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SAN JOSE — Defense attorneys say they’ve thought for some time that the Securities and Exchange Commission has been overzealous in pursuing high-ranking executives suspected of white-collar crime. And their suspicions were amplified following a series of corporate scandals and an avowed government crackdown on executive wrongdoing. But they had little to back their hunch until a former technology executive was found innocent last week of securities fraud. A federal jury in San Jose took just five hours to acquit former Legato Systems Inc. Executive Vice President David Malmstedt of six fraud charges. His attorneys say it was the first time the SEC had pursued a case against an executive not facing related criminal charges. Some attorneys also say the case shows the pitfalls of the government’s tough-at-any-cost attitude. “The significant piece of this case is what many defense lawyers have been saying . . . that the SEC is overreaching,” said David Bayless, a securities expert and partner at Morrison & Foerster in San Francisco. “Because of that, more individuals are making a calculated decision to take the case to trial.” “A lot of defense lawyers have been saying if you keep these unreasonable demands [in terms of a settlement], more people are going to fight, and you are going to lose,” added Bayless, who used to run the San Francisco SEC office that charged Malmstedt. “They are charging people who should not be charged.” But Malmstedt’s prosecutors denied they overreached. Susan LaMarca of the San Francisco SEC office said prosecutors “had a very good case [against Malmstedt],” adding that they closely examine every case before deciding to go to trial. “We fully respect the jury’s finding, but I don’t think it’s a reflection on our decision to prosecute,” she said. “No one could possibly accuse us of going overboard because of Martha Stewart and Enron. This predates that by a few years.” The case began when Legato was forced to restate its earnings because of improperly recorded sales transactions. The government charged Malmstedt with booking false sales — in particular, with trying to boost sales by claiming that contingent sales were recognizable revenue. When the restatement was announced, Legato’s stock plummeted from $44 to $19 per share. Malmstedt was charged with securities fraud, aiding and abetting securities fraud and improper bookkeeping. Malmstedt’s defense attorney argued that his client simply took over a company with poor internal financial controls and was railroaded for the mistakes of others. “The SEC basically bought the story that Legato peddled because they needed a [corporate] officer to pin this on to send a message,” said Phillip Eskenazi of Los Angeles’ Akin Gump Strauss Hauer & Feld. “And there’s no message to send if they don’t pin it on someone at a high enough level. “There is a stigma when an executive of a public company is charged with fraud. Their careers are derailed. People are backed into a corner, and they need to prevail. When they came after Dave and jeopardized his career, it was time to put up or shut up — and they couldn’t back it up.” Eskenazi characterized the case as an offshoot of bad business decisions. “There were a host of transactions where they [Legato] had information at their fingertips and made the wrong decisions . . . they just dropped the ball,” he said. “Our defense was that �revenue recognition’ problems existed prior to his arrival.” The SEC has recently taken a “blanket” approach to executives charged with crimes, Eskenazi alleged. He said the government has to really “look on a case-by-case basis” in the future. LaMarca said the SEC pursues white-collar cases that do not involve high-ranking executives, adding that their cases “run the range, depending on conduct.” In the past, the SEC has been more willing to settle cases, MoFo’s Bayless said. “Even if you didn’t like it, the feeling was that you could live with the terms and didn’t want to fight the government,” Bayless said. “But under these circumstances, why not litigate?” Other attorneys say that it’s natural to expect more vigorous prosecution, given the extent of recent corporate problems. “There is a tolerance point that we’ve reached in society, and we’re no longer going to accept people in positions of power abusing their power — even if it’s in the boardrooms,” said defense attorney Lance Burrow, of San Jose’s Anderson & Burrow. “There does appear to be a lot of abuse, so you will see the government be more active in policing corporate behavior. “Just like in any criminal cases, prosecutors sometimes go after people who don’t deserve to be gone after. But the checks and balances [in the criminal justice system] usually come through in the end.” Legato, a software and information management company and division of Boston-based EMC Corp., is based in Mountain View. The case is Securities and Exchange Commission v. Malmstedt,02-2427 .

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