Backdating: Are the Lawyers to Blame?

A general counsel brought the idea of misdating stock option grants from one company to another, says the SEC. Could it have happened elsewhere?

Since the backdating scandal began unfolding nearly two years ago, regulators and outsiders have been wondering why so many public companies — many of them in the technology industry — began issuing undisclosed, misdated stock options grants around the same time. Was it spread through word of mouth between directors who served on different boards? Could it have been shared between executives on cocktail napkins at a local bar in California? Or was it simply a coincidence, driven by Silicon Valley’s zeal for stock options before the dotcom bust?

In the case of two Golden State tech companies, the concept of granting undisclosed, “in the money” stock options to executives could have originated with their general counsel, according to the Securities and Exchange Commission. On Tuesday, the SEC charged Lisa Berry, former in-house corporate attorney of KLA-Tencor Corp. and Juniper Networks, with backdating option grants from 1997 to 2003. She “devised the improper backdating scheme while serving as general counsel of KLA and then implemented similar practices after assuming the position of general counsel for Juniper,” the SEC said in its complaint filed with the U.S. District Court in San Jose, Calif.

“When we started looking at the players [of these two cases] and saw they had the same general counsel, we said ‘Wow,’” Marc Fagel, associate regional director in the SEC’s San Francisco office, told CFO.com. “That certainly raised our eyebrows.”

While at KLA, a San Jose semiconductor equipment company, Berry “routinely” used hindsight to pick dates when the company had had historically low stock prices and chose the corresponding prices for option grants given to KLA employees, the SEC alleges. These grants were given without proper disclosures, and thus hid true compensation numbers from investors, the SEC adds. Moreover, Berry acknowledged in a 1998 memorandum that repricing executive stock options with an earlier grant date’s lower price would result in KLA having to take “a charge to its P&L,” the SEC said.

When Berry, who studied accounting in college, switched jobs and went to another technology company, Sunnyvale, Calif.-based Juniper, just before its 1999 initial public offering, she boasted about her experience in stock administration, the SEC contends. While there, she oversaw the stock option granting process and allegedly backdated grants for new employees and current executives to capture lower stock prices. By not disclosing these changes, her practice went against Juniper’s stated policy of granting stock options at fair market value, the SEC notes. She also allegedly created minutes of compensation committee meetings that had not occurred in order to justify misdated option grants. Her alleged scheme resulted in more than $300 million in expenses not being disclosed by Juniper, according to the SEC.

Berry’s attorney, Melinda Haag of Orrick, Herrington & Sutcliffe, disputes the commission’s findings. “This case is unfounded, and the SEC’s allegations don’t make it otherwise,” she told CFO.com. “Lisa had no responsibility for accounting at either company, had no idea that either company violated options accounting, and did not personally benefit from misdated option grants at either company.”

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