Poor Internal Controls Lead to Brazen Self-Dealing: SEC Charges Former General Counsel of KLA-Tencor And Juniper for Fraudulent Stock Option Backdating

The SEC filed its latest stock option backdating enforcement action, this time against a former general counsel of two public companies. 

The SEC filed fraud charges against the attorney, Lisa C. Berry, for her role in “illegally backdating stock option grants” from 1997 to 2003, first as GC of KLA-Tencor and then as GC of Juniper Networks.  The SEC alleges that the misconduct resulted in the concealment of hundreds of millions of dollars in executive compensation expenses relating to undisclosed in-the-money option grants.

In related actions, the SEC settled fraud charges against Juniper and KLA.  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.  KLA had previously settled charges brought by the Commission.

The cases show how poor corporate governance and weak internal controls lead to self-dealing, breaches of duties, and securities fraud.  The Complaint specifically alleges that

“Beginning in the second half of 1999, [Berry] routinely prepared backdated stock option grants to issue options to groups of recently hired employees of Juniper. For these new hire grants, the executive collected the names of recently hired employees and had lists prepared. The executive then selected as the exercise price of the new hire grants the closing price of Juniper’s stock on a date in the past, reflecting the low closing price during a particular period around the time the employees were hired. For each backdated grant fkom 1999 through 2003, the executive then created Stock Option Committee meeting “minutes” that falsely stated that the Stock Option Committee had met on the date of the low closing price and granted options on that date.”

“The executive signed the backdated committee “minutes” as a Stock Option committee member. In addition, for each backdated grant the executive either presented the minutes to the other Stock Option Committee members for signature or stamped the minutes with a signature stamp the executive maintained bearing the other Stock Option Committee members’ signatures.”

“Once the executive selected a backdated grant date and a corresponding exercise price, the executive informed Juniper’s stock administrator, who then entered the grants into Juniper’s stock option tracking software using the backdated date as the grant date. Juniper did not reflect in its books an expense related to the in-the-money portion of the options.”

Here is a copy of the Complaint filed against Berry in the U.S. District Court for the Northern District of California, San Jose Division and the Complaint settled with Juniper

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