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Nothing in memory has ever caused as many general counsel to lose their jobs as quickly as stock-options backdating. In little more than a year, at least a dozen general counsel have stepped down amid options problems at their companies. These legal chiefs compose about a quarter of the 40-plus executives who have lost their jobs in the steadily expanding options controversy. Indeed, backdating has forced out as many GCs as CEOs. By all indications, the casualty list will only grow. “I expect that we will see more general counsel lose their jobs,” said Erik Lie, the University of Iowa business professor whose research into backdating kindled the current firestorm. Some of these GCs won’t deserve their fate, Lie adds: “My sense is that a lot of innocent people might be implicated in this, including, possibly, general counsel.” Indeed, a review of government documents and official company statements about options-related investigations shows that in some cases, the GC appears to have been little more than a fall guy. In other instances, however, company and government reports have directly faulted in-house lawyers for failing to intervene when grant dates on options were deliberately altered to enrich their recipients. So far, the U.S. Department of Justice and the Securities and Exchange Commission (SEC) are scrutinizing option grants at more than 130 companies. But Lie thinks that another 70 may have engaged in backdating, based on his statistical analysis of 8,000 businesses that issued options between 1996 and 2005. Government probes have already resulted in criminal and civil actions against executives at two companies, Brocade Communications Systems Inc. and Comverse Technology Inc. One of those nailed at Comverse was its GC, William Sorin, who pleaded guilty in November to a single count of criminal conspiracy. Sorin, who will be sentenced in February, faces up to five years in jail and a $250,000 penalty. Other general counsel should brace themselves for government scrutiny as well, said Walter Ricciardi, the SEC’s deputy director of enforcement. “[Our] staff is taking a close look at the role of attorneys, especially to the extent that they were involved in the process by which options were awarded,” Ricciardi said. Of course, not all government investigations will result in a civil suit or criminal indictment. “Many of these GCs won’t ever be charged with wrongdoing,” predicts Russell Ryan, a former assistant director of enforcement at the SEC and now a partner in the Washington office of Atlanta’s King & Spalding. Ryan says that some company boards may have given GCs the boot mainly to show regulators and the market that they’ve cleaned house. “In today’s climate, general counsel can leave or lose their jobs for any number of reasons falling far short of the intentional misconduct that typically results in enforcement action against lawyers,” he added.

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