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Semiconductor equipment maker KLA-Tencor emerged Wednesday from a Securities and Exchange Commission backdating probe with barely a scratch. This is probably the result, some in the local defense bar say, of its extensive cooperation with the SEC – and an aggressive internal investigation carried out by Richard Marmaro, a partner with Skadden Arps Slate Meagher & Flom. The San Jose, Calif., company avoided fraud charges and penalties entirely, settling allegations that for years it had overstated its income by millions and made misleading statements to shareholders. In the end, the company agreed only to “a permanent injunction against violation” of corporate record-keeping laws. The SEC sang KLA’s praises and sent a message to other companies about the value of cooperation in its press release. “KLA-Tencor went to great lengths to clean house after discovering the fraud, and their cooperation greatly facilitated the government’s investigation,” Marc Fagel, the agency’s associate regional director, said in the release. Over the last six months, the defense bar has buzzed about Marmaro’s aggressive tactics in the KLA investigation. According to several attorneys briefed on the case, Marmaro conducted long and sometimes uncomfortable interviews with current and former KLA executives and provided the SEC and Department of Justice officials with a comprehensive account of who within the company engineered widespread options problems – to the joy of government lawyers and the frustration of defense counsel. Marmaro declined to comment on his work for KLA. He had spent the day working on jury instructions for another client, Gregory Reyes, the former Brocade chief executive whose criminal backdating case is expected to go to a jury this week. KLA’s former Chief Executive Kenneth Schroeder suffered far deeper wounds than his former employers: The SEC charged him Wednesday with engaging in a scheme to backdate option grants and hide their value from investors and auditors. Regulators are seeking disgorgement of Schroeder’s ill-gotten gains, monetary penalties, and a bar from serving as an officer or director of a public company. The SEC alleges that Schroeder, at several points over the years, was informed by his counsel of the accounting rules for option grants and then ignored his lawyers’ concerns about backdating. For instance, in September 1999, the SEC alleges, he received an e-mail from outside counsel explaining how to account for nonbackdated grants. In 1999, Wilson Sonsini Goodrich & Rosati served as the company’s primary outside counsel, and the firm’s chairman, Larry Sonsini, was KLA’s corporate secretary. In March 2001, the SEC says the company’s general counsel – who at the time was Stuart Nichols – warned Schroeder that failing to account for backdated grants could be against the law, and sent him a memo describing the relevant accounting rules. In an e-mailed response, Schroeder allegedly dressed his general counsel down, according to the SEC’s complaint. “Help me, don’t just tell me how to follow a strict interpretation of rules,” Schroeder wrote. “I need a ‘wartime counselor,’ not someone who can recite page and verse.” Schroeder’s attorney, DLA Piper partner Shirli Fabbri Weiss, said her client denies the allegations in the SEC complaint. “The SEC has misinterpreted his e-mail communication back to the general counsel,” she said. “That was simply requesting him to look into the matter and advise him as to the proper way to do things. It has been completely distorted in an attempt to make a case against Mr. Schroeder.” The SEC subpoenaed Wilson Sonsini in January, forcing the firm to turn over several e-mails from its work with KLA. People familiar with the case say the March 2001 advice Nichols provided Schroeder originated with Wilson partners Bret DiMarco and Roger Stern, whom Nichols had asked to opine on whether grants to executives could be backdated. DiMarco told Nichols no, and explained the regulatory and accounting risks of doing so, according to several people with direct knowledge of the government probe. KLA took a $370 million charge in January to account for improperly documented option grants. The SEC’s investigation continues, as does the DOJ’s criminal probe. This article originally appeared in The Recorder, a publication of ALM.

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