Emails Between General Counsel and CEO Form the Basis for Securities Fraud Claim

When you read the the Compliant filed in SEC v. Roberts (former GC of McAfee), one can readily appreciate why regulators, prosecutors, and litigants in general will continue to demand and fight for production of email from corporations. Here is an excerpt from the Complaint to give a flavor of what the SEC found in these emails dating back to 2002. No charges have been brought against former the CEO of McAfee.

“Roberts Wrongly Re-Priced and Re-Dated a 420,000-Share Option Grant to McAfee’s CEO
19. McAfee’s Compensation Committee met on January 15,2002, and approved a grant of an option to purchase 420,000 shares of McAfee common stock to the CEO. The same day, Roberts sent an email to the CEO and McAfee’s Senior Vice President of Human Resources indicating that the Board had made certain changes to the CEO’s compensation for 2002. Roberts wrote in part: “[The CEO] has been granted a 420,000 share stock option at today’s closing price of $27.19 which vests on January 15, 2005 (1 00% vesting on that date)[.]”

20. On the following day, January 16, after the market had closed, Roberts sent a second email to the CEO and McAfee’s Senior Vice President of Human Resources in which he stated: “Let’s price the 420,000 option shares at today’s closing price of $25.43.”

21. A week later, on January 23,2002, the CEO wrote in an email to Roberts and McAfee’s Senior Vice President of Human Resources: “On January 16 it appears that the stock price finished at $25.43 . . . is this the price that the new options will be set at?? Is that the low for those days after the Board Meeting??’Roberts replied on the same day: “The close on Jan 16 is the right price.”

22. Roberts prepared the minutes from the January 15,2002 Compensation Committee meeting. The minutes falsely state: “The Committee directed that [the CEO] be granted an additional stock option for 420,000 shares on January 16,2002, at the closing price on that date.”
23. Roberts was not authorized to unilaterally change the grant date or exercise price for the CEO’s option grant. Pursuant to McAfee7s shareholder approved stock option plan, Roberts’ changes to the grant date required the approval of McAfee’s Compensation Committee. The Compensation Committee was never told about, and did not approve, Roberts’ decision to re-price this option grant.

24. On December 29,2006, McAfee filed with the Commission a Current Report on Form 8-K in which it disclosed that it had revisedthe grant date for this option to January 15,2002, “the date on which Compensation Committee approval was obtained,” and, in turn, increased the option’s exercise price to $27.19 per share, the closing price of McAfee’s stock on January 15,2002.

Wheels of Justice are Slow but Justice Prevails: Federal Judge Approves Holocaust Victims’ Settlement

It is hard to believe it has taken this long. “This settlement isn’t perfect, but it accomplishes a long-awaited result for many many survivors and their heirs,” Robert A. Swift said.

The amount of the settlement is irrelevant.

SEC Files Fraud Charges Against McAfee’s Former General Counsel and Founder of the Company’s “Ethics First” Committee

Former general counsel of computer-security firm McAfee has been charged with criminal fraud for changing his own stock-option grant to increase its value and attempting to cover up his actions. To make matters worse, he earlier threw another officer, former controller Terry Davis, under a bus and caused Davis to lose his job back in 2003. Davis later pleaded guilty to criminal securities fraud. Roberts led that internal investigation regarding accounting irrregularities that led to Davis’ demise but forgot to tell investigators that Davis also changed the date on Roberts’ options.

For more see SEC Press Release dated February 28, 2007 and its Complaint filed in the U.S. District Court for the District of Columbia dated February 28, 2007.

Public Comment Period is Closed: Proposed Federal Rule of Evidence 502 is Ready for Next Steps…

After hearing two days of testimony in January, the Advisory Committee on Evidence Rules now has a broad range of written public comments on proposed Rule 502, including commentary from the ABA, SEC and numerous other associations, scholars, lawyers and interested parties. The comment period has closed and the Advisory Committee will deliberate on April 12-13, 2007. After that meeting, the Advisory Committee will formulate its recommendations, after which the Judicial Conference will report the new rule to the Supreme Court and then, finally, Congress. Here is the chronology of comments and other written submissions, with the most recent at the bottom.

More information coming soon….

A House of Cards and Jokers are Wild: Former CEO and HR Executive of KB Home Subject of U.S. Attorney Backdating Probe

Today’s Wall Street Journal reports that federal prosecutors in Los Angeles are investigating stock-options backdating at leading home builder KB Home. Apparently prosecutors are inquiring about the conduct of former chief executive officer Bruce Karatz and former human-resources chief Gary Ray.

The lawyer for the former CEO said he is “attempting to persuade [the prosecutor] that Gary Ray did not engage in any wrongdoing and certainly no conscious wrongdoing.” A spokesman for the former head of HR Mr. Karatz declined to comment.

For more see today’s Wall Street Online Journal.

ABA Weighs in on Backdating Debacle: Dear CalPERS, Accused Executives Have Right to Counsel

In response to a letter sent by the California Public Employees’ Retirement System (“CalPERS”) to various companies in 2006 relating to stock option backdating and investigations conducted into allegation of it (the “CalPERS Letter”), the ABA, in a letter sent through its Presidential Task Force on Attorney-Client Privilege (“ABA TF Letter”), expressed concern with CalPERS’ view that organizations should “[r]efrain using any company resources to satisfy the tax and legal liability for executives implicated for wrongdoing related to the backdating of options.” The ABA TF letter reiterates the policy favoring an employee’s right to counsel and opposing any governmental (or quasi-governmental) actions that discourage or forbid corporations from funding the defense of employees who are the subject or target of an investigation.

In the wake of the backdating scandals, which by all accounts have just begun to uncover the true breadth of the problem in public corporations, the ABA TF Letter to CalPERS is timely.

Here is a copy of the ABA TF Letter to CalPERS.

ABA President Urges SEC to Revise Securities Law Enforcement Policies on Attorney-Client Privilege

WASHINGTON, D.C., Feb. 16, 2007 — American Bar Association President Karen J. Mathis has urged the U.S. Securities and Exchange Commission to revise its securities law enforcement policies that pressure corporate clients to waive attorney client privilege, work product protections and legal protections for employees during investigations.

Mathis compared SEC policies contained in the so-called Seaboard Report with similar policies outlined in the Department of Justice’s 2003 Thompson Memorandum, saying both “have led to a number of profoundly negative consequences.” The Seaboard Report was issued by the SEC in 2001 as a statement of the criteria that the commission would consider in determining whether, and to what extent, companies under investigation should be granted credit for cooperating with commission staff as the agency decides whether and how to take enforcement action. Mathis proposed specific amendments to the SEC policies in a Feb. 5 letter to Commission Chairman Christopher Cox.

Although the report does not explicitly require companies under investigation to waive legal rights in every situation, the policy has led many SEC staff to regularly pressure companies to waive their privileges during investigations.

“Companies have no choice but to waive when encouraged or requested to do so because the risk of being labeled as ‘uncooperative’ will have a profound effect not just on the Commission’s enforcement action decisions, but on a company’s public disclosure obligations, stock price, image and credit worthiness,” said Mathis.
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