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The growing scandal over the backdating of executive stock options claimed a second local general counsel Tuesday when software maker McAfee Inc. said it had dismissed GC Kent Roberts because of stock option “improprieties” in 2000. Nationwide, about two dozen companies so far have been approached by the government in connection with backdated options grants. The scandal is fueling anxiety among audit committee members and in-house lawyers, with companies launching internal investigations into their options programs or preparing responses to government inquiries. Brewing in the background is a possible tussle between federal prosecutors in the Manhattan, Brooklyn and San Francisco U.S. attorney’s offices, all of which have been involved in probing companies thus far. Securities litigation partner Steven Schatz, of Wilson Sonsini Goodrich & Rosati, said he’s seeing an uptick in the number of clients both from the ranks of companies conducting their own internal investigations and those facing a Securities and Exchange Commission probe. “There’s no question that many companies in the Valley are taking a look at their past practices,” he said. As of yet, it appears there have been no civil or criminal charges filed in connection with backdated options. “In the next few months there will hopefully be a public filing so outside counsel can evaluate what is of most concern to the SEC and possibly to the criminal agencies,” Kathleen Bisaccia, Kroll & Associates’ managing director of business investigations and intelligence unit who until March 30 was co-head of enforcement at the San Francisco office of the SEC. “It’s just unknown at this point.” Santa Clara-based McAfee has said only that Roberts’ dismissal followed an investigation by the company’s board of directors audit committee. According to a press release Tuesday, McAfee has been in communication with the SEC and the audit committee has retained independent counsel. A company representative declined Tuesday to disclose who it was. Stock options, granted as an incentive to executives to improve a company’s performance, give the recipient the right to purchase shares at a later date at a price established when the grant was offered. Stories in The Wall Street Journal have noted that in some cases, the recipients appear to have been unbelievably lucky, as the option date coincided with the stock’s lowest close. It isn’t clear what criminal or civil liability in-house lawyers could face over option backdating. Under more strict Sarbanes-Oxley disclosure regulations, companies caught backdating could face securities-fraud and other charges. In particular, GCs have come under increasing pressure to report discrepancies and provide oversight to a company’s financial behavior. “I think in the past the SEC has been averse to suing the in-house lawyers, but now the attorney’s conduct is being scrutinized as well as the executives,” Bisaccia said. Additionally, outside counsel are also feeling the brunt of the weight of responsibility from Sarbanes-Oxley. “What we’re seeing are relatively young public companies that relied very heavily on their outside counsel and on industry practices to figure out how to administer stock options,” said a San Francisco-based securities fraud litigator who requested anonymity. “My own experience is that GCs rely heavily on outside counsel and what’s acceptable in the industry. To suddenly say we’re going to start charging GCs with securities fraud or firing them is a development that could discourage people from wanting to accept positions as GC at young companies.” According to The Wall Street Journal, about 24 companies have met government scrutiny in recent months for past stock-option grants, including several Bay Area businesses. In November 2005, three executives from Mercury Interactive Corp. resigned in connection with stock options, including the company GC, Susan Skaer. According to internal investigations, the executives were found to have participated to varying degrees in misdating stock option grants to boost their value and benefited personally from the practices. MAGNET FOR PROSECUTORS Since the Journal raised awareness of stock option backdating practices early this year, prosecutors and regulators have been clamoring to take the lead in investigating about two dozen companies suspected of manipulating options dates. So far, that’s meant a wave of subpoenas from at least two different SEC offices and three U.S. attorneys’ offices. It’s an unsurprising phenomenon when a wide-ranging financial scandal lands on the front page. But it’s one that’s raised the question of whether different prosecutors are fighting over who gets to pursue a high-profile case, especially since Silicon Valley companies have been subpoenaed by U.S. attorneys’ offices in New York. Last week, for example, the Journal’s law blog speculated that there may be a “turf battle” between the U.S. attorney’s offices for the Southern District and Eastern District of New York, as each was issuing subpoenas to companies accused of backdating. And the next day, it came out that the U.S. attorney’s office for the Northern District of California had issued two subpoenas, one of them to a company already subpoenaed by the Eastern District of New York, which is based in Brooklyn. Both offices have sent subpoenas to San Jose chip equipment maker KLA-Tencor. And the Eastern District has subpoenaed Sunnyvale-based Juniper Networks. The Manhattan office has apparently taken a less aggressive stance. Such spats are relatively common with high-profile allegations, said Leslie Caldwell, a partner at Morgan, Lewis & Bockius and a former assistant U.S. attorney in San Francisco and Brooklyn. “Whenever there’s an event that receives substantial press coverage, prosecutors want to get in on it, and the thing they do to get in on it is issue subpoenas,” said Caldwell, speaking on the general issue of inter-district conflicts. Encroachment “is always an issue of potential dispute between U.S. attorney’s offices,” she said. “The Southern District and the Eastern District have a long history of prosecuting companies outside their districts.” While the two New York offices competed to issue subpoenas over the last month, the SEC offices in San Francisco and New York were also sending out a flurry of their own subpoenas. That’s raised questions over what type of coordination � or competition � there is between the various agencies. As the Brooklyn and San Francisco prosecutors continue their probe, former prosecutors said any toe-stepping is likely to be worked out before things get too heated. “If they can’t work it out, they typically go to Washington,” said David Shapiro, a partner at Boies, Schiller & Flexner in Oakland who served as acting U.S. attorney in San Francisco prior to the appointment of current U.S. Attorney Kevin Ryan. Luke Macaulay, a spokesman for the San Francisco U.S. attorney’s office, said Tuesday that prosecutors there are “conducting an investigation into the possible backdating of stock option grant dates by several Bay Area companies,” but wouldn’t comment on the relationships between the various probes. “I’m sure that Kevin Ryan will be arguing that he should investigate the companies that are in his district,” Shapiro said. Reporter Petra Pasternak’s e-mail address is [email protected].

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