the options scandal: sec and private, enforcement trends

THE OPTIONS SCANDAL: THE OPTIONS SCANDAL: SEC AND PRIVATESEC AND PRIVATE

ENFORCEMENT TRENDSENFORCEMENT TRENDS

REED R. KATHREIN, PartnerREED R. KATHREIN, PartnerHAGENS BERMAN SOBOL HAGENS BERMAN SOBOL

SHAPIRO LLPSHAPIRO LLPEEI’sEEI’s

ANNUAL SEC ENFORCEMENTANNUAL SEC ENFORCEMENTINSTITUTEINSTITUTE

Effective Compliance Strategies in an Era of Stepped-Up Enforcement!Effective Compliance Strategies in an Era of Stepped-Up Enforcement!May 22-23, 2007 • New York June 27-28, 2007 • ChicagoMay 22-23, 2007 • New York June 27-28, 2007 • Chicago

Reed R. KathreinReed R. Kathrein

11 years defended corporations11 years defended corporations

19 years sued corporations for securities fraud19 years sued corporations for securities fraud

1994 – 2004 Partner and founder of San Francisco office 1994 – 2004 Partner and founder of San Francisco office of Milberg Weissof Milberg Weiss

2004 – 2006 Partner in Lerach Coughlin2004 – 2006 Partner in Lerach Coughlin

2007 Partner and founder of San Francisco Office of 2007 Partner and founder of San Francisco Office of Hagens BermanHagens Berman

Background Background

Between 140 and 170 companies have been investigated over the Between 140 and 170 companies have been investigated over the last year for options backdating.last year for options backdating.

Estimates are that the scandal is costing public companies over $5 Estimates are that the scandal is costing public companies over $5 billion in market capitalization.billion in market capitalization.

Now, with technology available for the first time, the SEC and the Now, with technology available for the first time, the SEC and the private plaintiffs bar are looking at spring loading options. private plaintiffs bar are looking at spring loading options.

Learn from one of the attorneys who has been close to the issues Learn from one of the attorneys who has been close to the issues what is happening, and where enforcement is going.what is happening, and where enforcement is going.

Will the plaintiffs bar jump into the spring loading cases too?Will the plaintiffs bar jump into the spring loading cases too?

DefinitionsDefinitions

Options backdatingOptions backdating is the practice of granting an is the practice of granting an employee stock option that is dated prior to the date that employee stock option that is dated prior to the date that the company actually granted the option.the company actually granted the option.Bullet dodgingBullet dodging - delaying an options grant until just after - delaying an options grant until just after bad news bad news Spring-loadingSpring-loading - timing an options grant to precede good - timing an options grant to precede good news news Symmetric spring-loadingSymmetric spring-loading - where members of the board - where members of the board who approve the grant are aware of the forthcoming who approve the grant are aware of the forthcoming good news good news Asymmetric spring-loadingAsymmetric spring-loading - where members of the - where members of the board who approve the grant are unaware of the board who approve the grant are unaware of the forthcoming good news forthcoming good news

Nefarious But Legal?Nefarious But Legal?

Granting in-the-money options is not illegal, so Granting in-the-money options is not illegal, so long as:long as:– you account for it properly,you account for it properly,– it is allowed under the stock option plan,it is allowed under the stock option plan,– you disclose it, andyou disclose it, and– pay your taxes.pay your taxes.

Backdating is to pretend that you’re not granting Backdating is to pretend that you’re not granting in-the-money options when in fact you are. in-the-money options when in fact you are.

Violate SOPsViolate SOPs

Almost always be violating the terms of the SOP Almost always be violating the terms of the SOP approved by shareholders.approved by shareholders.

SOP’s almost always require that the options be granted SOP’s almost always require that the options be granted at fair market value on the date of the grant.at fair market value on the date of the grant.

If not in SOP would have to make disclosures like:If not in SOP would have to make disclosures like:

– ““Please note that when we grant options, we sometimes pretend Please note that when we grant options, we sometimes pretend that we grant them on certain dates when in fact we grant them that we grant them on certain dates when in fact we grant them weeks later. Not to worry, though. We just do this to amuse weeks later. Not to worry, though. We just do this to amuse ourselves, because we account for them properly using the real ourselves, because we account for them properly using the real dates.” dates.” Roger Parloff ,Senior Editor (Legal Affairs) FORTUNERoger Parloff ,Senior Editor (Legal Affairs) FORTUNE

Bad AppleBad Apple

GC Nancy Heinen emailed CEO Steve Jobs a GC Nancy Heinen emailed CEO Steve Jobs a spreadsheet on January 30, 2001.spreadsheet on January 30, 2001.

Noted that it was a bad idea to choose a grant Noted that it was a bad idea to choose a grant date–even though that was the day the stock date–even though that was the day the stock had been at its lowest–if they wanted:had been at its lowest–if they wanted: ““to avoid any perception that the Board was acting in to avoid any perception that the Board was acting in

appropriately [sic] for insiders prior to Macworld appropriately [sic] for insiders prior to Macworld announcements.” announcements.”

Instead they chose the next lowest after Instead they chose the next lowest after Macworld.Macworld.

HistoryHistoryDavid Yermack, a New York University finance professor, in 1995 studied David Yermack, a New York University finance professor, in 1995 studied data that companies were obligated to publish, under a 1992 SEC decree, data that companies were obligated to publish, under a 1992 SEC decree, the exact dates of options grants in proxy statements. the exact dates of options grants in proxy statements.

Previously, dates were disclosed within often ignored filings. He found a Previously, dates were disclosed within often ignored filings. He found a pattern that the pattern that the stock prices often declined in value just prior to the options stock prices often declined in value just prior to the options grant and rose afterwardsgrant and rose afterwards..

He theorized these were timed to precede good news and follow bad news. He theorized these were timed to precede good news and follow bad news.

In 1997, his findings were published in the Journal of Finance.In 1997, his findings were published in the Journal of Finance.

Finance professors David Aboody of UCLA and Ron Kasznik of Stanford Finance professors David Aboody of UCLA and Ron Kasznik of Stanford followed with a study of companies that grant options at the same time followed with a study of companies that grant options at the same time every year and found a similar pattern, indicating timing of news.every year and found a similar pattern, indicating timing of news.

