterprises x 87. i2 Technologies x x 88. iBasis x x x x 89. Insight Enterprises 12.73 x x x 90. Integrated Silicon Solution x x x 91. Intuit 52.48 x x 92. J2 Global x x 93. Jabil Circuit 56.19 x x x x 94. Juniper Networks 154.87 x x x x x 95. Jupitermedia x x 96. KB Home 32.48 x x x x 97. Keithley 14.14 x x x 98. King Pharmaceuticals 6.43 x x 99. KLA-Tencor 86.29 x x x x x x 100. Knobias x 101. Kopin 22.85 x x 102. KOS Pharmaceuticals x x x 103. K-V Pharmaceutical Co. x x 104. L-3 Communications Holdings 113.63 x x 105. Linear Technology 107.35 x x 106. Macrovision 13.63 x x 107. Management Network Group x x 108. Marvell Technology Group x x x x x 109. Mattel 35.07 x x x 110. Maxim Integrated Products 184.75 x x x 111. McAfee Inc 88.48 x x x x x 112. Meade Instruments 3.34 x x x x 113. Medarex x x x x x 114. Mercury Interactive 95.12 x x x x x x 115. Michaels Stores 21.35 x x x x 116. Microlslet x x 117. Microsoft 334.92 118. Microtune x x x 119. Mips Technologies 20.08 x x x x 120. Moldflow x x 121. Molex 14.15 x x 122. Monster Worldwide 79.77 x x x x x 123. msystems x x x x 124. Nabi x 125. Nabors Industries 230.06 x x 126. Nephros x x 127. Network Appliance 233.21 x x 128. Newpark Resources x x x x 129. Novell 13.62 x x 130. Novellus Systems 48.61 x x


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131. Nvidia 104.67 x x x 132. Nyfix 11.82 x x x

Company

Value of In-The-Money Option

Class Action

Suit

Derivative Suit




Executive Departure

133. O.I. Corporation x x 134. Openwave Systems 35.36 x x x x 135. Parametric 11.58 x 136. Par Pharmaceutical 6.00 x 137. Pediatrix 30.49 x x x x 138. Peet’s Coffee 0.82 x x x 139. Pixar x x 140. PMC Sierra 136.97 x x x x 141. Pool Corp 9.25 x 142. Power Integrations 11.63 x x x x x 143. Progress Software 22.59 x x x x 144. Quest Software x x x x x x 145. QuickLogic x x x 146. Rambus 56.86 x x x x x 147. Redback Networks 37.32 x x x 148. Renal Care 28.36 x 149. Research In Motion x x x 150. Restoration Hardware x x 151. RSA Security 34.53 x x 152. SafeNet x x x x x x 153. Sanmina-SCI 122.18 x x x x x 154. Sapient 23.57 x x x 155. SBA Communications x x 156. ScanSource x 157. Selectia x 158. Semtech 58.04 x x x x 159. Sepracor 124.06 x x x x 160. Sharper Image x x 161. Shaw Group 9.73 x x 162. Sigma Designs x x x 163. Silicon Images x x 164. Silicon Storage Technology x 165. Sonus Networks x x 166. Stolt-Nielsen x x 167. SPSS 16.00 x x 168. SteelCloud x x 169. Sunrise Senior Living 8.97 x x x x 170. Sunrise Telecom x x x 171. Sun-Times Media x x 172. Sycamore Networks x x x x 173. Sysview Technology 174. Take-Two Interactive Software 6.43 x x x x x 175. TETRA Technologies 3.18 x x x 176. The Cheesecake Factory 15.31 x x x x 177. Third Wave x x 178. THQ 21.30 x x x 179. Transaction Systems 1.89 x x 180. Trident MicroSystems 2.93 x x x x x 181. Tyco 124.79 x x 182. Tyson Foods 2.31 x 183. Ulticom x x x x 184. UnitedHealth 369.83 x x x x x x 185. Valeant Pharmaceuticals 45.09 x x x x 186. Verint x x 187. VeriSign x x x 188. ViaSat 4.33 x x 189. Vitesse Semiconductor 97.94 x x x x x x 190. Waste Connections, Inc. 10.48 x 191. Western Digital 6.40 x x 192. Westwood One 45.54 x 193. Wet Seal 7.68 x x 194. Wind River 20.82 x 195. Witness Systems x x x x x x 196. Xilinx 195.04 x x x x


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197. Zarlink x x 198. Zoran x x x x


