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In the final days of 2000, accounting troubles led McAfee Inc. to announce a surprise loss in revenue. The company’s chief executive resigned, along with three other officers. Soon after, the Securities and Exchange Commission launched its first investigation into the Santa Clara company’s books. In the ensuing years, the SEC would bring suits against the departed officers, charging each with securities fraud. And in January 2006, just weeks before the SEC filed a civil fraud suit against the company � alleging it had misled investors and inflated revenues by hundreds of millions of dollars � McAfee’s president suddenly stepped down. That month, the company paid the SEC $50 million to settle the matter. Throughout the turmoil, General Counsel Kent Hart Roberts remained unscathed, dutifully guiding McAfee’s legal strategy from company offices in Plano, Texas. This spring, however, the stock options backdating scandal that has been rolling through Silicon Valley hit McAfee. In a statement released in May, the company said it became aware of “one episode involving the General Counsel in 2000 that was improper.” As a result, Roberts was the first � and so far, the only � executive at McAfee to get fired over backdating. Roberts’ plight vividly illustrates the vulnerability of in-house counsel in this latest dust storm to hit corporate America. To date, more than 70 companies have been publicly mentioned in connection with backdating problems. But unlike past scandals, backdating has put in-house lawyers under the magnifying glass of prosecutors and regulators. Federal prosecutors in Brooklyn are close to filing charges against former Comverse executives, defense lawyers say, a company whose general counsel resigned this past spring. And the SEC seems bent on holding lawyers more accountable than it has in the past. As a result, corporate counsel are sharing some of the same concerns that chief executives and chief financial officers have weighed for years, such as the breadth and depth of their indemnification and directors and officers (D&O) insurance, agreements drafted to cover what can amount to astronomical defense costs. Since the beginning of the year, Roberts, along with other McAfee executives, has been named defendant in multiple derivative class actions. In a suit filed by Lerach Coughlin Stoia Geller Rudman & Robbins in June, Roberts is accused of “having participated in the issuance of false and/or misleading statements, including the preparation of the false and/or misleading press releases and SEC filings.” Though the company itself has refused to provide more details of the incident that led to Roberts’ firing, in another civil suit he is accused of receiving an options grant for 100,000 shares on a date in 2002 when the stock rose nearly 25 percent in the days following. “The reason for the extraordinary pattern � is that the purported grant dates set forth therein were not the actual dates on which the stock option grants were made,” the suit said. Roberts declined to be interviewed for this story. He has tapped Cooley Godward chairman and the firm’s former litigation group head Stephen Neal to represent him. Neal, whose past clients have included savings and loan mogul Charles Keating Jr., also declined to comment. Makings of a GC Roberts, 49, earned his J.D. from the University of Missouri in 1981, where he was the note and comment editor for the law review and contributed real-estate law pieces. Former classmates remember him as smart, but not in-your-face about it. “To make law review at the end of the first year [of law school], you had to be in the top 20. We had a class of 150,” said classmate Jason Reschly, now an attorney in Kansas City. “He never went out of his way to get called on. Kent was not one of those who went out of his way to get attention.” Admitted to the bar in Texas and Missouri, Roberts eventually joined Brill, Sinex & Stephenson in 1988. Former name partner James Stephenson said he remembered Roberts as a competent attorney who was taking on tech clients in addition to the real estate work that made up the bulk of his practice. Roberts was not a rainmaker, he said. “I thought he was a good lawyer, very smart,” Stephenson said. “He was a dry, sarcastic-wit-type person,” remembers Joseph Byrom, a litigator who worked with Roberts in the Dallas office. “Very verbal. He wrote well, he spoke well, but his view of life was just different from most other folks” at the firm. Where Byrom said he opened the newspaper and read “Dennis the Menace,” for instance, Roberts would look at the “Far Side.” When Brill closed its Dallas office in 1993, Roberts became vice president of operations and GC at Dallas-based Saber Software Corp., which McAfee acquired in 1995. That accelerated Roberts’ entry into the high-flying tech world, where options have been and continue to be a popular way to attract and retain talented employees. Roberts climbed the ladder at Network Associates’ (McAfee’s other name for a brief time) legal organization for more than three years before the board of directors officially promoted him from vice president