Eric LieEric Lie

Finance professor Erik Lie of the University of Iowa in 2004 noted Finance professor Erik Lie of the University of Iowa in 2004 noted that many options grants were timed to exploit marketwide price that many options grants were timed to exploit marketwide price depressions that nobody, including insiders, could predict leading to depressions that nobody, including insiders, could predict leading to the conclusion that at least some of the grants must have been the conclusion that at least some of the grants must have been retroactive.retroactive.

His mid-2005 research first suggested that hundreds of companies His mid-2005 research first suggested that hundreds of companies may have routinely manipulated stock- option accounting rules to may have routinely manipulated stock- option accounting rules to sweeten top executives' paydays. A later study done with his sweeten top executives' paydays. A later study done with his research partner, Indiana University associate professor Randall research partner, Indiana University associate professor Randall Heron, puts the number at 2,000, or 29% of all public corporations. Heron, puts the number at 2,000, or 29% of all public corporations.

Lie helped make sure the scandal exploded, notifying the Securities Lie helped make sure the scandal exploded, notifying the Securities & Exchange Commission of his work and showing The Wall Street & Exchange Commission of his work and showing The Wall Street Journal how to interpret a particular company's options records, Journal how to interpret a particular company's options records, although he insists he never I.D.'d companies himself.although he insists he never I.D.'d companies himself.

SEC Begins LookingSEC Begins Looking

Suspecting such patterns aren't due to chance, the Securities and Suspecting such patterns aren't due to chance, the Securities and Exchange Commission began examining whether some option Exchange Commission began examining whether some option grants carry favorable grant dates for a different reason: They were grants carry favorable grant dates for a different reason: They were backdated.backdated.

Before the Sarbanes-Oxley Act of 2002, companies did not have to Before the Sarbanes-Oxley Act of 2002, companies did not have to report option grants until 45 days after the end of the fiscal year in report option grants until 45 days after the end of the fiscal year in which they were granted, which provided firms a significant window which they were granted, which provided firms a significant window of time to retroactively match grant dates with share lows.of time to retroactively match grant dates with share lows.

Companies now are required to file Form 4 reports on option grants Companies now are required to file Form 4 reports on option grants within two business days of the grant date, which limits opportunities within two business days of the grant date, which limits opportunities for backdating. for backdating.

Can’t hide any longer.Can’t hide any longer.

Mercury InteractiveMercury Interactive

The SEC started looking at Mercury Interactive Corp., a The SEC started looking at Mercury Interactive Corp., a Mountain View, Calif., software maker.Mountain View, Calif., software maker.

CEO and two others resigned late 2005.CEO and two others resigned late 2005.

Internal probe found 49 cases where the reported date of Internal probe found 49 cases where the reported date of options grants differed from the date when the options options grants differed from the date when the options appeared to have been awarded. appeared to have been awarded.

The company said it would have to restate financial The company said it would have to restate financial results. results.

Analog DevicesAnalog Devices

Analog Devices Inc. admits reached a tentative Analog Devices Inc. admits reached a tentative settlement with the SEC late 2005.settlement with the SEC late 2005.

It neither admitted nor denied that it had misdated It neither admitted nor denied that it had misdated options or had made grants just before releasing good options or had made grants just before releasing good news that would tend to push up the stock.news that would tend to push up the stock.

Agreed to pay a $3 million civil penalty and re-price Agreed to pay a $3 million civil penalty and re-price some options.some options.

CEO Jerald Fishman tentatively agreed to pay a $1 CEO Jerald Fishman tentatively agreed to pay a $1 million penalty and disgorge some profits. million penalty and disgorge some profits.

““Perfect Payday”Perfect Payday”

Wall Street Journal reporters Charles Forelle and James Bandler, Wall Street Journal reporters Charles Forelle and James Bandler, along with Journal reporters Mark Maremont and Steve along with Journal reporters Mark Maremont and Steve Stecklow,write “Stecklow,write “The Perfect Payday--Some CEOs reap millions The Perfect Payday--Some CEOs reap millions by landing stock options when they are most valuable. Luck -- by landing stock options when they are most valuable. Luck -- or something elseor something else". ".

The first article was published in the WSJournal in March 2006.The first article was published in the WSJournal in March 2006.

Exposed widespread practice of secretly backdating stock options Exposed widespread practice of secretly backdating stock options grants to benefit corporate insidersgrants to benefit corporate insiders

Based on material provided to the Journal by Lie.Based on material provided to the Journal by Lie.

Honored by the Pulitzer committee with Pulitzer Prize top honor for Honored by the Pulitzer committee with Pulitzer Prize top honor for public service reporting in April 2007.public service reporting in April 2007.

The Perfect Payday – Buy LowThe Perfect Payday – Buy Low

William McGuireWilliam McGuire

UnitedHealth GroupUnitedHealth Group, chairman and chief executive, chairman and chief executive

Total grants: Total grants: 1212

Odds: At least 1 in 200 millionOdds: At least 1 in 200 million

The Perfect Payday—Buy LowThe Perfect Payday—Buy Low

Robert TherrienRobert TherrienBrooks AutomationBrooks Automation, former chief executive, former chief executiveTotal grants*: Total grants*: 77Odds: About 1 in 9 millionOdds: About 1 in 9 million


Timothy Main*Timothy Main*

Jabil CircuitJabil Circuit, president and chief executive, president and chief executive


Odds: About 1 in 1 millionOdds: About 1 in 1 million

The Perfect Payday – Buy LowThe Perfect Payday – Buy Low

Jeffrey RichJeffrey Rich

Affiliated Computer ServicesAffiliated Computer Services, former chief executive, former chief executive


Odds: About 1 in 300 billionOdds: About 1 in 300 billion


Louis TomasettaLouis Tomasetta

Vitesse SemiconductorVitesse Semiconductor, president and chief executive, president and chief executive




Kobi AlexanderKobi Alexander

Comverse TechnologyComverse Technology, chairman and chief executive, chairman and chief executive



