Yesterday federal prosecutors announced the indictment of Kent Roberts, McAfee’s former general counsel, for backdating related charges. Today’s Wall Street Journal points out that former McAfee CEO George Samenuk knew about some date gamesmanship with one of his stock options grant, as well. So why wasn’t he indicted?
Larry Ribstein—who coined the “Apple Rule”—wonders if there isn’t some invisible federal law enforcement rule protecting sitting corporate chief’s from getting indicted so long as they don’t actually have backdating ink-stains on their hands.
The bottom line seems to be that the Apple Rule protects an executive who lets an underling do the messy backdating, even if the executive knows about it. While Samenuk isn’t a popular well-known executive like Jobs, we need to have an “indirect Apple rule” for executives whose indictment would set an unpleasant precedent for an executive who is protected by the “direct Apple rule.”
In the end I expect that the biggest mess left by the backdating “scandal” will be a widespread perception of unfairness in the criminal justice system.
But clearly the “indirect Apple Rule” isn’t quite as strong as the “direct Apple rule”–Samenuk was forced to resign last year when backdating at McAfee came to light.
SEC Details McAfee Plan For Options [$$] [Wall Street Journal]
The former general counsel of McAffee yesterday became the eleventh person charged with criminal offenses related to stock-options backdating. The feds have said they are examining some 140 companies for backdating but its not hard to see why McAffee’s former general counsel ended up high on its lists for criminal indictments.
First, McAffee was an early and somewhat easy target for the feds because the company has had to restated its financial results five times in the past five years. The company faced securities fraud charges in connection with an alleged scheme to overstate revenue from 1998 to 2000. It settled with the authorities by agreeing to pay a $50 million civil penalty, but neither admitted nor denied any wrong-doing. It’s former controller, however, pleaded guilty to one count of securities fraud.
Kent Roberts, the indicted former general counsel, allegedly manipulated his own stock options grant date, as well as that of his chief executive. He then allegedly turned around and fired the controller for manipulating stock options grant dates. Nasty. His indictment has been expected for at least two weeks now.
Roberts seemed to have tripped the self-dealing alert that we’ve seen in other backdating indictments, and engaged in some corporate backstabbing that makes him hardly a sympathetic character. Here are the details on the indictment from the Wall Street Journal:
According to a seven-count indictment returned by a federal grand jury in San Francisco, Mr. Roberts in late 2000 became dismayed that an option grant made to him earlier that year was “underwater” — that is, its exercise price of $29.62 was higher than the stock’s price at the time. An option can only be cashed out for profit if the exercise price is below the open-market price of the stock.
According to the indictment, Mr. Roberts directed the company’s then-controller, Terry W. Davis, to change the grant’s record so it appeared to have been granted April 14, 2000, a day the stock fell to $19.75. That immediately made his grant more valuable, though he never later cashed out any of the options for a profit.
Mr. Roberts got Mr. Davis pushed out of his job, the indictment says. In 2002, Mr. Roberts headed an internal probe of irregularities at McAfee, which was then known as Network Associates Inc. Upon learning that Mr. Davis, who wasn’t identified by name in the indictment, had among other things lowered the exercise price on some other options, Mr. Roberts recommended that he be removed from his finance-department position, the indictment said. It added that Mr. Roberts didn’t tell internal auditors or the SEC that Mr. Davis had manipulated Mr. Roberts’s own grant.
It’s notable that the prosecutors seem to have concluded that the self-dealing trigger was pulled when Robert’s manipulated his own grant even though he never cashed out the backdated options. This is important because the “no gain from backdating” has become a major line of defense for some corporate executives, including Apple chief Steve Jobs. So the question remains: will the feds indict Jobs or will the “Apple Rule” continue to protect him? (More on the “Apple Rule” from the man who coined the term here)
McAfee’s Ex-Counsel Is Charged With Options Fraud [$$] [Wall Street Journal]
McAfee Ex-GC Indictment [pdf file via WSJ Law Blog]
The former general counsel of computer-virus fighter McAfee may be the sixth person charged with criminal offenses related to stock-options backdating, the Wall Street Journal reported this morning. The feds are reportedly preparing criminal charges against Kent Roberts, who was fired in May 2006 after the company revealed it had become aware of “one episode” that it described as “improper.”
We won’t know the details of the wrong-doing alleged until the indictment is handed down but as of right now Roberts reported conduct doesn’t look too much different from that of, say, Apple’s Steve Jobs.
Here’s how the Journal describes the backdating episode:
Mr. Roberts received options dated April 14, 2000, to buy 20,000 shares at $19.75, a deep low in the company’s stock price, according to a Securities and Exchange Commission filing. Shares rose to more than $25 that month.
Unfortunately for Roberts he is not a celebrity corporate executive. So he is being treated like a backdating miscreant and probably can’t expect a former vice-president to write a report exonerating his conduct. What’s more, since he seems not to have had his options converted into restricted stock awards, he may have actually exercised his options, sold the stock and therefore benefited from the backdating.
Actually, the main reason for Roberts’ indictment is probably not because of anything he did. It’s most likely an attempt to secure his cooperation against his superiors at McAfee. Since the backdating scandal came to public attention, McAfee has been especially hard hit, losing its Chairman and Chief Executive, George Samenuk, its president, Kevin Weiss. No doubt the feds look at these as the big fish and hope that an indictment will persuade Roberts to turn on his former bosses.
McAfee Ex-Counsel Likely To Face Options Charges [Wall Street Journal]