Sealed is the fate of Comverse Technology’s former general counsel, William Sorin, for his role in that company’s backdated stock options. An uncertain future, however, still potentially awaits many more GCs caught up in the Securities and Exchange Commission’s web of backdating investigations.
Sorin, 57, the first attorney to plead guilty over allegations that he helped manipulate backdated stock options, will pay $3.1 million to settle civil-fraud charges brought by the SEC. The settlement illuminates a whole new area of concern among attorneys who now find themselves in the crosshairs of government investigators, even as they try to probe their own companies’ possible misdeeds.
Henning
The increasing enforcement action against general counsels by the SEC is “uncommon to the extent that we don’t have that many lawyers involved,” says Peter Henning, a former attorney in the enforcement division of the SEC and in the criminal division of the U.S. Department of Justice, and now law professor at Wayne State University. “You may be talking in the double digits, but certainly not more than 100, but at the same time that’s a lot more than we’ve seen in the past.”
And it’s not over yet, as indicated by SEC enforcement director Linda Chatman Thomsen, who promised in a written statement to “vigorously pursue those responsible for backdating schemes wherever the investigation may lead, even, as appropriate, into the offices of corporate counsel.”
Sorin’s indictment serves as an example to other GCs that their fiduciary duties to a company far outweigh their instinctive legal duties to fellow coworkers. “If you know that your company’s financial statements are wrong, don’t wait for the regulators to make you fix them,” says Joan Waggoner, a partner with the accounting firm Blackman Kallick. “If you know that some of your employees have purposefully participated in a financial reporting fraud, you need to remove them.”
But, Henning warns, the SEC will not only pursue general counsels, but rather any lawyer involved in security violations relating to legal advice. It’s certainly something of which all lawyers—both in-house counsel and outside counsel—need to be aware, he says.
Heed Red Flags
Lawyers must be especially aware of three main conditions that will trigger a serious action by the SEC, Waggoner says. First is an “egregious, blatant, purposeful abuse of rules,” she says. Such abuse includes any situation where an individual falsifies records or intentionally fails to record information.
“The Commission is looking at lawyers now more broadly as ‘gatekeepers,’ ... [with] the lawyer ha[ving] a responsibility to ensure that fraud is prevented and not just dealt with after the fact,” Henning says.
A second condition that the SEC considers is whether the general counsel personally benefited from the options backdating. Therefore, the SEC also will closely scrutinize the lawyer’s direct involvement, Waggoner says.
Hackett
This increasing level of scrutiny by the SEC is what has caused many in-house counsels to resign in recent months, says Susan Hackett, general counsel of the Association of Corporate Counsel. “The issue of other GCs resigning often will take place when the GC is not implicated as having proactively been involved in some kind of scheme, but rather when they were on duty, but didn’t stop others from engaging in what is now seen as shenanigans.”
General counsels who don’t believe they are guilty of a crime, “but whose reputations are being dragged into the mud” by allegations that the company engaged in improper backdating, often will leave largely to keep their reputations clean, Hackett adds. Otherwise they risk a professional perception that they failed to stop something they should have.
And any time the SEC can file charges, a prosecution is likely, Hackett says. “There aren’t going to be many cases in which they can prove wrongdoing by the GC, so wherever they’ve got that evidence, I think they’ll prosecute to the fullest extent, not only to send the message, but also to underscore that lawyers aren’t exempt.”
The third condition that will trigger a SEC action is the quality of the case. For example, the case against Monster Worldwide—which included an email trail written by the company’s former general counsel, Myron Olesnyckyj— demonstrates his alleged knowledge of the accounting implications of backdated options and implies a high level of culpability, Waggoner says.
ANNOUNCEMENT
An excerpt follows announcing that the SEC has filed charges against Monster’s former GC, Myron Olesnyckyj.
