Non-Feasance Leads SEC to Charge Former CFO and COO of Brocade for Illegal Backdating of Stock Options

In a new twist to the SEC’s options backdating enforcement policy, the Securities and Exchange Commission filed fraud charges against Michael J. Byrd, a former Chief Financial Officer and Chief Operating Officer of Brocade Communications Systems, Inc., alleging that “he disregarded indications that other senior corporate executives were improperly backdating stock option grants at the company.” The Commission alleges Byrd “learned of instances in which Brocade’s then-CEO and others were backdating options for certain individuals, yet failed to ensure that the company properly accounted for the option expenses and disclosed them to investors.”

This latest action could indicate a shift in the SEC’s enforcement policy.  By filing charges against an executive with oversight duties who failed to act, the SEC has  broadened its enforcement net to include executives who were on notice of improper conduct and failed to take “appropriate action.” The case should serve as a disincentive for executives to “turn the other cheek” and give more vigor to corporate compliance programs.

Here is a copy of the Complaint filed against Michael J. Byrd in the U.S. District Court for the Northern District of California, San Francisco Division.

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. 

SEC Stumbles on Privilege Waivers

Justin Scheck
The Recorder
September 10, 2007

By the middle of last month, Securities and Exchange Commission lawyers were growing frustrated with running into claims of attorney-client privilege in their probe of troubled chipmaker Marvell Technology. The company had investigated its past stock options grants and found a widespread pattern of misdating. But Marvell’s former general counsel told Marvell board members that the internal investigation was biased, and that accusation piqued the interest of the SEC.Lawyers there wanted to interview the former general counsel, Matthew Gloss, according to attorneys briefed on the case. But Marvell, they said, claimed that whatever Gloss had to say about the internal probe was covered by attorney-client privilege.That put SEC lawyers in a tough position: The commission adopted a policy late last year of not asking for privilege waivers, even in situations — like the Marvell case — in which they clearly expect them.

Scrushy Sentenced To Nearly 7 Years In Bribery Case

By Ann Carrns and Valerie Bauerlein
Word Count: 945 | Companies Featured in This Article: HealthSouth

Richard M. Scrushy was sentenced to nearly seven years in prison for bribery, and a judge denied his bid to remain free pending appeal, putting the HealthSouth Corp. founder and former chief executive behind bars immediately.

U.S. District Judge Mark Fuller’s ruling last night to hand Mr. Scrushy and former Alabama Gov. Don Siegelman over to federal marshals was a surprise ending to a three-day sentencing hearing that capped the downfall of two longtime political and business giants. The judge left no doubt that he believed Mr. Scrushy had arranged for $500,000 in contributions to a foundation established by Mr. …

Brocade to Pay $7 Million Penalty to Settle Charges for Fraudulent Stock Option Backdating

As reported in an earlier post, the SEC has, indeed, settled backdating claims against issuer Brocade Communications Systems, Inc.

The SEC press release indicates that it filed “a civil action against Brocade Communications Systems, Inc., a San Jose, California computer networking company, for falsifying its reported income from 1999 through 2004. Brocade has agreed to pay a penalty of $7 million to settle the charges that it committed fraud through its former CEO and other former executives who repeatedly granted backdated stock options, misstated compensation expenses, and concealed the conduct by falsifying documents.”

For more see SEC Press Release.

Email Trail Comes Back to Haunt Former Executives: SEC Settles With Mercury Interactive and Sues Former Mercury Officers for Stock Option Backdating and Other Fraudulent Conduct

In an earlier post, it was reported that an allegedly inculpatory email trail between in-house counsel and executives at Mercury Interactive regarding stock options could lead to regulatory or criminal action. That possibility became a reality, as the SEC has announced a settlement stemming from that evidence discovered in the form of email.

In a press release, the Securities and Exchange Commission announced that it “filed civil fraud charges in federal district court for the Northern District of California against California-based software maker Mercury Interactive, LLC (formerly known as Mercury Interactive Corporation) and four former senior officers of Mercury — former Chairman and Chief Executive Officer Amnon Landan, former Chief Financial Officers Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer. The SEC alleges that the former senior officers perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The SEC also alleges that during this period Mercury, through Landan and at times Abrams, Smith or Skaer, backdated stock option exercises, made fraudulent disclosures concerning Mercury’s “backlog” of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses. Mercury, which was acquired by Hewlett-Packard Company on November 8, 2006, after the alleged misconduct, settled the matter by agreeing to pay a $28 million civil penalty and to be permanently enjoined.”

For more see SEC Press Release and Complaint.

SEC Settles With IBM for Misleading Statements Regarding Stock Option Expenses

FOR IMMEDIATE RELEASE
2007-109

Washington, D.C., June 5, 2007 – The Securities and Exchange Commission announced today a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning the impact that the company’s decision to expense employee stock options would have on its first quarter 2005 (1Q05) and fiscal year 2005 (FY05) financial results. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company.

For more see the SEC’s Press Release.

SEC Enforcement Director: Gatekeepers and the Virtue of “Professional Courage”

At the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute of 2007, Linda C. Thomsen, Director of the SEC Division of Enforcement, gave a keynote speech that addressed several important issues to corporate law departments and the office of general counsel.

Director Thomsen’s remarks include an extensive discussion of the SEC’s principles-based approach for gauging cooperation in corporate investigations. Her speech emphasizes the agency’s respect for the attorney-client relationship and says the SEC will remain judicious with circumstances in which it would ask for privilege waiver.

Perhaps more important, however, is Director Thomsen’s discussion of the critical role attorneys play as gatekeepers in organizations. Quoting from the New York City Bar Association Report of the Task Force on the Lawyer’s Role in Corporate Governance (Nov. 2006), Director Thomsen reminds us that it “may take genuine professional courage to provide unwelcome advice and stick to it.”

As she continues, “[t]hese acts of courage can be dramatic—resigning for example. But more often, there will be less dramatic, but just as important, opportunities for lawyers to effect good. Encouraging a client to step back from a line rather than help the client squeeze as close to it as possible. Once you’ve figured out whether a particular course of conduct can be taken, encouraging everyone to think about whether it should be taken. When going through the process of looking back over events, whether in an internal investigation or otherwise, not only figuring out whether the conduct is legally defensible but also asking, the quieter questions, is it in the business’s long term interest? Is it behavior we want to encourage? Is it something we should be proud of?”

For a full copy of Director Thomsen’s speech, see www.sec.gov.

Stock Options Backdating Practices Continue to Haunt Silicon Valley and Cause Management Team Shake Ups

In the latest on the stock options backdating front, chip maket Marvell Technology Group Ltd. said today its chief financial officer resigned and its operating chief will step down as part of a management shakeup after the board found a pattern of abuse in the granting of stock options.

For more on this story, see Wall Street Online Journal.

Email Trails Suggests Gatekeepers Tasted Forbidden Fruit and SEC Files Charges Against Apple’s Former General Counsel and Chief Financial Officer

Based on an apparently inculpatory email trail discovered in an ongoing SEC investigation, the government has filed new charges against two former senior executives of Apple, Inc. in a matter involving improper stock option backdating.

The SEC accused former General Counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple’s top officers that caused the company to underreport its expenses by nearly $40 million. The Commission’s complaint alleges that Heinen, of Portola Valley, California, caused Apple to backdate two large options grants to senior executives of Apple — a February 2001 grant of 4.8 million options to Apple’s Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs — and altered company records to conceal the fraud.

For more on this development, see SEC v. Heinen et al.