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22 février, 2008 13:59

Dan Levine

The Recorder

02-20-2008

The stock option backdating case against former KLA general counsel Lisa Berry features two radically different interpretations of a memo (.pdf) Berry wrote to her outside counsel, Larry Sonsini.

From the SEC's perspective, the 1998 document demonstrates that Berry understood the accounting implications involved in backdating. But Berry's lawyers at Orrick, Herrington & Sutcliffe argue it shows Wilson Sonsini Goodrich & Rosati "either approved or did not object to the way KLA was pricing its options grants," according to their motion to dismiss the Securities and Exchange Commission's case. Thus Berry couldn't know she was doing anything wrong, her lawyers claim.

At a hearing on the motion Friday morning in San Jose, Calif., U.S. District Judge Ronald Whyte brought up the document in the government's preferred context. In the memo, Berry describes a meeting in which KLA board members discussed options backdating "that would not cost the company a charge" to its profits and loss statements.

"Doesn't the letter Ms. Berry sent to Larry Sonsini indicate backdating options requires expense recognition?" Whyte asked.

Washington, D.C.-based Orrick partner James Meyers responded that the passage was simply Berry's recollection of what another executive said at the board meeting.

"We think that document reveals she understood the company was reporting options grants in accordance with applicable GAAP," Meyers said.

Whyte did not indicate Friday which way he would rule on the motion.

The SEC charged Berry and former KLA CEO Kenneth Schroeder last year with securities fraud. KLA-Tencor has restated $400 million in earnings due to backdating. Berry is also being charged in connection with her conduct as GC at Juniper Networks, where she worked after KLA. Juniper restated earnings by $900 million. She departed that company in 2004.

Berry sent Sonsini the memo on Nov. 14, 1998, cc'd to Wilson partner Judith O'Brien, that discusses "August and October board meetings and subsequent actions regarding repricing of options."

In the memo, Berry relates that directors were unhappy that KLA's stock price had risen from $27.63 to $33.94 in the four days between the board's agreeing to re-price stock options and the date board members had actually submitted required paperwork.

"As a result, [board member] Ken Levy presented to each of the board members a compromise that would not cost the company a charge to its P&L (if we were to have used the Oct. 19 date, the charge would have been approximately $3.5 million)," Berry wrote.

Berry's lawyers argue the memo to Sonsini should exonerate their client.

"The option process employed at KLA was openly shared with KLA's outside counsel, and was not fraudulently concealed," they wrote in their motion to dismiss. "[I]f Ms. Berry were engaged in a securities fraud scheme, she would not have alerted the company's outside lawyers to the purported plot."

The SEC counters that the memo does not reveal Berry's "repeated practice" of backdating to outside counsel.

"Nor does the memo suggest that she ever made her scheme for systematic backdating of options known to the company's outside auditors," SEC attorney Susan LaMarca wrote. "Just as far fetched is her theory that she received approval for backdating in the memo she wrote."

Whyte shouldn't dismiss the case because any inferences in the Sonsini memo must be drawn in favor of the SEC, the government further contends.

In court Friday, Whyte also questioned the government's argument that Berry must disgorge gains from backdated stock options.

Orrick's Meyers argued that even though Berry may have received backdated options, she did not profit from them.

"She exercised options from non-backdated grants," Meyers said.