Susan Skaer was the top lawyer at Silicon Valley highflier Mercury Interactive Corp. for five years. Today, the newlywed Skaer sells real estate in Palo Alto under her married name, Susan Tanner.
Skaer is just one in a generation of Silicon Valley in-house lawyers whose careers were turned upside down by backdating � the widespread and illegal practice of companies picking stock option grant dates after the fact and not accounting for them properly.
The scandal � which covered a decade starting in the late 1990s � shook in-house lawyers with unprecedented force. The Recorder surveyed 39 Silicon Valley companies that restated financial results because of backdating and found that just three general counsel still remain in their positions at those companies.
“I can’t think of another industry-wide crisis that hit so hard on general counsel,” observed David Anderson, a Pillsbury Winthrop Shaw Pittman white-collar defense lawyer who is set to join the U.S. attorney’s office.
Of the 30 companies that had general counsel during the backdating period, 14 GCs were directly caught in the fallout. Four were charged by the government � though none has been convicted � and another 10 either shouldered blame from their company or stepped down or were fired at the time of an internal or government investigation.
“I personally have not seen a genre of cases in which GCs played such an important role in the wrongdoing,” said Michael Dicke, the SEC’s assistant regional director in San Francisco.
|Charting New Courses
See our breakdowns (in .pdf) of the how the 20 Valley companies with the biggest backdating-related earnings restatements dealt with their GCs, and where those lawyers have gone since.
On the flip side, some speculate privately that certain GCs took the fall for their superiors. Defense lawyers in some cases have argued that outside counsel was actually to blame. And many lawyers say they believe that few GCs blessed backdating � or some semblance of it � knowingly.
Regardless, washing off the stink of backdating has been difficult for some � even for those who weren’t charged. At least 12 of the 31 GCs The Recorder surveyed appear not to be practicing currently, such as former Apple Inc. GC Nancy Heinen, who is facing SEC charges.
Although Heinen probably doesn’t need the work � she has cashed out at least $50 million in Apple stock � others have found it tough to move on, legal recruiters say.
“A lot of these people were innocent, but the reality is that boards became so skittish on this issue that they didn’t want to take a chance on being second-guessed if they hired a ‘tainted’ general counsel,” said Robert Major, a veteran in-house recruiter at Major, Lindsey & Africa.
Even so, seven of these general counsel have managed to get other jobs practicing law, either in house or at law firms. Four had already obtained other jobs before the backdating mess became public, but three have moved on since. For those three, a premium seems to have been put on having cleaned up or resisted backdating � as in the case of Stuart Nichols, former general counsel at KLA-Tencor Corp. who became the top lawyer at MIPS Technologies Inc. last fall.
Three others � like Mercury’s Skaer, who is fighting SEC charges � have chosen less traditional legal careers since.
The scandal also has changed the role of in-house lawyers in Silicon Valley. Some of the nine companies that didn’t have a GC at the time that backdating occurred have added one as a way to remedy the situation. Other companies, like BEA Systems Inc., have given the top lawyer’s position more authority since the scandal, according to public filings.
“It’s reaffirmed how important the legal function is,” said Stephen Debenham, general counsel at Asyst Technologies Inc.
Debenham, along with Foundry Networks Inc.’s Cliff Moore and Maxim Integrated Products’ Charles Rigg, are the three who have remained in their positions. None of them took any blame for the options problems at their companies.
THE TOLL OF THE BLAME GAME
General counsel were used to being the ones asking the questions. The backdating scandal cast them as suspects in the eyes of their company audit committees and government investigators.
Marcia Sterling retired as GC at Autodesk Inc. after more than a decade in March 2006. Five months later, her company launched an internal investigation that would reveal that options had been improperly handled at times over an 18-year period ending in 2006. Autodesk took a $35 million charge and didn’t place any blame on the former GC. Even so, Sterling said, she’s glad she retired when she did.
