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Google and its general counsel, David Drummond, reached a settlement with the Securities and Exchange Commission Jan. 13 in connection with the company’s failure to register more than $80 million in employee stock options in the two years prior to its initial public offering. Google and Drummond weren’t fined, but they did agree to cease and desist from future securities laws violations. Under the terms of the settlement, Drummond and Google neither admit nor deny the SEC’s findings. The agency’s crackdown marks the end of the SEC’s investigation into Google’s bumpy road to a blockbuster IPO. It also marks the SEC’s first enforcement action in connection with Rule 701, a provision of the SEC code requiring that any company issuing more than $5 million in stock options in a 12-month period provide detailed financial statements to option recipients. The SEC found that Drummond, acting on advice from inside and outside counsel, determined that other exemptions for certain stock option grants permitted Google to issue the options without registering the securities or providing disclosures. It also found that he failed to advise Google’s board of directors that the company risked exceeding the threshold. The SEC and Google declined to name the outside counsel that advised Drummond, but Google has been a Wilson Sonsini Goodrich & Rosati client since its incorporation in 1998. Drummond was a partner at Wilson prior to joining Google. SEC officials say they wanted to send a message with the action. “We wanted to let them know that the commission takes violation of its law seriously,” says Tracy Davis, the SEC branch chief who supervised the investigation. There were no fines, Davis says, in part because the company cooperated and in part because “investors weren’t harmed in this case because the IPO was successful.” The SEC also says Drummond had concluded that even if the company ran afoul of the rules, it could always offer to buy back the options � which is what it did. “We got the impression that there is a mentality that exists that it is a technical violation,” says Marc Fagel, assistant district administrator in the SEC’s San Francisco district office. “You can always offer a rescission offer � no harm, no foul. It was enough of an issue that we wanted to get it out there.” The action got the attention of corporate partners at other firms. For example, Orrick, Herrington & Sutcliffe sent out an e-mail advisory to its corporate partners. But Weil, Gotshal & Manges’ corporate partner Rod Howard says that the SEC’s action didn’t carry much sting. “That’s about the lowest level of sanction. Anything beyond that is hard to call a sanction,” he says. Though Google raised $1.67 billion in its auction-style IPO in August, there were lots of Maalox moments. Last July, the SEC investigated Drummond for possible violations of securities laws while he was a senior executive at SmartForce. The SEC wouldn’t comment on the status of that investigation. Google hit another glitch on Aug. 14, when an interview with Google’s founders showed up in Playboy magazine during the IPO quiet period. The SEC didn’t penalize the company, but made it attach the article to its prospectus. Marie-Anne Hogarth is a reporter for the ALM newspaper The Recorder in San Francisco, where this article first appeared.

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