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My recent columns in this space have noted two trends. The first, as all readers know, is the SEC’s numerous ongoing investigations of public companies’ stock option granting practices. The second is the commission’s increasing focus on attorneys as gatekeepers. When fraudulent activities occurred at Enron and other companies, the cry of “Where were the lawyers?” often arose. Subsequently, the SEC has focused significant enforcement resources on the role of lawyers, especially those in in-house positions. Both trends have now come to a head. In January and February of this year, the SEC filed three enforcement actions against former general counsel of public companies � an unprecedented event. Based on historical patterns, the commission would normally not have been expected to file that many actions in three years, let alone two months. Let’s focus on these three cases � all of which involve stock option grants � in order to see what conclusions can be drawn. On Jan. 10, the SEC filed settled securities fraud charges against William Sorin, former general counsel at Comverse Technology Inc. The commission claimed that Sorin had engaged in a fraudulent scheme for a number of years to grant undisclosed in-the-money options to himself and others by backdating stock option grants to coincide with historically low closing prices of Comverse common stock. According to the SEC, Sorin created records that falsely indicated that Comverse’s compensation committee had approved stock option grants on certain dates when in reality no such actions had taken place. The SEC also charged Sorin with creating false records that facilitated a similar backdating scheme at a majority-owned subsidiary. Sorin consented to the entry of a final judgment that permanently enjoined him from violating both fraud and anti-fraud provisions of the federal securities laws. He agreed to pay more than $1.6 million in disgorgement, of which more than $1 million represented the “in the money” benefit from exercises of backdated stock options. Sorin also agreed to pay in excess of $800,000 in prejudgment interest as well as a $600,000 civil penalty. About a month later, on Feb. 15, the SEC filed a non-settled federal court action against Myron Olesnyckyi, the former general counsel at Monster Worldwide Inc. The SEC’s complaint alleges that for nearly six years Olesnyckyj backdated stock option grants to coincide with the dates of low closing prices for the company stock, resulting in grants of in-the-money options to several individuals. The GC also allegedly prepared backdated documentation for the compensation committee that reflected events that had not actually occurred. He then allegedly caused the company to misrepresent these facts in SEC filings. According to the commission, Olesnyckyi also misled Monster’s outside auditors by providing them with documentation that misrepresented the grant date of the stock options. Unlike Sorin, Olesnyckyj is apparently prepared to litigate as the SEC has not announced any settlement as of the time of this writing in early April. Finally, on Feb. 28, the SEC filed a non-settled enforcement action against Kent Roberts, the former general counsel and corporate secretary at McAfee Inc. Roberts was accused of wrongfully repricing McAfee’s stock option grants to him and others to secretly increase their value. The SEC’s complaint alleges that Roberts, in 2002 and without authorization, changed the date of an earlier stock option grant to him to take advantage of McAfee’s declining stock price, increasing the potential value of his grant by nearly $200,000. Roberts then allegedly concealed his fraudulent repricing by filing false stock ownership reports with the SEC. Two years later, Roberts, in his capacity as secretary of the compensation committee of the board of directors, allegedly falsified minutes of a committee meeting to cause the company to issue stock option grants to the CEO one day later than the committee had actually directed. This resulted in the CEO obtaining a potential benefit of more than $700,000 due to an intervening decline in McAfee’s stock price. Roberts then allegedly signed a proxy statement that misleadingly described this grant and failed to disclose the additional compensation to the company’s CEO. According to the SEC, McAfee conducted an internal investigation during which Roberts confessed his actions. But there is no discussion in the SEC’s press release of any settlement with Roberts. What are the lessons from these three cases? Assuming that the SEC’s allegations are true (which may or may not be proven), the type of conduct that these in-house lawyers engaged in reflects what many in-house lawyers typically take on � preparing minutes of compensation committee meetings, preparing and editing disclosure in SEC filings and proxy statements and documenting stock option grant dates. Thus, the old adage that the commission will not go after lawyers “for doing what lawyers do” is certainly not true. Yet, to be fair, no lawyer should be surprised by an SEC investigation triggered by an SEC filing that contains a false statement that the lawyer knows to be false. The real difficulty arises when it comes to detecting the line between doing something you know is improper versus something that is a close call but later turns out to be deemed improper. I do not know the precise facts of any of the three cases I’ve mentioned above. But I assume that the in-house lawyers � at least with respect to the practice of backdating or repricing option grants or the pertinent documentation � may well have relied on outside counsel for advice. As I have argued previously, in-house lawyers must seek and obtain outside advice when confronted with borderline conduct. An outside law firm may raise issues that the in-house lawyer never saw. Also, in-house lawyers are in a difficult position because, while their client is the company itself, as a practical matter they are normally retained by members of the company’s senior management. That may result in subtle � or not so subtle � pressure to do things that, while not obviously illegal, may at least raise some eyebrows. In those circumstances, in-house lawyers are urged to get outside advice � and follow it! So where does it go from here? We will certainly see many more stock option cases. Indeed, the commission in February filed enforcement actions for fraud against a CFO, a controller and a CEO and chairman of the board for backdating stock option grants. I have not discussed these here because they did not involve in-house counsel. But there is no doubt that there are many more such enforcement actions in the pipeline, and some will presumably involve lawyers. The important point is that lawyers are now squarely within the target zone of the SEC. Commission officials have stated so publicly and are now bringing enforcement actions to prove that they meant what they said. The bottom line: The commission’s stated emphasis on depicting lawyers as gatekeepers is no longer mere talk. David B. Bayless, a partner in the San Francisco office of Covington & Burling, specializes in SEC enforcement matters. He formerly headed the SEC’s San Francisco office.

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