Part XIV: SEC Enforcement Trends and Priorities, 2008
As 2007 drew to a close, the SEC filed an option backdating case which raises significant questions. SEC v. Maxim Integrated Products, Inc., Civil Action No. C-07-65121 (N.D. Cal. Dec. 4, 2007). Until Maxim, the SEC appeared to have been quite selective in prosecuting option backdating, focusing on actions which involved cover ups and other types of scienter-based fraudulent conduct. Maxim, however, dropped the standard to negligence, at least as to its former CEO John Gifford. If this is the standard going forward, scores of additional corporate executives could be at risk.
Maxim was brought against the company and former CEO John Gifford. A separate action was brought against former CFO Carl Jasper. SEC v. Jasper, Case No. C-07-6122 (N.D. Cal. Dec. 4, 2007). The complaints alleged that the company routinely granted in-the money options to its employees. The grants were backdated.
According to the complaint against the company and Mr. Gifford, Messrs. Gifford and Jasper discussed the grants. During the discussions, the fact that the options were backdated was reviewed. CEO Gifford did not object to the fact that the options were backdated. He did however, direct CFO Jasper to record an expense for the options. Mr. Jasper failed to comply with the directive. The accounting was wrong, resulting in an overstatement of net income by more than 10%.
The claims against the company were based on Section 10(b) and the reporting provisions. In contrast, the claims against Mr. Gifford alleged that he should have known the expense for the options was not recorded, despite his instruction. The claims against him were based on Securities Act Section 17(a)(3), negligence and the reporting provisions.
To resolve the case, Mr. Gifford consented to an injunction and an order which required him to pay disgorgement of $652,000 and to pay a civil penalty of $150,000. The case against Mr. Jasper is still pending.
Before the SEC brought the action against Mr. Gifford, it had not filed an option backdating case based on negligence. Since that action the SEC has not brought an option backdating case based on negligence. While the case could signal a change in prosecution standards to date that does not appear to be the case. Rather,the case appears to be an anomaly with no explanation for the reason the SEC went out of its way to charge Mr. Gifford based on facts which should surely have suggested that no action be brought.
Next: Counsel as a defendant