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Former Juniper Networks GC Lisa Berry’s backdating settlement with the U.S. Securities and Exchange Commission this week may have symbolized the end of an era. But the vigor with which the agency pursued a number of corporate executives on fraud claims has left a lasting impression on lawyers. Thanks to legal changes and regulatory developments, illegal backdating of stock options has been more or less eliminated, says Robert Jackson, associate professor of law at Columbia Law School and an expert on corporate governance. “What we’re seeing is the legacy of practices that corporate boards have worked hard to eliminate,” he says. While stock options are an important tool to motivate executives and align their interests with those of shareholders, Jackson says there’s a lesson to be learned from the mass federal crackdown. Executive incentive is complex, he says, and governance protections are needed. “Even when you have the tools that you want in order to motivate managers,” says Jackson, “what you really need is a series of protections around those tools that make you confident that the tools are being used in a way that actually aligns the interests of shareholders and executives.” The use of stock options is still widespread at public companies. Jackson says most of those companies don’t limit executives’ ability to unload options. “The fact that public companies do not limit that undermines and limits the effectiveness of these tools,” says Jackson. Elizabeth Nowicki, currently a professor at Tulane University Law School, was an SEC attorney from 1999-2000. While at the agency, she worked on the same types of disclosure issues involved in the surge of backdating cases several years later. In 2006, plaintiffs’ lawyers began looking for ways to bring securities fraud lawsuits against companies. Many of cases were brought against tech firms—which lacked tangible assets and had to use stock options to lure top talent from more traditional companies. In some instances, the backdating was unintentional. “Some thought it was legitimate,” says Nowicki. But in other cases the practice was an end-run around accurate disclosure. After leaving the government, Nowicki was frequently called on by public companies to advise them about fiduciary duties owed by officers—including general counsel—and the materiality of disclosure failures. In no instance was Nowicki ever able to make the argument that deliberate backdating was in the best interest of shareholders. She says the biggest takeaway from the wave of backdating cases is pretty basic. “Don’t lie,” she says, “even if what you have to say is not going to be good and is going to make people unhappy.” The more nuanced lesson is that if companies do lie about something that is supposedly as hard to detect as backdating, there’s still a good chance they are going to be found out. And shareholders are not likely to be pleased when and if that happens. “There are going to be significant costs to your reputation, out-of-pocket costs, and costs to your shareholders,” says Nowicki. The fact that the stock option backdating scandals were so aggressively pursued by the SEC conveys a message that the agency is up to the challenge. “If lawyers are paying attention, I think the message should have been widely received,” she says. T. Markus Funk, a partner in Perkins Coie’s Investigations and White Collar Defense group, has been listening. Although the backdating scandals are now mostly history, Funk says the enduring lesson for in-house and outside counsel is that the SEC and federal prosecutors are likely to continue to heavily scrutinize the advice lawyers give their clients. Federal law enforcers get inspiration from their past successes, according to Funk. He says there’s no reason to believe they “will shy away from their consistent practice of seeking to leverage their enforcement programs by targeting those legal and accounting professionals they consider failed gatekeepers.” See also: “GC Charged with Stock Backdating at Two Companies, Settles With SEC,” The Recorder, October 2011.

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