WSJ Keeps Story AliveWSJ Keeps Story AliveThe Perfect Payday: CEOs Reap Millions by Landing Stock Options When The Perfect Payday: CEOs Reap Millions by Landing Stock Options When They Are Most Valuable--March 18They Are Most Valuable--March 18

How the Journal Analyzed Stock-Options Grants--March 18How the Journal Analyzed Stock-Options Grants--March 18

Five More Companies Show Questionable Options Pattern--May 22Five More Companies Show Questionable Options Pattern--May 22

At HealthSouth, an Options Issue--May 31At HealthSouth, an Options Issue--May 31

Monster Worldwide Gave Officials Options Ahead of Share Run-Ups--June Monster Worldwide Gave Officials Options Ahead of Share Run-Ups--June 1212

During 1990s, Microsoft Practiced Variation of Options Backdating--June 16During 1990s, Microsoft Practiced Variation of Options Backdating--June 16

Executive Pay: The 9/11 Factor--July 15Executive Pay: The 9/11 Factor--July 15

Setting the Date: How One Tech Company Played With Timing Setting the Date: How One Tech Company Played With Timing of Stock Options--July 20 of Stock Options--July 20

WSJ Flags 26 –May 24, 2006WSJ Flags 26 –May 24, 20061.1. Affiliated Computer ServicesAffiliated Computer Services

2.2. AlteraAltera

3.3. Boston Communications Group Boston Communications Group

4.4. Brooks AutomationBrooks Automation

5.5. Caremark Rx. Caremark Rx.

6.6. CNET NetworksCNET Networks

7.7. Comverse TechnologyComverse Technology

8.8. F5 NetworksF5 Networks

9.9. Jabil CircuitJabil Circuit

10.10. Juniper NetworksJuniper Networks

11.11. KLA-TencorKLA-Tencor

12.12. Meade InstrumentsMeade Instruments

13.13. MedarexMedarex

1.1. Mercury Interactive Mercury Interactive

2.2. Openwave SystemsOpenwave Systems

3.3. Nyfix Nyfix

4.4. Power IntegrationsPower Integrations

5.5. Sycamore NetworksSycamore Networks

6.6. Quest SoftwareQuest Software

7.7. Renal Care Group Renal Care Group

8.8. RSA SecurityRSA Security

9.9. SafeNet SafeNet

10.10. SemtechSemtech

11.11. Trident MicrosystemsTrident Microsystems

12.12. UnitedHealthUnitedHealth

13.13. Vitesse SemiconductorVitesse Semiconductor

WSJ Options Score CardWSJ Options Score Card

About 126 About 126 companies that companies that have disclosed have disclosed government probes, government probes, misdated options, misdated options, restatements and/or restatements and/or executive executive departures.departures.

http://http://online.wsj.com/online.wsj.com/public/resources/public/resources/documents/info-documents/info-optionsscore06-optionsscore06-full.htmlfull.html

200 Companies Have 200 Companies Have Announced Internal Announced Internal

InvestigationsInvestigations

SEC and DOJ ActionSEC and DOJ Action

Division of Enforcement is investigating over 140-170 matters Division of Enforcement is investigating over 140-170 matters relating to potential abuses of employee stock options.relating to potential abuses of employee stock options.

The investigations are being conducted by SEC offices throughout The investigations are being conducted by SEC offices throughout the country and are being centrally coordinated and tracked in the country and are being centrally coordinated and tracked in Washington.Washington.

Substantial criminal interest in options matters from United States Substantial criminal interest in options matters from United States Attorneys' Offices nationwide.Attorneys' Offices nationwide.

SEC has brought several enforcement actions — one relating to SEC has brought several enforcement actions — one relating to Brocade and another involving Comverse. With respect to both, Brocade and another involving Comverse. With respect to both, there are pending parallel criminal actions as well. Most recently the there are pending parallel criminal actions as well. Most recently the SEC filed an action against Apple. SEC filed an action against Apple.

..

Non-Enforcement EffortsNon-Enforcement Efforts

SEC adopted rules relating to executive compensation SEC adopted rules relating to executive compensation disclosure which specifically address options.disclosure which specifically address options.

These rules, in combination with the Sarbanes-Oxley These rules, in combination with the Sarbanes-Oxley requiring timely reporting of stock option grants, will go a requiring timely reporting of stock option grants, will go a very long way toward preventing. very long way toward preventing.

In September 2006 the Office of the Chief Accountant In September 2006 the Office of the Chief Accountant issued guidance for companies trying to cope with the issued guidance for companies trying to cope with the financial reporting ramifications of their various historical financial reporting ramifications of their various historical options practices from a reporting perspective. options practices from a reporting perspective.

New Comp Disclosure (1)New Comp Disclosure (1)SEC unanimously adopted final rules July 26 on the disclosure of executive and SEC unanimously adopted final rules July 26 on the disclosure of executive and director compensation--including on stock option grants.director compensation--including on stock option grants.

Specifically, the rule would require disclosure of the timing of option grants in Specifically, the rule would require disclosure of the timing of option grants in coordination with the release of material nonpublic information (“spring-loading”), and coordination with the release of material nonpublic information (“spring-loading”), and the selection of exercise prices that differ from the underlying stock’s price on the the selection of exercise prices that differ from the underlying stock’s price on the grant date.grant date.

Some of the required disclosure will include clear tabular presentations of option Some of the required disclosure will include clear tabular presentations of option grants including: the fair value on the grant date, as spelled out by Financial grants including: the fair value on the grant date, as spelled out by Financial Accounting Standards Statement 123R; the closing market price on the grant date if it Accounting Standards Statement 123R; the closing market price on the grant date if it is greater than the exercise price of the award; and the date the compensation is greater than the exercise price of the award; and the date the compensation committee or full board took action on the award if that date is different than the grant committee or full board took action on the award if that date is different than the grant date. date.

Further, if the exercise price of an option grant is not the closing market price on the Further, if the exercise price of an option grant is not the closing market price on the grant date, the rules will require a description of the methodology for determining the grant date, the rules will require a description of the methodology for determining the exercise price. The MD&A section also will require enhanced narrative disclosure of exercise price. The MD&A section also will require enhanced narrative disclosure of grants to executives.grants to executives.