“My timing was fortunate,” she said. “I know it’s been a trying time for a lot of general counsels, for sure.”
The trying times were well-documented at companies like Apple and KLA-Tencor, but GCs at less well-known companies like Blue Coat Systems also felt the heat. Cameron Laughlin, who had risen from corporate counsel to general counsel in a matter of months in 2004, was put on the spot during Blue Coat’s 2006 internal investigation.
The special committee concluded early last year that Laughlin was aware that grant dates were being chosen with the “benefit of hindsight” and should have known better. She also received backdated options herself. Other execs also shared the blame and the company took a $49 million charge.
The committee did note that Laughlin � a former associate at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian and GC at two private companies � “had limited public company securities and corporate governance experience prior to joining us.” They recommended that Blue Coat get a new GC, but said that Laughlin could remain with the company.
Laughlin, who now serves as associate GC at Blue Coat, declined to comment.
Some GCs were blamed by their companies and resigned, like CNET’s Sharon LeDuy, who was never charged. Others were blamed even after they’d left the company. Mike Ross, the former Atmel GC, was fired after an investigation into travel funds amid a struggle for corporate control at the company in 2006. A year later Atmel laid the blame for backdating on Ross, among others.
White-collar defense lawyers say that some companies were spooked by government investigators and moved quickly to get rid of GCs or other higher-ups in an effort to appease them.
“There’s a difference between the SEC putting pressure on, and companies feeling like they needed to be responsive to perceived pressure for the SEC,” said Jordan Eth, a securities lawyer with Morrison & Foerster. “But what better way to do it than to serve up a senior officer?”
Dicke, of the SEC, said that if a company took “swift remedial measures” it was taken into account in decisions about penalizing companies.
In all, the SEC charged or settled with 14 individuals from seven Silicon Valley companies in backdating trouble. Four of them were GCs � Skaer, Heinen, McAfee’s Kent Roberts, and Lisa Berry, formerly of KLA-Tencor and Juniper Networks Inc. All four have denied wrongdoing and are fighting the charges in court.
Getting a new start has not been easy.
For those fighting SEC charges, a new job may be out of the question. Roberts, who also was charged by the Justice Department, and Berry and Heinen appear to have laid down the law books for now.
But Skaer has found a new career as a real estate broker for the time being. According to the SEC, Skaer was forced to resign from Mercury in 2005. But in early 2006, she obtained a broker’s license and now works at Dreyfus Properties in Palo Alto. She was married in the summer of 2006.
Skaer did not return repeated phone calls seeking comment and her lawyer declined to comment. (Disclosure: The Recorder and Skaer were adversaries in litigation last year over public access to documents in Mercury civil litigation.)
For GCs who weren’t charged, the road has been easier � especially for those who were perceived to have cleaned up or at least resisted backdating.
KLA-Tencor GC Nichols stepped down in late 2006 after the company admitted to backdating. But in a much-publicized 2001 e-mail exchange, Nichols warned KLA execs about backdating, according to the SEC. That earned him the now famous e-mailed scolding from CEO Kent Schroeder, 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 ‘war time counselor,’ not someone who can recite page and verse.”
Nichols was hired as GC at MIPS Technologies � which has faced its own backdating issues last fall.
Likewise, Thomas Lavelle was embraced as Rambus Inc.’s new GC in 2006. His former company, Xilinx Inc., restated $2.2 million in earnings due to misdated options, but due to administrative errors and not misconduct, according to the company. Xilinx successfully got all shareholder lawsuits dismissed.
“There was a very small adjustment as a result of few clerical errors,” Lavelle said. “Truthfully, I may have got undue credit for making the allegations go away.”
It appears in general that the more minor restatements � especially where there was no foul play � didn’t dampen career prospects. Michael Heafey, an IP lawyer who was GC at Sunrise Telecom Inc. when the company had issues with options, just made partner at Orrick, Herrington & Sutcliffe. The company took a $5.5 million charge and found that the irregularities were from administrative errors in the granting process, not any misconduct.
