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Stock Backdating Investigations Changed Silicon Valley

Publication Date: 
January 24, 2010
Source: 
San Jose Mercury News
Author: 
Brandon Bailey

Professor Joseph Grundfest weighed in on the impact of criminal investigations compared with civil actions related to stock-option backdating in the context of the Brocade case:

Hoping to spare her client from prison, an attorney for former Brocade executive Stephanie Jensen stood before a federal judge this month and argued that the furor over stock-option backdating was a "so-called scandal" that never amounted to much.

"Some would say it fizzled," added defense attorney Jan Nielsen Little, who argued that a wave of investigations that shook the tech industry had turned up little evidence of wrongdoing in connection with a practice that was "widespread, albeit misunderstood."

But as authorities gear up for a retrial next month of Jensen's former boss, ex-Brocade CEO Greg Reyes, federal officials and legal experts say the investigations found widespread accounting abuses at a host of companies. These led to numerous civil and criminal enforcement actions that helped change those practices, they say, despite some high-profile stumbles by prosecutors in recent months.

...

"It's not surprising that more of these were handled civilly," said Joseph Grundfest, a law professor and co-director of the Rock Center on Corporate Governance at Stanford. "In a criminal case, you have to prove wrongdoing beyond a reasonable doubt, and in many of these situations you would have trouble demonstrating that a CEO knew he was in engaged in a criminal violation."

...

The government's investigations, as well as changes in accounting rules, have made companies more sensitive to legal requirements around backdating, added Grundfest. "There certainly were companies that were unnecessarily tortured because of backdating violations. But there were other companies at which the violations were serious and had to be addressed."