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1 Dr. Sunil Panikkath, Matthew Evans, Dr. Patrick Conroy, Erik Stettler, & Nathan Saperia, Options Backdating: A Primer (Oct. 5, 2006), http://www.nera.com/image/PUB_Backdating_Part_1_Primer_SEC1381_final.pdf. 2 Id. 3 Id. 4 15 U.S.C. § 7201 et seq. 5 Officers, directors, and owners of more than ten percent of a company were required to make individual filings on SEC Forms 3, 4, and 5 about all transactions involving the company’s stock. The deadline for filing a Form 4 was ten days after the end of the month; whereas From 5 filings were due forty-five days after the end of the fiscal year. Any grant approved by two independent directors or a shareholder vote (and thus most stock option grants) were exempt from Form 4 filing and qualified as Form 5 transactions. Paul Hinton, Dr. Thomas Porter & Dr. Patrick Conroy, Options Backdating: Accounting, Tax, and Economics (Nov. 30, 2006), http://www.nera.com/image/PUB_Backdating_Part_2_Primer_SEC1502_final.pdf. 6 Id. 7 Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). 8 Christopher Cox, Chairman, U.S. Securities and Exchange Commission, Testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs (September 6, 2006); see also I.R.C. § 422 (any gain on options granted at-the-money is taxed as a capital gain rather than as ordinary income when the options are exercised); I.R.C. § 162(m). 9 I.R.C. § 162(m). 10 See Joseph W. Bartlett, Plain Talk About Stock Options: An Outline of a New Model (Part I), (Nov. 14, 2006), http://www.vcexperts.com/vce/news/buzz/archive_view.asp?id=411. 11 Nancy Kestenbaum, Paul Krieger & Dan Sella, When Is Dating Illegal? Stock Options Investigations: Cases and Issues, 1599 PLI/Corp 27, 31 (2007). 12 Public Company Accounting Reform and Investor Protection (Sarbanes-Oxley) Act §403(a), 15 U.S.C. § 78(p) (2007). 13 17 C.F.R. §§ 240.16a-3, 249.103-05, 274.203 (2002). 14 Order Approving NYSE and Nasdaq Proposed Rule Changes and Nasdaq Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 Thereto Relating to Equity Compensation Plans, Release No. 34-48108 (June 30, 2003); see also NYSE, Inc., Listed Company Manual § 303A(8) (2003); Nasdaq, Inc., NASD Rule 4350(i) (2003). 15 Testimony by Christopher Cox, Chairman, supra note 8. 16 Financial Accounting Standards Board’s Statement of Financial Accounting Standards, Statement No. 123(R) (revised 2004), Share-Based Payment. 17 Kestenbaum, supra note 11 at 29. 18 Erik Lie, On the Timing of CEO Stock Option Awards, 51 MANAGEMENT SCIENCE 802 (2005). 19 Charles Forelle & James Bandler, The Perfect Payday, WALL ST. J., Mar. 18, 2006, at A1. 20 See Dr. Renzo Comolli, Dr. Branko Jovanovic, Dr. Patrick Conroy & Erik Stettler, Options Backdating: The Statistics of Luck (Mar 8, 2007), http://www.nera.com/image/PUB_Backdating_PartIII_Final.pdf. 21 Kestenbaum, supra note 11 at 29-30. 22 Linda Thomsen, Director, Division of Enforcement, U.S. Securities and Exchange Commission, Testimony before the U.S. Senate Committee on Finance (Sept. 6, 2006).