New Comp Disclosure (2)New Comp Disclosure (2)With regard to the timing of option grants, companies will have to answer questions, With regard to the timing of option grants, companies will have to answer questions, such as:such as:

– Does a company have any program, plan, or practice to time option grants to its Does a company have any program, plan, or practice to time option grants to its executives in coordination with the release of material non-public information? executives in coordination with the release of material non-public information?

– How does any program, plan, or practice to time option grants fit in the context of the How does any program, plan, or practice to time option grants fit in the context of the company’s program, plan or practice, if any, with regard to option grants to company’s program, plan or practice, if any, with regard to option grants to employees more generally? employees more generally?

– What was the role of the compensation committee in approving and administering What was the role of the compensation committee in approving and administering such a program, plan, or practice? How did the board or compensation committee such a program, plan, or practice? How did the board or compensation committee take such information into account when determining whether and in what amount to take such information into account when determining whether and in what amount to make those grants? Did the compensation committee delegate any aspect of the make those grants? Did the compensation committee delegate any aspect of the actual administration of a program, plan, or practice to any other persons? actual administration of a program, plan, or practice to any other persons?

– What was the role of executive officers in the company’s program, plan, or practice of What was the role of executive officers in the company’s program, plan, or practice of option timing?option timing?

– Does the company set the grant date of its stock option grants to new executives in Does the company set the grant date of its stock option grants to new executives in

coordination with the release of material non-public information? coordination with the release of material non-public information?

– Does a company plan to time, or has it timed, its release of material non-public Does a company plan to time, or has it timed, its release of material non-public information to affect the value of executive compensation?information to affect the value of executive compensation?

Trends in Enforcement--SECTrends in Enforcement--SECSEC currently has about 140-170 investigations into stock option backdating. SEC currently has about 140-170 investigations into stock option backdating.

Many more companies have derivative actions filed against them for options backdating Many more companies have derivative actions filed against them for options backdating issues. issues.

Some of these investigations have since been closed with no enforcement action, but many Some of these investigations have since been closed with no enforcement action, but many are still open.are still open.

The Commission has filed five to ten options backdating cases thus far.The Commission has filed five to ten options backdating cases thus far.

In determining whether to recommend such an enforcement action, the SEC staff considers In determining whether to recommend such an enforcement action, the SEC staff considers the degree of scienter of the individuals involved, the amount of harm, and the personal the degree of scienter of the individuals involved, the amount of harm, and the personal benefit to those who were directing the activity. benefit to those who were directing the activity.

The Commission is likely to continue bringing options backdating cases where either The Commission is likely to continue bringing options backdating cases where either conduct was egregious or criminal, or the case involves unique facts that may convey an conduct was egregious or criminal, or the case involves unique facts that may convey an important message.important message.

Some cases are more attractive to criminal prosecutors than others.Some cases are more attractive to criminal prosecutors than others.

Some company’s options backdating problems do not rise to the level of fraud.Some company’s options backdating problems do not rise to the level of fraud.

They may the result of sloppy administration or record-keeping. While there might be They may the result of sloppy administration or record-keeping. While there might be accounting consequences, this is not fraud. accounting consequences, this is not fraud.

Trends in Enforcement--DOJTrends in Enforcement--DOJ

U.S. Attorneys are interested where:U.S. Attorneys are interested where:

– “ “Bottom of the V” in-the-money options were granted;Bottom of the V” in-the-money options were granted;

– Magnitude of the fraud is large. Magnitude of the fraud is large.

– Managers remain;Managers remain;

– No steps to prevent it from recurring. No steps to prevent it from recurring.

DOJ ActionsDOJ Actions

The Justice Department filed criminal The Justice Department filed criminal charges in summer of 2006 against former charges in summer of 2006 against former executives at executives at

– Comverse Technology Inc. Comverse Technology Inc.

– Brocade Communications Systems Inc. Brocade Communications Systems Inc.

Apple Enforcement ActionApple Enforcement Action

Key question: What standard prosecutors will use when exercising Key question: What standard prosecutors will use when exercising their broad discretion to charge?their broad discretion to charge?

On April 25, 2007, SEC gave some indication of where that line On April 25, 2007, SEC gave some indication of where that line might fall. It brought a long awaited action based on its investigation might fall. It brought a long awaited action based on its investigation into the backdating practices at Apple. Named as defendants in an into the backdating practices at Apple. Named as defendants in an enforcement action were Apple’s former GC of nine years, Nancy enforcement action were Apple’s former GC of nine years, Nancy Heinen, and its former CFO and director, Fred Anderson. SEC v. Heinen, and its former CFO and director, Fred Anderson. SEC v. Nancy R. Heinen and Fred D. Anderson, Case No. 07-2214-HRL Nancy R. Heinen and Fred D. Anderson, Case No. 07-2214-HRL (Lloyd) (N.D. Cal. filed April 24, 2007) (Lloyd) (N.D. Cal. filed April 24, 2007) http://sec.gov/litigation/litreleases/2007/lr20086.htm http://sec.gov/litigation/litreleases/2007/lr20086.htm

These are the two persons identified by internal investigators as These are the two persons identified by internal investigators as having engaged in possible misconduct.having engaged in possible misconduct.

Apple Enforcement ActionApple Enforcement Action

The SEC’s complaint follows what is becoming a familiar formula. It The SEC’s complaint follows what is becoming a familiar formula. It alleges:alleges:

– instances of backdating and preparation of false documents and targets instances of backdating and preparation of false documents and targets those persons who specifically participated in granting the options. those persons who specifically participated in granting the options.

– two option grants, the first in January 2001 of 4.8 million options to two option grants, the first in January 2001 of 4.8 million options to Apple’s Executive Team and the second in October 2001 of 7.5 million Apple’s Executive Team and the second in October 2001 of 7.5 million options to Apple’s CEO Steve Jobs. options to Apple’s CEO Steve Jobs.

