Follow all the coverage of Hewlett-Packard’s boardroom spying scandal � and the continuing legal fallout.
As The Recorder reported earlier this year, a 2004 internal Wilson Sonsini e-mail referred to KLA’s options practice as “the time machine.”
That missive caught the eye of SEC lawyers, who interviewed the two Wilson attorneys involved, said several people familiar with the case.
Those lawyers are not targets, they said, and are not expected to face further government scrutiny. More recently, an old KLA e-mail has opened up new questions of whom KLA insiders relied on when it came to options grants.
In fact, several people familiar with the KLA case described a Nov. 14, 1998, memo from Lisa Berry � then the general counsel of KLA-Tencor � to Sonsini. They said it was written to prepare Sonsini for a meeting, and covered a range of subjects.
In the communication, which was described by three people close to the case, Berry tells Sonsini that PriceWaterhouse Coopers accountants had approved a process by which the company finalized options dated to August and October at later meetings.
“We got approval by PWC for the stock options committee to meet during the 30 days following Aug. 31 and set the price for repricing at that time in order to maximize the value for employees,” the memo said.
The company has acknowledged that the August grant was backdated, and has repriced those options.
ACCOUNTING FOR APPLE
In both the criminal cases brought by the Department of Justice and civil charges filed by the SEC against various companies, the government is arguing that executives acted with fraudulent intent in manipulating options grants.
In its most recent civil filing, the San Francisco SEC lawyers say ex-Apple Inc. GC Nancy Heinen ordered a subordinate to manipulate the date of a 2001 options grant to CEO Steve Jobs.
It’s not yet clear what Heinen’s exact defenses will be; reached Tuesday, her lawyer, Miles Ehrlich, pointed to an April 24 statement in which he said Heinen acted “consistent with the rules as she reasonably understood them.”
People familiar with the Apple investigation say the case will likely point to the months of hand-wringing at the company in 2001, when executives and attorneys tried to navigate the esoteric rules of options accounting.
A 2001 memo that recently cropped up shows how lawyers struggled with the hazy rules � and ended up dabbling in accounting � as they tried to structure options that would benefit Jobs without hurting the balance sheet.
That year, Apple’s board spent months working out how to compensate Jobs, since a declining share price rendered Jobs’ large 2000 options grant worthless.
Board members, said people familiar with the probe, decided not to simply reprice Jobs’ options, since that would have subjected the company to variable accounting, and therefore a major hit to the balance sheet.
So, according to three people familiar with their communication, Sonsini offered a possible solution: Cancel Jobs’ 2000 grant, wait six months and one day, and issue new options. The delay, Sonsini argued, would have gotten the company out from under variable accounting.
Lawyers working on options cases � who asked not to be identified because they’re handling ongoing SEC probes � said it’s debatable whether such a practice should prevent variable accounting.
And in the end, Apple didn’t take up Sonsini’s suggestion: The board instead gave Jobs a new grant on top of the old one. And it is the new one that forms the basis of the SEC’s complaint against Heinen.
LIKE ROBBING A BANK?
Part of the haziness surrounding the options strategy stems from the difficulty executives face in mounting a pure advice-of-counsel defense.
Peter Henning, a professor at Wayne State University School of Law who studies white-collar crime, said that strictly speaking, defenses that rely entirely on professional advisers can be tough � they require that attorneys or accountants be explicitly informed of a defendant’s behavior.
“Frankly, no lawyer is going to get up there and say, ‘Yup, I told them to commit a crime,’” he said.
But, Henning added, that won’t keep executives from claiming that interactions with accountants and lawyers show that they didn’t intend to commit a crime.
In the Brocade trial, that could be a tough case to make � the government accused Reyes of intentionally deceiving auditors.
“An e-mail authored by the defendant himself � with the emphasis all his own � could not be clearer: ‘IT IS ILLEGAL TO BACK DATE OPTION GRANTS,’” Crudo wrote in a brief.
Speaking generally � and not about any case in particular � Fagel, the SEC enforcement director, said that the options cases that have been charged have involved falsified records.
“I’m skeptical,” he said, “of the claim that someone didn’t understand there was an accounting issue when they created a false document.”