The Securities and Exchange Commission [has] charged Myron F. Olesnyckyj, the former General Counsel of Monster Worldwide, Inc. with securities fraud for participating in a multi-year scheme to secretly backdate stock options granted to thousands of Monster officers, directors and employees, including himself. Olesnyckyj, along with others, falsified documents to make it appear as if the company had actually granted options on certain dates. In reality, the grant dates had been selected after the fact by looking backward for a date on which the stock price was low. By backdating and improperly accounting for options, Monster granted undisclosed compensation to its employees, failed to recognize compensation expenses, and overstated its net income by $340 million from 1997 through 2005. Olesnyckyj, 45 and a resident of New Providence, N.J., personally profited by receiving backdated options.
Linda Thomsen, Director of the Commission's Division of Enforcement, said, "By backdating the vast majority of the stock options it granted, Monster, one of the premier Internet companies of the last decade, used the lure of instant 'paper profits' to attract and retain its employees without booking the appropriate employee compensation charges. This scheme defrauded Monster's investors. The SEC will continue to work tirelessly to uncover and to stop such conduct."
Mark Schonfeld, Director of the Commission's Northeast Regional Office, said, "Olesnyckyj knew that backdating was wrong but nonetheless went along with the scheme. Any lawyer who works at a public company should do everything possible to thwart fraud — not participate in it."
The complaint alleges that, from 1997 through 2003, Olesnyckyj backdated stock options grants to coincide with the dates of low closing prices for the company's common stock, resulting in grants of in-the-money options to numerous individuals. When making grants of options to numerous recipients, certain officers and employees at Monster would select a low closing stock price at which they wanted to grant stock options. Olesnyckyj, or others acting at his direction, prepared backdated documentation for Monster's Compensation Committee containing the grant date that reflected the low closing price for Monster's common stock. Olesnyckyj then caused Monster to misrepresent in its periodic filings and proxy statements that all stock options were granted at the fair market value of the stock on the date of the award, when that was not the case.
The complaint further alleges that Olesnyckyj misled Monster's outside auditors in an attempt to hide the backdating scheme by providing documentation to them that misrepresented the grant date of the stock option awards.
Source
Litigation Release No. 20004 (Securities and Exchange Commission; Feb. 15, 2007)
On the other hand, in a case like the one against Apple, the quality of the case and the charges that the SEC may bring (it has not yet filed any) also depend largely on the number of innocent shareholders who were harmed in connection to the wrongdoing, says Hackett. The company’s stock has soared in recent years, largely thanks to the technology and marketing genius of CEO Steve Jobs. An argument can be made, Hackett says, that prosecuting the company and possibly ousting Jobs will do Apple shareholders no favors.
The quality of the case also depends on the level of seniority of those involved in the targeted activity, since the SEC tends to be more interested in those cases that involve company leaders, as opposed to mid- or lower-level officials. “And obviously, they have to be able to prove a case of criminal action [or] intent,” Hackett says. “Not all of these scandals are so cut and dry in that regard.”
Such was not the case for Sorin, who faces up to five years in prison for being found guilty on all counts. Prison time or not, state bar disciplinary action is sure to follow. “Certainly in Mr. Sorin’s case, I can’t think of a way Mr. Sorin won’t lose his license,” says Henning.
And that’s not to mention the taint that such a decision puts on one’s reputation, says Hackett. “To be barred is a stain on your character and integrity you can never remove.”
Just Say ‘No’
The lesson to be learned is not to make careless decisions, Henning says. “I don’t think anybody sits down and says, ‘What can I do to commit fraud today?’ But instead, they cut corners. They try to get something done immediately, or they’re asked to find a way to do something and turn a little bit of a blind eye to this.”
Then come the legal actions—criminal, civil, and professional—and often all arrive at the same time. “It follows you, and you can’t lie your way out of it,” Henning continues. “Everyone else is doing it. You’re not hurting anyone. You have a litany of excuses. None of them, by the way, are recognized as excusable.”
A good lawyer, on the other hand, keeps you out of trouble, Henning says. “One of the most important jobs of a GC is to say no,” he says. “That’s also the hardest thing for a lawyer to do.”
If you are currently already under scrutiny by the SEC, the best thing to do is to “settle and settle quickly,” Hackett advises. “There is no argument that you will raise that will convince anyone that your practices were not suspect, even if you’re right, so the best you can do is to cooperate and get the issue closed so that you’re not in the headlines, and your stock price is preserved and your employees can focus on doing their jobs and making the company work.”
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