of legal affairs to general counsel in January 2001. The promotion added oversight of mergers and acquisitions and IP rights to Roberts’ roster of domestic and international legal responsibilities. “His dedication and commitment to delivering value to customers and shareholders is admirable, and I am proud to have him on our team,” CEO George Samenuk said in a press release at the time. The former GC apparently did well financially during his time at McAfee. Roberts’ expected salary and bonus totaled $592,000 in 2005. His contract includes a severance package including a year’s worth of salary, unless he’s fired “for cause,” according to SEC filings. The Lerach civil lawsuit against McAfee pointed out that Roberts sold 265,834 shares of McAfee stock for $6.7 million between 2002 and 2005. Public records show that among their assets, Susan and Kent Roberts own a two-story single family townhouse on Lovers Lane in Dallas. Valued at $1.5 million in 2004, the residence has three baths, a fireplace and a pool. The Roberts bought it in 1993 for $660,000. Roberts and his former employer are now likely hunkering down with their insurance carriers over their contracts to see who pays what in the legal battle. “Legal defense can run into the seven figures in a difficult scenario,” said one attorney, who requested anonymity because several clients are officers implicated in backdating. “In the worst-case scenario, it can run into the eight figures.” Covering all the bases A recent trial court decision involving accounting giant KPMG held that the government cannot pressure companies to withhold attorney’s fees in criminal matters. That ought to give companies some pause before they cut off payments, said the lawyer. But there are still ways for officers to get stuck with the bill. Though McAfee declined to provide details on its own practices, companies offer indemnification agreements as required by statute or corporate bylaws to cover their employees for “alleged wrongful acts.” Indemnification agreements are valuable, according to Shartsis Friese attorney Jahan Raissi, because they cover costs as they are incurred, up until the point of adjudication, or judicial determination of wrongdoing. “The situation where someone is most likely to foot the bill themselves is when they are found guilty of wrongdoing,” Raissi said. The second line of defense is D&O insurance, which typically covers civil and criminal investigations, including defense costs. An insurance recovery attorney who requested anonymity because of involvement in the McAfee matter said an insurance company has a duty to defend or a duty to reimburse defense costs. “If there’s a civil action and someone is named, they have to go out and buy attorneys,” the attorney said. “As long as there is no finding of fraud or intentional wrongdoing or unapproved personal profit or gain, the insurance company has to reimburse those defense fees as soon as those bills are due.” Much depends on the wording of these highly technical policies, the lawyer said. For example, some definitions explicitly include the word “investigation,” while others attempt to limit the defense to “suits.” Often there is the question of whether the defense costs are covered in full, or if the insurance company can argue that some of the defense costs are not “reasonable and necessary” to the defense. Insurance and indemnification may not cover fines the SEC may levy. And if a company goes bankrupt, the insurance may be in question. For the most part, though, individuals very rarely have to pay legal defense fees because civil lawsuits are typically settled, and settlements do not include admissions of wrongdoing. But then there’s the SEC, which post-Enron is flexing its bow to target lawyers. Rule 102e, which the commission can use to press charges of malpractice, can lead to suspension and disbarment, effectively banning an attorney from practicing as inside or outside counsel of a public company. The rule itself is not new. What’s new, said Raissi, is the SEC’s desire to use it against lawyers. “Traditionally, it’s been used against accountants and auditors,” Raissi said. “In the last two years, the SEC has said they’ll be looking at lawyers, too.” That could lead the State Bar to swing into action, Raissi added. “Bringing an SEC action against a lawyer has profound career impact and if the State Bar gets involved, that could be a death sentence.” Already, the loss of his job has had an impact on Roberts’ other professional pursuits. The Business Software Alliance, which named him chairman in January, had to withdraw the title because he is no longer part of the member company. Legal consultant Peter Zeughauser said further career fallout will all depend on the outcome of the investigation. “If it’s a minor civil offense or a minor fine, I think over time he’ll be fine and � some firm will be happy to have him. People will view it as something in the past that might have happened to anyone,” he said. “If it’s more pernicious, I think many law firms or companies would still welcome him, but I think they’d be a different caliber.”

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