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23 Id. 24 Press Release, U.S. Att’ys Office, N.D. Cal., U.S. Attorney Kevin Ryan Creates Local Stock Option Backdating Task Force (July 13, 2006), http://sanfrancisco.fbi.gov/dojpressrel/2006/sf071306.htm. 25 Paul J. McNulty, Deputy Attorney General, United States Department of Justice, Testimony before the U.S. Senate committed on Finance (Sept. 6, 2006). 26 Those local attorneys coordinating their own investigations include state attorneys in Minnesota and Ohio, as well as local district attorneys such as the Manhattan District Attorney’s Office. Kestenbaum, supra note 11 at 30. 27 For example, in May 2006, a California court granted summary judgment against the SEC in an enforcement action against former Gateway executive Jeffery Weitzen. The action alleged violations of the antifraud and reporting provisions of the securities laws, but the complaint was dismissed when the SEC failed to present any evidence of, inter alia, scienter or bad faith on the part of Mr. Weitzen. In February 2006, the SEC lost summary judgment in an insider trading case against J. Thomas Talbot, a director for Fidelity National Financial, Inc.. In August 2006, the Commission lost yet another summary judgment regarding insider trading allegations against executives of Heartland Advisors, Inc.. See SEC v. Todd, No. 03-CV-2230 BEN, 2006 WL 1564892, at *7-8 (S.D. Cal. May 30, 2006); SEC v. Talbot, 430 F. Supp. 2d 1029, 1045 (C.D. Cal. Feb. 14, 2006); SEC v. Heartland Abvisors, Inc., No. 03-C-1427, 2006 WL 2547090, at *6 (E.D. Wis. Aug. 31, 2006). 28 The universe of companies considered are those identified by the Wall Street Journal’s Options Scorecard, Reuters Factbox, NERA research and news searches as of June 20, 2007. 29 Value of in-money-options granted by those companies, for which data was available, who have issued financial restatements or announced the possibility of a restatement. The option values are determined by averaging the value both exercisable and unexercisable in-the-money options from 1997 through 2002. See also Comolli supra note 20 at 9-12. 30 15 U.S.C. § 78j(b); 17 C.F.R. § 240, 10b-5. 31 See generally Aaron v. SEC, 446 U.S. 680, 697-700 (1980). 32 SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001); Dirks v. SEC, 681 F.2d 824, 844 (D.C. Cir. 1982), rev’d on other grounds, 463 U.S. 646 (1983). 33 See SEC v. MacDonald, 699 F.2d 47, 50 (1st Cir. 1983); Wechsler v. Steinberg, 733 F.2d 1054, 1058 (2nd Cir. 1984); SEC v. Tandem Management Inc., No. 95 Civ. 8411, 2001 WL 1488218, at *9 (S.D.N.Y. Nov 21, 2001); SEC v. Burns, 614 F.Supp. 1360, 1362 (S.D. Cal. 1985); SEC v. International Heritage, Inc., 4 F.Supp.2d 1368, 1374 (N.D.Ga. 1998). 34 See generally U.S. v. Dixon, 536 F.2d 1388, 1397 (2d Cir. 1966). 35 Press Release, U.S. Securities and Exchange Commission, SEC Charges Former Brocade CEO, Vice President, and CFO in Stock Option Backdating Scheme (July 20, 2006), http://www.sec.gov/litigation/litreleases/2006/lr19768.htm. 36 Press Release, U.S. Attorney’s Office, N.D. Cal., U.S. Attorney’s Office and SEC Separately Charge Former Brocade CEO and Vice President in Stock Option Backdating Scheme (July 20, 2006), http://sanfrancisco.fbi.gov/dojpressrel/2006/ sf072006.htm. 37 Press Release, U.S. Securities and Exchange Commission, Brocade to Pay $7 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating (May 31, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20137.htm. 38 Press Release, U.S. Securities and Exchange Commission, SEC Charges Former Comverse Technology, Inc. CEO, CFO, and General Counsel in Stock Option Backdating Scheme (Aug. 9, 2006), http://www.sec.gov/litigation/litreleases/2006 /lr19796.htm; Press Release, U.S. Attorney's Office for the Eastern District of New York, Former Executive of Comverse Technology Inc. Charged with Backdating Millions of Stock Options and Creating a Secret Stock Options Slush Fund (Aug. 9, 2006), http://www.usdoj.gov/opa/pr/2006/August/06_odag_517.html. 39 Press Release, U.S. Securities and Exchange Commission, David Kreinberg, Former CFO of Comverse Technology, Inc., Agrees to Settle SEC Charges in Options Backdating Case (Oct. 24, 2006), http://www.sec.gov/litigation/litreleases/ 2006/lr19878.htm; Press Release, U.S. Securities and Exchange Commission, SEC Settles Options Backdating Case Against William F. Sorin, Former General Counsel of Comverse Technology, Inc. (Jan. 10, 2007), http://www.sec.gov/litigation/ litreleases/ 2007/lr19964.htm

