Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, November 17, 2007

Analyzing SEC Enforcement Actions Against General Counsel in the Backdating Cases

The UC Corporate Law Center recently co-sponsored, with Association of Corporate Counsel, Southwest Ohio chapter, a program on The Role of Corporate Counsel in Fostering an Ethical Corporate Environment."  For that program, I reviewed recent SEC enforcement actions against inhouse corporate counsel, particularly those relating to backdating stock options.  Here are my findings:

To date the SEC has filed six complaints against general counsel for their alleged involvement in backdating stock options.   Two of the actions have already been settled, and in both those cases the general counsel also pleaded guilty to criminal charges (SEC v. Olesnyckyj; SEC v. Alexander).  The other four actions are ongoing (SEC v. Berry; SEC v. Mercury Interactive; SEC v. Heinen; SEC v. Roberts).

There are common allegations in each SEC complaint, and I want to emphasize that what follows are the allegations as taken from the SEC's complaints.  First, the GC was actively involved in selecting the dates for the purported issuance of the options.  Second, the GC was involved in the preparation of false documentation (written consents or minutes of the Compensation Committee) and the false SEC filings.  Third, the GC had an understanding of the accounting implications.  Finally, the GC in each instance received backdated stock options.

What do we know about the GC?  Their ages at the time the backdating began ranged from mid-30s to mid-40s; most were also either an officer or a director of the company; and they all appear to be well-educated and well-qualified for their positions.

If the allegations are substantially true -- a big if -- then, contrary to previous reports on SEC enforcement actions, the SEC does not appear to be using these cases to argue for novel theories of liability or increased gatekeeping responsibilities for inhouse counsel.  Rather, the SEC appears to have been cautious in its selection of cases and gone after inhouse attorneys who it thinks were active participants in the fraud and significantly benefited financially from the backdating.  One of the lawyers who pleaded guilty allegedly realized more than a $14 million gain from the sale of stock underlying the exercises of backdated stock options.

The larger question that goes beyond the backdating cases is what factors can drive inhouse counsel allegedly to risk their professional reputation and license to embrace a corrupt corporate culture?  Is it just greed?  Is it pressure exerted by management to "enable" deals and not to question them?   How can the inhouse lawyer be the "can do" person and maintain sufficient independence to say no when he has to?

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