– in both instances Ms. Heinen caused Apple to backdate the options and in both instances Ms. Heinen caused Apple to backdate the options and directed her staff to prepare documents to reflect the new date. directed her staff to prepare documents to reflect the new date.

– Ms. Heinen signed fictitious board minutes for a special meeting that did Ms. Heinen signed fictitious board minutes for a special meeting that did not occur. not occur.

– Mr. Anderson should have realized the implications of Ms. Heinen’s Mr. Anderson should have realized the implications of Ms. Heinen’s actions, failed to disclose key information to Apple’s auditors and actions, failed to disclose key information to Apple’s auditors and neglected to ensure that the financial statements were accurate. neglected to ensure that the financial statements were accurate.

Settlements-ComverseSettlements-ComverseWSJonline-5/9/2007WSJonline-5/9/2007

Comverse-The maker of telecom software said May 4 that it received a subpoena Comverse-The maker of telecom software said May 4 that it received a subpoena from the U.S. attorney's office for the Eastern District of New York, indicating a from the U.S. attorney's office for the Eastern District of New York, indicating a criminal investigation of stock-option-granting practices. criminal investigation of stock-option-granting practices. CEO Kobi Alexander, as well as the company's CFO and senior general counsel, CEO Kobi Alexander, as well as the company's CFO and senior general counsel, resigned just days earlier. resigned just days earlier. In April, the company said some option-grant dates used in its accounting "differed" In April, the company said some option-grant dates used in its accounting "differed" from the actual grant dates, and that it would restate more than five years of financial from the actual grant dates, and that it would restate more than five years of financial results. results. On Aug. 9, the former CEO, CFO and general counsel were charged with criminal On Aug. 9, the former CEO, CFO and general counsel were charged with criminal fraud. fraud. On Sept. 27, Alexander, who failed to show up in court and was declared a fugitive by On Sept. 27, Alexander, who failed to show up in court and was declared a fugitive by the FBI, was found in Namibia, and was set to be extradited to the U.S. the FBI, was found in Namibia, and was set to be extradited to the U.S. On Oct. 24, ex-CFO Kreinberg pleaded guilty to securities-fraud charges in federal On Oct. 24, ex-CFO Kreinberg pleaded guilty to securities-fraud charges in federal court, making him the first person to plead guilty in the backdating scandal. court, making him the first person to plead guilty in the backdating scandal. On Nov. 2, 2006 former general counsel William F. Sorin pleaded guilty to a On Nov. 2, 2006 former general counsel William F. Sorin pleaded guilty to a conspiracy charge. On Jan, 10, 2007, it was announced that Sorin will pay $3 million conspiracy charge. On Jan, 10, 2007, it was announced that Sorin will pay $3 million to settle an SEC lawsuit over stock-option grants. to settle an SEC lawsuit over stock-option grants.

http://online.wsj.com/public/resources/documents/info-optionsscore06-full.htmlhttp://online.wsj.com/public/resources/documents/info-optionsscore06-full.html

Settlements-TakeSettlements-Take Two Two WSJonline-5/9/2007WSJonline-5/9/2007

Take Two-The New York entertainment software company disclosed on July Take Two-The New York entertainment software company disclosed on July 10, 2006 that the SEC opened an informal investigation into stock-option 10, 2006 that the SEC opened an informal investigation into stock-option grants dating back to January 1997. grants dating back to January 1997. Take-Two said it plans to fully cooperate and also is conducting its own Take-Two said it plans to fully cooperate and also is conducting its own investigation. The company said on Aug. 31 that it has received additional investigation. The company said on Aug. 31 that it has received additional grand-jury subpoenas requesting documents regarding stock options, grand-jury subpoenas requesting documents regarding stock options, compensation and expenses. compensation and expenses. On Dec. 11, the company said an independent investigation found On Dec. 11, the company said an independent investigation found improprieties in the process, and it will need to restate its historical financial improprieties in the process, and it will need to restate its historical financial results to record charges for compensation expense related to option results to record charges for compensation expense related to option grants. grants. On Jan. 21, 2007, the company accused former Chairman and Chief On Jan. 21, 2007, the company accused former Chairman and Chief Executive Ryan Brant of backdating stock options spanning a six-year Executive Ryan Brant of backdating stock options spanning a six-year period. period. On Feb. 14, 2007, Mr. Brant pleaded guilty to a false filing charge, agreeing On Feb. 14, 2007, Mr. Brant pleaded guilty to a false filing charge, agreeing to pay $7.3 million in disgorgement, interest and penalties in connection with to pay $7.3 million in disgorgement, interest and penalties in connection with the New York criminal case and a SEC civil probe. Brant agreed to settle the New York criminal case and a SEC civil probe. Brant agreed to settle the SEC probe without admitting or denying wrongdoing. the SEC probe without admitting or denying wrongdoing. http://online.wsj.com/public/resources/documents/info-optionsscore06-full.htmlhttp://online.wsj.com/public/resources/documents/info-optionsscore06-full.html

Settlements-ESSISettlements-ESSI WSJonline-5/9/2007WSJonline-5/9/2007

ESSI-Parsippany, N.J., military contractor DRS announced on June 12 that ESSI-Parsippany, N.J., military contractor DRS announced on June 12 that it has been advised by the SEC and the U.S. Attorney’s office that each is it has been advised by the SEC and the U.S. Attorney’s office that each is investigating possible backdating of option grants at recently acquired ESSI, investigating possible backdating of option grants at recently acquired ESSI, prior to DRS's acquisition of the company, a supplier of logistics and prior to DRS's acquisition of the company, a supplier of logistics and maintenance support. maintenance support. DRS said the U.S. Attorney’s office has advised DRS that it considers DRS DRS said the U.S. Attorney’s office has advised DRS that it considers DRS to be a witness, not a subject or target of its investigation. to be a witness, not a subject or target of its investigation. On Feb. 6, 2007, the SEC filed civil charges against two former executives On Feb. 6, 2007, the SEC filed civil charges against two former executives ESSI, accusing them of participating in a six-year options backdating ESSI, accusing them of participating in a six-year options backdating scheme in which they granted in-the-money options to themselves and scheme in which they granted in-the-money options to themselves and other executives. other executives. Steven Landmann, the former controller, agreed to settle the charges by Steven Landmann, the former controller, agreed to settle the charges by paying $886,557 and accepting a bar on serving as an officer or director of paying $886,557 and accepting a bar on serving as an officer or director of a public company and a ban on practicing before the SEC as an accountant. a public company and a ban on practicing before the SEC as an accountant. Ex-CFO Gary Gerhardt hasn't settled with the SEC.Ex-CFO Gary Gerhardt hasn't settled with the SEC.