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40 Press Release, U.S. Attorney’s Office, E.D.N.Y., David Kreinberg, Former CFO of Comverse Technology, Inc. Please Guilty to Securities Fraud Charges (Oct. 24, 2006), http://www.usdoj.gov/usao/nye/pr/2006/2006Oct24a.html; Press Release, U.S. Attorney’s Office, E.D.N.Y., William F. Sorin, Former General Counsel of Comverse Technology, Inc., Pleads Guilty to Securities Fraud Charge (Nov. 2, 2006), http://www.usdoj.gov/usao/nye/pr/2006/2006Nov02b.html. 41 Stephen Taub, First Prison Term in Backdating Scandal, CFO.com (May 11, 2007), http://www.cfo.com/article.cfm/9172725/ c_9172279?f=home_todayinfinance. 42 November 2, 2006 Press Release, supra note 41. 43 Press Release, U.S. Securities and Exchange Commission, SEC Files Actions Against Former CFO and Former Controller of Engineered Support Systems, Inc. Relating to Options Backdating Scheme (Feb. 6, 2007), http://www.sec.gov/litigation/ litreleases/2007/lr19990.htm. 44 Id. 45 Dave Cook & Stephen Taub, Ex-CFO at Defense Contractor Indicted, CFO.com (March 27, 2007), http://www.cfo.com/article.cfm/8915660/c_8914291?f=archives&origin=archive. 46 Id. 47 Press Release, U.S. Securities and Exchange Commission, SEC Charges Former General Counsel of Monster Worldwide, Inc. for Role in Options Backdating Scheme (Feb. 15, 2007), http://www.sec.gov/litigation/litreleases/2007/lr2004.htm. 48 Press Release, U.S. Securities and Exchange Commission, SEC v. Myron F. Olesnyckyj (March 27, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20056.htm. 49 Press Release, U.S. Securities and Exchange Commission, SEC Charges Former General Counsel of McAfee, Inc. for Fraudulently Re-Pricing Option Grants (Feb. 28, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20020.htm; Press Release, U.S. Attorney’s Office, N.D. Cal., Former McAfee General Counsel Indicted for Stock Options Backdating (Feb. 27, 2007), http://www.usdoj.gov/usao/can/press/2007/2007_02_27_roberts.indictment.press.html. 50 Press Release, U.S. Securities and Exchange Commission, SEC Charged Former Apple General Counsel for Illegal Stock Option Backdating (April 24, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20086.htm. 51 Press Release, U.S. Securities and Exchange Commission, SEC Settles with Mercury Interactive and Sues Former Mercury Officers for Stock Option Backdating and Other Fraudulent Conduct (May 31, 2007), http://www.sec.gov/litigation/litreleases/ lr20136.htm. 52 Press Release, U.S. Securities and Exchange Commission, SEC Charges Former General Counsel of KLA-Tencor And Juniper Networks For Fraudulent Stock Option Backdating, Juniper Settles Fraud Charges Brought by Commission (Aug. 28, 2007), http://www.sec.gov/news/press/2007/2007-170.htm. 53 See section II.C.2. (f), infra. 54 SEC v. Nicholas, No. SA CV08-539 CJC, Complaint (“Dull Complaint”) (May 14, 2008) at ¶ 2-3. 55 Id. ¶ 1. 56 U.S. Securities and Exchange Commission, Study and Report on Violations by Securities Professionals, http://www.sec.gov/news/studies/sox703report.pdf. 57 Of the 49 cases brought against attorney during that time frame 14 were for insider trading and 17 for securities offerings violations. Id. 58 David W. Porteous, Christopher S. Griesmeyer & Christine S. Bautista, SEC Enforcement Actions Against General Counsel Since Sarbanes-Oxley, (2007), http://www.lplegal.com/files/Publication/8e943e40-52e6-4640-b6fc-04396a724a9a /Presentation/ PublicationAttachment/218c5ca6-80c7-422f-bea8-0e8507e9b4f1/SEC_Enforcement_040307.pdf. 59 Id.


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60 Stephen M. Cutler, Director, Division of Enforcement, U.S. Securities and Exchange Commission, Speech at the University of California, Los Angeles School of Law, “The Themes of Sarbanes-Oxley as Reflected in the Commission’s Enforcement Program” (Sept. 20, 2004). 61 John L. Coffee, Jr., Understanding Enron: “It’s About the Gatekeepers, Stupid,” 57 Bus. Lawyer 1403, 1405 (2002). 62 Id. 63 Stephen M. Cutler, Director, Division of Enforcement, U.S. Securities and Exchange Commission, Speech at the Second Annual General Counsel Roundtable, “Tone at the Top: Getting it Right” (December 3, 2004), http://www.sec.gov/news/speech/spch120304smc.htm. 64 Id. 65 Id. 66 Christopher Cox, Chairman, U.S. Securities and Exchange Commission, Address to the 2007 Corporate Counsel Institute (Mar. 8, 2007). 67 Giovanni P. Prezioso, General Counsel, U.S. Securities and Exchange Commission, Remarks before the Spring Meeting of the Association of General Counsel (April 28, 2005), http://www.sec.gov/news/speech/spch042805gpp.htm. 68 Cutler, Speech supra note 58. 69 Id. 70 August 9, 2006 Press Release, U.S. Attorney’s Office, supra note 39. 71 See SEC v. Alexander, CV-06-3844 (E.D.N.Y. Aug. 9, 2006) (“Sorin Complaint”) (alleging violations of 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78n(a) and 17 C.F.R. § 240.14a-9; 15 U.S.C. § 78m(b)(5); 17 C.F.R. § 240.13b2-11; and 17 C.F.R. § 240.13b2-2). 72 Sorin Complaint, ¶¶ 39-41, 43. 73 Sorin Complaint, ¶¶ 7, 51 74 Sorin Complaint, ¶¶ 44, 87-90, 92, 99, 102-105 75 Sorin Complaint, ¶ 114. 76 Sorin Complaint, ¶ 75-77. 77 January 10, 2007 Press Release, U.S. Securities and Exchange Commission, supra note 40. 78 Taub, supra note 42. 79 Press Release, U.S. Attorney’s Office, S.D.N.Y., Former General Counsel of Monster Pleads Guilty to Securities Fraud in Connection with Backdating of Stock Options (February 15, 2007). 80 See SEC v. Olesnyckyj, 07-CV-1176-HAB (S.D.N.Y. Feb. 15, 2007) (“Olesnyckyj Complaint”) (alleging violations of 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78n(a) and 17 C.F.R. § 240.14a-9; 15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1; and 17 C.F.R. § 240.13b2-2). 81 Olesnyckyj Complaint, ¶¶ 12, 24-25, 37-40, 42, & 44 82 Olesnyckyj Complaint, ¶¶ 31-32. 83 Olesnyckyj Complaint, ¶¶ 58, 69-70. 76-77, & 79-81. 84 Olesnyckyj Complaint, ¶¶ 15, 29, 68, & 78.


