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White-collar defense lawyers had plenty of theories Tuesday about last week’s unexpected decision by SEC staff attorneys to drop fraud charges on the eve of trial against four former executives in Utah. The SEC has offered minimal explanation about dropping charges against the former president and CEO of software developer TenFold Corp., Gary Kennedy, and three others. The SEC announced its decision at a pre-trial conference Thursday in front of U.S. District Judge Tena Campbell in Utah. Don Hoerl, associate regional director for the SEC in Denver, would only say that facts came to light that weren’t available earlier. Some lawyers, including Kennedy’s defense attorney, Morrison & Foerster partner Darryl Rains, interpreted the decision as “an intriguing first look at [new SEC Chairman Christopher] Cox’s administration.” Others just saw it as a lucky break. The decision came down like “a bolt of lightning,” said Stuart Gasner, a Keker & Van Nest partner who represented TenFold’s former CFO and current senior VP of finance, Robert Hughes. But he added, “Fortune smiles on the well prepared.” Defense lawyers have hailed Cox, who was nominated to the position by President Bush in June, as a savior for companies squeezed by the tight regulatory regime of Cox’s predecessor, Chairman William Donaldson. The case centered around information that the company allegedly failed to disclose in filings with the commission dating back to 1999 and 2000. The SEC believed TenFold should have included certain information about project delays. A litigation release filed by the SEC in 2002 also makes reference to the TenFold executives selling stock and reaping “significantly unjust benefits.” According to Rains, SEC lawyers had called more than 100 witnesses and had been investigating the matter for two years prior to charges being brought. He said SEC staff lawyers stated in the pre-trial conference that they dropped the case after being told to do so during a video conference with SEC commissioners. “We were 30 days before trial and the lawyers doing the case were very committed,” said Rains. Still, he added that, “I am really happy that having argued this aggressive theory, they are saying, ‘oops.’” Both Rains and Gasner said Stephen Cutler, the former director of the SEC’s Enforcement Division, had refused to drop the charges against the four men. “I do know that when we first went back to Washington, we weren’t successful [in getting the charges dismissed],” said Gasner. “The second time that it got to the higher levels, the result was to discuss the facts that came out of discovery.” Other white-collar defense lawyers characterized the reversal as rare, although they differed in their interpretations. “Usually when the SEC gets into litigaton and realizes that their case may be weaker than they originally thought, they are open to a very mild settlement,” said one local white-collar defense lawyer who didn’t want to be identified. “It is unusual for them to dismiss a case outright.” The lawyer said he had heard the case was “flimsy.” Two defense lawyers say the SEC’s Colorado office is less experienced, and they speculated it was possible that weaknesses in the case weren’t visible until moments before trial. Gasner said he thought that after more than two years of discovery, SEC lawyers came to better understand the nature of the delays explained in company spreadsheets. He was pleased the SEC was open-minded enough to reverse itself. “Part of what is happening here is that � there was a bit of hysteria when the bubble burst in early 2000, and a lot of companies failed,” said Gasner. “I think the SEC was under a lot of pressure to bring cases. � [Now] I think that things have stabilized. I think they feel under less pressure and say, ‘Gee, what are the facts in this particular case?’” Defense attorneys said Hughes and two other executives, Stanley Hanks and Wynn Clayton, had proposed settlements before the commission. Clayton, the most junior of the four, was likely to be dismissed from the case. The defense lawyers commented that despite their relief, their clients endured much hardship. In the case of Kennedy he was asked to resign from the board of Overstock.com when it went public, as well as step down from other public company boards. He remains an investor in private companies. Orrick, Herrington & Sutcliffe partner James Meyers said the SEC’s reversal was “an interesting development,” even based purely on the SEC’s own explanation. “If you take the SEC’s explanation at their word, what it suggests is that the commissioners are more likely to be receptive to an advice-of-counsel defense than the staff had been,” said Meyers. “If that portends a trend, it could be significant.” Most recently, SEC commissioners have spoken publicly about the role of gatekeepers, such as attorneys who advise companies in making disclosures. Orrick partner Don Keller, previously at Venture Law Group, originally advised the company on its SEC filings. He wouldn’t comment for the story, but one defense attorney for the executives considered the SEC’s recent action a “vindication” on Keller’s behalf. Wilson Sonsini Goodrich & Rosati partner Robert Feldman commented that few companies, and even fewer individuals, attempt to fight the government. “It takes a lot of time, resources and courage,” said Feldman. “But sometimes good things like this happen.”

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