http://online.wsj.com/public/resources/documents/info-optionsscore06-full.htmlhttp://online.wsj.com/public/resources/documents/info-optionsscore06-full.html

Settlements-AppleSettlements-Apple WSJonline-5/9/2007WSJonline-5/9/2007

Apple-On Aug. 3, 2006, the Cupertino, Calif., computer maker said it will delay filing Apple-On Aug. 3, 2006, the Cupertino, Calif., computer maker said it will delay filing quarterly results and will likely restate past results after discovering more quarterly results and will likely restate past results after discovering more "irregularities" as part of an internal probe of stock-option grants going as far back to "irregularities" as part of an internal probe of stock-option grants going as far back to 1997. 1997. In June, Apple said "one of the grants in question" was made to CEO Steve Jobs. On In June, Apple said "one of the grants in question" was made to CEO Steve Jobs. On Oct. 4, the company said its internal investigation had found Jobs was aware of Oct. 4, the company said its internal investigation had found Jobs was aware of options backdating but didn't benefit from the practice.options backdating but didn't benefit from the practice.Director Fred Anderson, who served as the company's chief financial officer from Director Fred Anderson, who served as the company's chief financial officer from 1996 until 2004, resigned from its board of directors. 1996 until 2004, resigned from its board of directors. Apple said Dec. 29, 2006 that CEO Jobs had recommended the selection of some Apple said Dec. 29, 2006 that CEO Jobs had recommended the selection of some favorable stock-option grant dates, but didn't personally benefit. It also said it will favorable stock-option grant dates, but didn't personally benefit. It also said it will restate financial data going back to 2002 and take an $84 million charge. restate financial data going back to 2002 and take an $84 million charge. On April 24, 2007, the SEC filed civil charges against Apple's former general counsel, On April 24, 2007, the SEC filed civil charges against Apple's former general counsel, Nancy Heinen, and former CFO Fred Anderson for their alleged involvement in Nancy Heinen, and former CFO Fred Anderson for their alleged involvement in backdating of stock options at Apple. Mr. Anderson settled the charge with the SEC backdating of stock options at Apple. Mr. Anderson settled the charge with the SEC without admitting wrongdoing. without admitting wrongdoing. http://online.wsj.com/public/resources/documents/info-optionsscore06-full.htmlhttp://online.wsj.com/public/resources/documents/info-optionsscore06-full.html

Winding Down?Winding Down?

On April 25, 2007, Reuters reported that SEC Chairman On April 25, 2007, Reuters reported that SEC Chairman Christopher Cox expects to wrap up many of its stock options dating Christopher Cox expects to wrap up many of its stock options dating cases within weeks.cases within weeks.

““We are working on procedures to move many of the cases very We are working on procedures to move many of the cases very quickly,” Cox said, adding their resolution would be within “weeks.”quickly,” Cox said, adding their resolution would be within “weeks.” Rueters reported that Mr. Cox gave no indication of whether the Rueters reported that Mr. Cox gave no indication of whether the options cases would be resolved through settlements, lawsuits or a options cases would be resolved through settlements, lawsuits or a combination of both.combination of both.

Mr. Cox added that the SEC would like to put the option backdating Mr. Cox added that the SEC would like to put the option backdating scandal behind them, noting that such conduct will not likely scandal behind them, noting that such conduct will not likely continue in today’s environment.continue in today’s environment.

Mr. Cox did not elaborate on what process the SEC is likely to use. Mr. Cox did not elaborate on what process the SEC is likely to use.

Securities Fraud Class ActionsSecurities Fraud Class Actions

29 Securities Class 29 Securities Class Actions as of April Actions as of April 20072007

1.1. American Tower Corp.05/26/2006USDC - D.American Tower Corp.05/26/2006USDC - D.2.2. Mass.Amkor Technology11/21/2006USDC - E.D. Pa.Mass.Amkor Technology11/21/2006USDC - E.D. Pa.3.3. Apollo Group11/02/2006USDC - D. ArizApollo Group11/02/2006USDC - D. Ariz4.4. Apple Computer, Inc.08/25/2006USDC - N.D. CaApple Computer, Inc.08/25/2006USDC - N.D. Ca5.5. Aspen Technology09/08/2006USDC - D. MassAspen Technology09/08/2006USDC - D. Mass6.6. Broadcom Corp.08/13/2006USDC - C.D. CalBroadcom Corp.08/13/2006USDC - C.D. Cal7.7. Brocade Communications Systems, Inc.05/19/2005USDC - Brocade Communications Systems, Inc.05/19/2005USDC -