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85 Olesnyckyj Complaint, ¶ 55. 86 February 15, 2007 Press Release, supra note 49. 87 March 27, 2007 Press Release, supra note 50. 88 February 27, 2007 Press Release, supra note 51. 89 See SEC v. Roberts, No. 1:07-CV-00407 (N.D. Cal. Feb. 28, 2007) (“Roberts Complaint”) (alleging violations of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1; 15 U.S.C. § 78n(a) and 17 C.F.R. § 240.14a-9; and 15 U.S.C § 78p(a) and 17 C.F.R. § 240.16a-3). 90 Roberts Complaint, ¶ 7. 91 Roberts Complaint, ¶¶ 13-16. 92 Roberts Complaint, ¶¶ 19-22. 93 Roberts Complaint ¶¶ 25-27, & 28. 94 Ex-McAfee lawyer pleads not guilty in options case, Reuters, March 1, 2007, available at http://www.reuters.com/article/ idUSN0128212320070301. 95 April 24, 2007 Press Release, supra note 52. 96 See SEC v. Heinen, No. 07-CV-2214-HRL (N.D. Cal. April 24, 2007) (“Heinen Complaint”) (alleging violations of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 77q(a); 17 C.F.R. § 240.13b2-2; 15 U.S.C § 78m(b)(5); 17 C.F.R. § 240.13b2-1; 15 U.S.C. §78n(a) and 17 C.F.R. § 240.14a-9; and 15 U.S.C. § 78p(a) and 17 C.F.R. § 240.16a-3). 97 Heinen Complaint, ¶¶ 12, 15, & 33. 98 Heinen Complaint, ¶¶ 15-21. 99 Heinen Complaint, ¶¶ 34-42. 100 Heinen Complaint, ¶¶ 22-27, 46-48. 101 Heinen Complaint, ¶¶ 29-32. 102 May 31, 2007 Press Release, supra note 53. 103 See SEC v. Mercury Interactive, LLC, No. 07-2822-RS (N.D. Cal. May 31, 2007) (“Skaer Complaint”) (alleging violations of 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78m(b)(2)(A); 15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1; 17 C.F.R. § 240.13b2-2; 15 U.S.C. § 78p(a) and 17 C.F.R. § 240.16a-3; and 15 U.S.C. § 78n(a) and 17 C.F.R § 240.14a-9). 104 Skaer Complaint, ¶¶ 15, 22, 25, & 36. 105 Skaer Complaint, ¶¶ 61-63, 65-67, & 72-74. 106 Skaer Complaint, ¶¶ 37-38, 43, & 45. 107 SEC v. Berry, No. C-07-04431 RMW, 2008 WL 2002537 at *1 (N.D. Cal. May 7, 2008). 108 August 28, 2007 Press Release, supra note 54. 109 See generally SEC v. Berry, 2008 WL 2002537. 110 Id.


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111 Id. at * 10. 112 Id. at *13. 113 Dull Complaint ¶ 3. 114 The universe of companies is defined as those identified by the Wall Street Journal’s Options Scorecard, Reuters Factbox and NERA reports. 115 In millions of dollars. Defined as the average of fiscal year-en-in-the-money options from 1997 to 2002. Data from NERA reports and S&P’s ExecuComp Database.