The Week in Review (November 9-15, 2007): Backdated Options, the FCPA and Cooperation Credit in Congress
Securities enforcement litigation this week echoed with familiar themes: Backdated options, the FCPA and cooperation credit and privilege waivers.
Closing Option Investigations
Perhaps the backdated options crisis is finally winding down. The SEC staff continued informing companies under scrutiny for their options issuances practices that an enforcement action would not be recommended. Recently Electronic Arts, Linear Technology Corp., Nvidia Corp, PMC-Sierra Inc. and Zoran Corp. were informed that the investigations involving their options granting practices were being closed. Undoubtedly this is good news, not only for these issuers, but perhaps dozens of others who are waiting to hear whether an action will be brought against them by the SEC. While it is clear that the SEC still has a large inventory of backdated option cases and that more will be brought, this wave of closing letters may suggest that it is the beginning of the end of this scandal.
The Brocade Criminal Case
Stephanie Jensen, former Brocade Communications Human Resources director, also received some good news in her backdated options case. The government is dropping more counts in the indictment.
Ms. Jensen was named as a defendant in an SEC enforcement action, and indicted on criminal charges along with former Brocade CEO Gregory Reyes, who was convicted on all ten counts in September. Significant fanfare surrounded the filing of the civil and criminal charges against Ms. Jensen and Mr. Reyes in July 2006. At that time, there was a joint press conference with SEC Chairman Cox and representatives of the U.S. Attorney’s office for the Northern District of California, among other, joining in the announcement.
The notice that the government was dropping four of the remaining six counts was contained in a single sentence in a recently filed government brief. The charges dropped include securities fraud and making false filings with the SEC. Previously, other counts had been dropped. Two counts remain, conspiracy to falsify books and falsification of the books.
The FCPA Again
The SEC also brought another in a series of Foreign Corrupt Practices Act (“FCPA”) cases. This time, Chevron Corp. was named as a defendant in a settled action based on improper payments to Iraq under the U.N. Oil for Food Program. According to the complaint, over a two year period third parties that contracted with Chevron paid about $20 million in illegal kickback payments in connection with Chevron’s purchases of crude oil under the U.N. program. Surcharges paid by the third parties in connection with Chevron’s purchases of oil bypassed the escrow account and were paid to Iraqi-controlled bank accounts. Chevron consented to the entry of a statutory injunction to settle the action. In addition, the company agreed to the entry of an order directing it to pay disgorgement of $25 million and a civil penalty of $3 million. The company also has to pay $5 million in disgorgement under an agreement with the U.S. Attorney’s Office for the Southern District of New York and a $2 million penalty to the Office of Foreign Asset Controls of the U.S. Department of Treasury. SEC v. Chevron Corp., Civil Action No. 07 CIV 10299 (S.D.N.Y. Filed November 14, 2007). The Commission’s Litigation Release appears here.
Legislation, Cooperation and Waiver
Finally, the Attorney Client Protection Act of 2007 passed in the House of Representatives this week as discussed here. That Act is designed to end the so-called “culture of waiver” that has resulted from government cooperation standards in the SEC’s Seaboard Release and DOJ’s Thompson and McNulty memos. The proposed legislation would bar officials such as SEC enforcement staff and attorneys at DOJ from seeking the waiver of an organization’s attorney client privilege or work product protection. In addition, the proposed legislation would bar SEC enforcement officials and criminal prosecutors from considering matters such as the indemnification payments and common interest agreements in the charging process.
Unfortunately, the proposed legislation will probably have little impact on the SEC or DOJ. Under the Act, companies can voluntarily waive their rights in the name of cooperation and receive credit in the charging process. While passage of the Act may bar enforcement officials from making specific requests, it will not require any alteration to statements such as those made by SEC Enforcement Chief Linda Thomsen earlier this year. In her remarks Ms. Thomsen gave two examples of cooperation: in one the company cooperated, waived privilege and was not prosecuted. In the second the company cooperated, did not waive privilege and was prosecuted. Ms Thomsen’s remarks before the Mutual Fund Directors Forum 7th Annual Policy Conference are available here. Given these examples what else needs to be said?