N.D. Cal.N.D. Cal.8.8. Brooks Automation, Inc.06/19/2006USDC - D. Mass.Brooks Automation, Inc.06/19/2006USDC - D. Mass.9.9. Comverse Technology, Inc.04/19/2006USDC - E.D.N.Y.Comverse Technology, Inc.04/19/2006USDC - E.D.N.Y.10.10. Hansen Natural Corporation11/29/2006USDC - C.D. Cal.Hansen Natural Corporation11/29/2006USDC - C.D. Cal.11.11. HCC Insurance Holdings, Inc.03/08/2007USDC - S.D. Tex.HCC Insurance Holdings, Inc.03/08/2007USDC - S.D. Tex.12.12. Jabil Circuit, Inc.09/19/2006USDC - M.D. Fla.Jabil Circuit, Inc.09/19/2006USDC - M.D. Fla.13.13. Juniper Networks, Inc.07/17/2006USDC - N.D. CalJuniper Networks, Inc.07/17/2006USDC - N.D. Cal14.14. .KLA-Tencor Corp.06/29/2006USDC - N.D. Cal.KLA-Tencor Corp.06/29/2006USDC - N.D. Cal15.15. .Marvell Technology Group10/06/2006USDC - N.D. Cal..Marvell Technology Group10/06/2006USDC - N.D. Cal.16.16. Meade Instruments, Inc.09/27/2006USDC - C.D. CalMeade Instruments, Inc.09/27/2006USDC - C.D. Cal17.17. .Mercury Interactive Corp.08/19/2005USDC - N.D. Cal..Mercury Interactive Corp.08/19/2005USDC - N.D. Cal.18.18. Michaels Stores, Inc.09/06/2006USDC - N.D. Michaels Stores, Inc.09/06/2006USDC - N.D. 19.19. Tex.Monster Worldwide, Inc.03/15/2007USDC - S.D.N.Y.Tex.Monster Worldwide, Inc.03/15/2007USDC - S.D.N.Y.20.20. Openwave Systems Inc.02/21/2007USDC - S.D.N.YOpenwave Systems Inc.02/21/2007USDC - S.D.N.Y21.21. .Quest Software10/27/2006USDC - C.D. Cal..Quest Software10/27/2006USDC - C.D. Cal.22.22. Rambus, Inc.07/17/2006USDC - N.D. Cal.Rambus, Inc.07/17/2006USDC - N.D. Cal.23.23. Safenet, Inc.08/01/2006USDC - S.D.N.Y.Safenet, Inc.08/01/2006USDC - S.D.N.Y.24.24. Sunrise Senior Living01/16/2007USDC - D.D.CSunrise Senior Living01/16/2007USDC - D.D.C25.25. .UnitedHealth Group, Inc.05/05/2006USDC - D. Minn.UnitedHealth Group, Inc.05/05/2006USDC - D. Minn26.26. .Vitesse Semiconductor Corp.05/02/2006USDC - C.D. Cal.Vitesse Semiconductor Corp.05/02/2006USDC - C.D. Cal27.27. .Witness Systems, Inc.08/15/2006USDC - N.D. Ga..Witness Systems, Inc.08/15/2006USDC - N.D. Ga.28.28. Wireless Facilities, Inc.03/19/2007USDC - S.D. CalWireless Facilities, Inc.03/19/2007USDC - S.D. Cal29.29. .Zoran Corp.08/10/2006USDC - N.D. Cal..Zoran Corp.08/10/2006USDC - N.D. Cal.

Shareholder Derivative ActionsShareholder Derivative Actions

157 Shareholder Derivative 157 Shareholder Derivative Actions filed.Actions filed.

Claim directors and officers Claim directors and officers breached their fiduciary breached their fiduciary obligations by backdating obligations by backdating options or otherwise options or otherwise manipulating grant dates to manipulating grant dates to maximize executive pay.maximize executive pay.