“It was an accounting error,” said Heafey, who left Sunrise long before the issues came to light, “not backdating.”
Another GC, Tyler Wall, was at Chordiant Software Inc., which took an $8 million charge, but found no intentional misconduct. In 2005 Wall found a home at Brocade Communications Systems, which already had huge backdating problems before he arrived.
But others have been lost to the winds. Verisign’s former GC, James Ulam, was asked to sign a termination agreement two days before the company claims it found out it might have backdating issues in 2006. The legal department was criticized by the audit committee for being lax, but it didn’t name him personally. Today, Ulam is listed as inactive on the Mississippi State Bar Web site.
Others also appear no longer to be practicing, including CNET’s LeDuy and Atmel’s Ross. Neither returned calls. Their lawyers declined to comment.
“A number of general counsel have left and my understanding is that some of them have not been able to be employed since � that’s pretty severe,” said Rambus’ Lavelle.
The lesson of the troublesome option grants was a hard one for GCs, but some companies say they’ve learned and strengthened the GC position.
BEA Systems, which had a huge $425 million restatement, said last February that it would get a new GC to replace Robert Donohue, who stayed on as a vice president in the legal department. The audit committee recommended that the new GC report directly to the CEO and also have responsibility to report to the board’s nominating and governance committees. (That arrangement may now be moot because the company has since been taken over by Oracle).
In particular, more GCs have now been given � or simply taken � more responsibility for the stock options granting process. At Sunrise Telecom, the chief legal and compliance officer now attends all compensation committee meetings, records the minutes and makes sure grants are in line.
Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.
“General counsels feel that the compensation committee is no longer just the domain of VP of HR,” said Kate Rundle, GC at Bookham Inc., which didn’t have backdating problems. “Back in the days when most of this was happening, the whole stock thing was considered sort of an administrative matter.”
Nine companies surveyed did not have general counsel at the time that options were being improperly handled. Since then, four of those companies � Sanmina-SCI Corp., PMC-Sierra Inc., Zoran Corp. and Trident Microsystems Inc. � have installed the position. Trident hired a GC, David Teichmann, specifically as a remedy to its issues with options, the company said in a regulatory filing.
For in-house lawyers themselves, the lessons may be more grim. The Association of Corporate Counsel put out a report last September ominously entitled “In-House Counsel in the Liability Crosshairs.” The report concluded that, especially with the fallout from the backdating scandal, “changes in the potential liability environment” have become “tangible and real.”
“One enduring lesson is get outside help when you’re in over your head � but even then it might not be enough,” said ACC General Counsel Susan Hackett. “They would much rather target the in-house lawyer than the outside counsel or the auditors.”
The report also highlighted the tension between expectations from the SEC that GCs be “gatekeepers” and the need to represent their companies.
“There’s been a lot of discussion about who do we work for,” said Asyst GC Debenham. “There’s a lot of pressure to police the conduct of companies; there’s sometimes a tension between that and properly advising your clients.”
Another change may be that management and boards of directors are a little more skeptical of their lawyers’ advice. Lionel “Lon” Allan, the president of the local chapter of the National Association for Corporate Directors, said directors have been reminded to think for themselves.
“The punch line is that regardless of the expertise or the intellectual caliber of inside and outside counsel,” Allan said, “directors realize that just because the lawyers say it’s legal, or waffles a little, doesn’t mean it is.”
On the other side, the SEC’s Dicke says the whole scandal has taught lawyers not just to go along with higher-ups.
“I can tell you from [being] out giving speeches, it’s certainly caught the attention of in-house and lawyers and their outside counsel that they have to be vigilant to not get sucked into schemes like backdating,” he said.
Ultimately, the message from the backdating scandal may be a far more personal one for general counsel.
“It’s reminded general counsel how precarious our jobs can be,” Asyst’s Debenham said.