The High Price of Vindication

The price for vindication can be high — it is doubtful that even winning at trial is enough to overcome the stigma of being accused of wrongful conduct by the SEC or the Department of Justice. Achieving some vindication typically requires eschewing the conventional wisdom that settlement is the safe road to travel because it minimizes risk and cost while avoiding years of nerve-wracking litigation.

Settlement may be prudent, but it is not vindication. Two who chose vindication rather than the safe road are Kent Roberts, former general counsel of McAfee, Inc., and John Tuli, former Vice President of Business Development for NetScape. Both men were accused by the SEC and the Department of Justice of securities fraud. Both stood trial on criminal charges and were acquitted. Both litigated with the SEC until the Commission dropped its case. Both were vindicated — but the cost was years of difficult litigation in the face of government claims of fraud.

Last week, the SEC has dropped its securities fraud suit based on option backdating claims against Mr. Roberts. SEC v. Roberts, Case No. 07-CV-00407 (D.D.C. Feb. 28, 2007). The dismissal with prejudice of the SEC’s complaint follows his acquittal on criminal charges last fall which were based on similar allegations. U.S. v. Roberts, Case No. 1:07 cv 00407 (N.D. Cal. Feb. 28, 2007). In that case, the jury acquitted Mr. Roberts on two counts of securities fraud based on option backdating claims, but was unable to decide a third count based on falsifying records. That count was later dropped at the suggestion of the trial judge, as discussed here.

The SEC’s complaint against Mr. Roberts alleged intentional fraudulent conduct, claiming that he secretly re-priced options without authority for his own benefit. Specifically, the complaint claimed that Mr. Roberts “engaged in a fraudulent scheme to enrich himself and others by secretly changing the dates on which stock options awards had been granted to coincide with lower closing prices of McAfee’s common stock, resulting in disguised in-the-money grants. Roberts falsified company documents … .” The complaint alleged violations of the antifraud, reporting and proxy provisions of the federal securities laws.

The dismissal with prejudice of the SEC’s complaint ends claims by the government against Mr. Roberts. The long battle, ordeal and lingering stigma were the price of vindication for Mr. Roberts.

Mr. Tuli’s story is similar. Last fall, the SEC dismissed securities fraud charges against him as discussed here. The SEC had accused Mr. Tuli of participating in a scheme to falsify the books and records of a Las Vegas-based internet company by repeatedly and falsifying audit confirmations or causing others to falsify the documents. Prior to the SEC’s decision to dismiss its case, Mr. Tuli stood trial on the related criminal charges and was acquitted. As in the case of Mr. Roberts, Mr. Tuli’s vindication came at a high price — years of difficult litigation with a lingering stigma. The road less traveled can lead to vindication. But the cost is high.

Another Settlement In the Mercury Interactive Option Backdating Case

The SEC settled another in its series of option backdating cases involving Mercury Interactive, LLC. SEC v. Mercury Interactive, LLC, Case No. 07-2822 (N.D. Cal. Filed May 31, 2007). This settlement is with the former CFO of the company, Sharlene Abrams.

According to the Commission’s complaint, Ms. Abrams, and three others engaged in a scheme to backdate options grants to themselves and others from 1997 through 2005. The complaint alleged that these options were a form of secret compensation which was not properly disclosed and for which the proper accounting charges were not taken.

In contract to most other option backdating cases, the complaint here also alleges financial fraud. The SEC claims that there was false disclosure during the same period regarding a backlog of sales revenue to managing earnings. The defendants are also alleged to have structured fraudulent loans for option exercises by overseas employees and to avoid recording expense.

To resolve the case, Ms. Abrams consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and proxy provisions. She also agreed to the entry of an order requiring the payment of about $2.2 million in disgorgement, along with prejudgment interest. Approximately $1.4 million of that amount represents the in-the-money component of the exercised options. Ms. Abrams previously returned this amount to the company. Ms. Abrams will also pay a civil penalty of $425,000, be barred from being an officer or director of a public company and consented to the entry of an order in an administrative proceeding under Rule 102(e)(3) barring her from appearing or practicing before the SEC as an accountant.

The SEC has entered into other settlements stemming from the option backdating practices at Mercury Interactive as discussed here and here. The Commission is also litigating with others related to this matter.