1. Actel1. Actel2. Activision2. Activision3. Adobe Systems3. Adobe Systems4. Affiliated Computer Service4. Affiliated Computer Service5. Affymetrix5. Affymetrix6. Agile Software6. Agile Software7. Alkermes7. Alkermes8. Altera8. Altera9. American Tower9. American Tower10. Amkor10. Amkor11. Analog Devices11. Analog Devices12. Apollo Group12. Apollo Group13. Apple13. Apple14. Applied Micro Circuits 14. Applied Micro Circuits 15. Arthrocare15. Arthrocare16. Aspen Technology16. Aspen Technology17. Asyst 17. Asyst 18. Atmel18. Atmel19. Autodesk19. Autodesk20. Barnes and Noble 20. Barnes and Noble 21. BEA Systems21. BEA Systems22. Bed Bath and Beyond 22. Bed Bath and Beyond 23. Biomet23. Biomet24. Black Box24. Black Box25. Blue Coat25. Blue Coat26. Boston Communications Group26. Boston Communications Group27. Broadcom27. Broadcom28. Brocade Communications28. Brocade Communications29. Brooks Automation 29. Brooks Automation 30. CA, Inc.30. CA, Inc.31. Cable Vision Systems 31. Cable Vision Systems 32. Cardinal Health32. Cardinal Health33. Caremark Rx 33. Caremark Rx 34. Ceradyne34. Ceradyne35. Cheesecake Factory 35. Cheesecake Factory 36. Children's Place Retail Stores36. Children's Place Retail Stores37. Chordiant Software 37. Chordiant Software 38. Cirrus Logic38. Cirrus Logic39. Cisco Systems 39. Cisco Systems 40. Clorox40. Clorox41. CNET Networks41. CNET Networks42. Coherent42. Coherent43. Computer Sciences Corp.43. Computer Sciences Corp.44. Comverse Technology44. Comverse Technology45. Corinthian College 45. Corinthian College 46. Countrywide Financial Corp.46. Countrywide Financial Corp.47. Crown Castle International47. Crown Castle International48. Cyberonics48. Cyberonics49. Delta Petroleum49. Delta Petroleum50. Dean Foods50. Dean Foods51. Digital River51. Digital River52. Ditech Networks52. Ditech Networks53. Electronic Arts 53. Electronic Arts 54. Electronics for Imaging 54. Electronics for Imaging 55. Embarcadero Technologies55. Embarcadero Technologies56. EMCORE56. EMCORE57. ePLUS57. ePLUS58. Equinix58. Equinix59. F5 Networks59. F5 Networks60. Family Dollar60. Family Dollar61. Finisar61. Finisar62. Flir Systems62. Flir Systems63. Flowserve63. Flowserve64. Fossil64. Fossil65. Foundry Networks 65. Foundry Networks 66. Getty Images 66. Getty Images 67. Glenayre Technologies67. Glenayre Technologies68. HCC Insurance Holding68. HCC Insurance Holding69. Home Depot69. Home Depot70. Hansen Natural Corp.70. Hansen Natural Corp.71. Hot Topic71. Hot Topic72. Hovnanian Enterprises 72. Hovnanian Enterprises 73. i2 Technologies73. i2 Technologies74. Insight Enterprises74. Insight Enterprises75. Integrated Silicon Solutions75. Integrated Silicon Solutions76. Intuit 76. Intuit 77. J2 Global Communications77. J2 Global Communications78. Jabil Circuit78. Jabil Circuit79. Juniper Networks79. Juniper Networks80. Jupitermedia Corp.80. Jupitermedia Corp.81. KB Homes81. KB Homes82. Keithley Instruments82. Keithley Instruments83. KLA-Tencor 83. KLA-Tencor 84. Kopin Corp.84. Kopin Corp.85. KV Pharmaceutical 85. KV Pharmaceutical 86. L-3 Communications Holding86. L-3 Communications Holding87. Lehman Brothers Holdings87. Lehman Brothers Holdings88. Linear Technology88. Linear Technology89. M-Systems (see note below)89. M-Systems (see note below)90. Marvell Technology90. Marvell Technology91. Mattel91. Mattel92. Maxim Integrated92. Maxim Integrated93. McAfee93. McAfee94. Meade Instruments94. Meade Instruments95. Medarex95. Medarex96. MercuryInteractive96. MercuryInteractive97. Michael's Stores97. Michael's Stores98. Microtune98. Microtune99. MIPS Technologies99. MIPS Technologies100. Monster.com 100. Monster.com 101. Nabors Industries101. Nabors Industries102. Network Appliance102. Network Appliance103. Newpark Resources103. Newpark Resources104. Novell104. Novell105. Novellus 105. Novellus 106. Nvidia106. Nvidia107. Nyfix107. Nyfix108. Openwave108. Openwave109. Par Pharmaceuticals 109. Par Pharmaceuticals 110. Peet's Coffee & Tea110. Peet's Coffee & Tea111. Pool Corp.111. Pool Corp.112. PMC Sierra112. PMC Sierra113. Power Integrations113. Power Integrations114. Progress Software114. Progress Software115. Quest Software 115. Quest Software 116. QuickLogic116. QuickLogic117. Redback Networks117. Redback Networks118. Rambus118. Rambus119. Research in Motion119. Research in Motion120. RSA Security120. RSA Security121. Safenet121. Safenet122. Sanmina-SCI122. Sanmina-SCI123. Sapient123. Sapient124. ScanSource124. ScanSource125. SecureLogic Corp.125. SecureLogic Corp.126. Semtech126. Semtech127. Sepracor127. Sepracor128. Sharper Image128. Sharper Image129. Sigma Designs129. Sigma Designs130. Silicon Storage Tech130. Silicon Storage Tech131 Sonus Networks 131 Sonus Networks 132. SPSS132. SPSS133. Staples133. Staples134. Sunrise Senior Living134. Sunrise Senior Living135. Superior Industries International135. Superior Industries International136. Sycamore Networks136. Sycamore Networks137. Take-Two Interactive137. Take-Two Interactive138. Tetra Tech138. Tetra Tech139. The First American Corp.139. The First American Corp.140. THQ140. THQ141. Trident Microsystems141. Trident Microsystems142. TriQuint Semiconductor142. TriQuint Semiconductor143. Tyson Foods 143. Tyson Foods 144. Ultratech144. Ultratech145. Ulticom145. Ulticom146. United Healthcare 146. United Healthcare 147. UTStarcom147. UTStarcom148. Valeant148. Valeant149. Verisign149. Verisign150. Vitesse Semiconductor 150. Vitesse Semiconductor 151. Waste Connections151. Waste Connections152. Western Digital Corp.152. Western Digital Corp.153. Westwood One153. Westwood One154. Wind River Systems154. Wind River Systems155. Witness Systems155. Witness Systems156. Xilinx156. Xilinx157. Zoran Corp157. Zoran Corp

ERISA ActionsERISA Actions

5 ERISA or 401(k) Cases 5 ERISA or 401(k) Cases

– 1. United Health Group 1. United Health Group

– 2. Affiliated Computer Services 2. Affiliated Computer Services

– 3. Analog Devices3. Analog Devices

– 4. KB Homes 4. KB Homes

– 5. The Home Depot 5. The Home Depot

It’s Not OverIt’s Not Over18.9% of unscheduled, at-the-money option grants to top executives during the 18.9% of unscheduled, at-the-money option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated.period 1996-2005 were backdated or otherwise manipulated.

23.0% before the new two-day filing requirement took effect on August 29, 2002.23.0% before the new two-day filing requirement took effect on August 29, 2002.

10.0% afterward. 10.0% afterward.

19.9% for grants not filed within the required two-day window. 19.9% for grants not filed within the required two-day window.

Higher frequency of backdating among tech firms, small firms, and firms with high Higher frequency of backdating among tech firms, small firms, and firms with high stock price volatility.stock price volatility.

Firms that use smaller (non-big-five) auditing firms are more likely to file their grants Firms that use smaller (non-big-five) auditing firms are more likely to file their grants late.late.

29.2% of firms manipulated grants to top executives at some point between 1996 and 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.2005.

What fraction of stock option grants to top executives have been backdated or manipulated?, Randall A. Heron and Erik Lie, July 14, 2006What fraction of stock option grants to top executives have been backdated or manipulated?, Randall A. Heron and Erik Lie, July 14, 2006

It’s Not OverIt’s Not Over

First Options Backdating; First Options Backdating; Now Options Now Options Springloading?Springloading?

Springloading is when a Springloading is when a company purposely:company purposely:– schedules an option grant schedules an option grant

ahead of expected good ahead of expected good news or news or

– delays it until after it delays it until after it discloses business discloses business setbacks likely to send setbacks likely to send shares lower.shares lower.

It’s Not OverIt’s Not Over

Call for more information.Call for more information.Reed R. Kathrein Reed R. Kathrein

PartnerPartnerHagens Berman Sobol Shapiro LLPHagens Berman Sobol Shapiro LLP

San Francisco, CA San Francisco, CA Telephone: (415) 896-6300Telephone: (415) 896-6300

Fax: (415) 896-6301Fax: (415) 896-6301Email: Email: [email protected]@hbsslaw.com

the options scandal: sec and private, enforcement trends

Business

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bad news springloading