Wednesday, May 31, 2006

Massachusetts U.S. Attorney Jumps Into the Options-Timing Investigation

There are now four U.S. Attorney's Offices looking into the timing of stock options granted to senior executives with the issuance of a grand jury subpoena from the District of Massachusetts to Sycamore Networks, Inc., a Chelmsford, Mass., company.  According to an 8-K filed on May 30 (here):

In addition to the previously reported investigation by the Securities and Exchange Commission (the “SEC”) of the practices of Sycamore Networks, Inc. (the “Company”) related to certain stock option grants, the Company is also cooperating with the U.S. Attorney’s Office for the District of Massachusetts (“U.S. Attorney's Office”) in its investigation of the Company’s stock option practices. On May 26, 2006, the U.S. Attorney's Office issued a grand jury subpoena to the Company requesting that the Company produce documents relating to stock option grants. The Company is cooperating, and will continue to cooperate, with the SEC and the U.S. Attorney's Office in their investigations.

The U.S. Attorney's Offices for the Southern and Eastern Districts of New York, i.e. Manhattan and Brooklyn, have taken the lead by subpoenaing over a dozen companies between them, while the U.S. Attorney's Office for the Northern District of California issued a subpoena to Altera Corp. related to its options grant practices (see press release here).  It remains unclear whether there is a coordinated investigation by the U.S. Attorney's Offices, although the companies subpoenaed in Massachusetts and California are within the districts, while the New York investigations are nationwide.  The SEC is also conducting investigations of the companies that have received grand jury subpoenas, so there is likely at least some coordination through that agency, although there are important limitations on how closely the civil and criminal investigators can work together.  Of particular concern, after two district court decisions in the past year dismissing criminal charges, will be how the SEC deals with witnesses who may also be the targets of grand jury investigations.

The Wall Street Journal has a very helpful chart (here) detailing the companies that so far have disclosed governmental and internal investigations of possible options-timing issues.  The investigations have already resulted in the dismissal of a few senior executives related to the probes, including the firing of the general counsel at McAfee discussed in an earlier post (here).  With the U.S. Attorneys in New York, Boston, and San Francisco conducting investigations, can the offices in Chicago and Los Angeles be too far behind?  Moreover, look for the SEC investigations, most of which have been identified as "informal" to this point, to move into the "formal" category in the near future, which will trigger a wave of civil subpoenas. (ph)

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