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.