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22 février, 2008 13:59

Dan Levine

The Recorder

02-22-2008

Privilege issues are heating up in two high-profile SEC fraud prosecutions for stock option backdating.

On Monday, former McAfee Inc. General Counsel Kent Roberts will ask a federal judge to compel lawyers at Howrey to turn over notes from their internal investigation of the company. Armed with favorable precedents from courts in Delaware and San Francisco, Roberts claims the notes will show that other McAfee executives were behind backdating at the company.

Howrey and McAfee are trying to keep the notes under wraps. Among their arguments is that Roberts' lawyers at Cooley Godward Kronish can simply depose the same witnesses who sat down with the internal investigators.

That's just what lawyers tried to do for KLA-Tencor's Kenneth Schroeder, another executive accused by the SEC of improper stock option backdating. In that case, though, KLA's counsel -- John Hemann at Morgan, Lewis & Bockius -- shut down Schroeder's lawyers when they tried to depose KLA's former general counsel last month, according to court filings.

Rather than file a motion to compel -- like Roberts -- Schroeder's lawyers at DLA Piper and Keker & Van Nest reacted to KLA's broad privilege assertion by seeking to have the SEC's case dismissed on due process grounds. The government has not yet filed a response.

While company lawyers may be loath to allow any nuggets of information to fall into the hands of the plaintiffs bar, recent case law has been running against them, said Shartsis Friese's Robert Friese, who chairs the American Bar Association's securities enforcement subcommittee. A November ruling from the Delaware Court of Chancery ordering Maxim Integrated Products to turn over attorney notes to plaintiffs lawyers was cited by Roberts' lawyer, Cooley's William Freeman.

"The wind is at his back, and at the position they're asserting, based on the trends we're seeing," Friese said.

The SEC accuses Roberts of secretly accessing the company's computer system to change the date of a stock option grant from Feb. 14, 2000 -- when the shares were worth over $29 -- forward to April 14, 2000, when they were worth $19.75. The government also alleges he created false documents to hide improper options repricing on other grants.

Following an internal investigation, McAfee fired Roberts and George Samenuk, the CEO at the time, retired. The SEC and the Department of Justice leveled fraud charges against Roberts in February 2007.

Freeman thinks Howrey's raw interview notes can help his client.

"Among other things, this information may well demonstrate that McAfee, through its finance and human resources departments and through its board of directors, frequently modified and repriced option grants," Freeman wrote in his motion to compel.

In the Gregory Reyes criminal backdating prosecution, U.S. District Judge Charles Breyer ruled that Brocade Communications had waived its privilege when it shared information with the government -- a ruling Freeman heavily leans on in trying to convince Judge Marilyn Hall Patel.

McAfee and Howrey say Breyer's opinion in the criminal case shouldn't be allowed to help Roberts in his SEC case.

With rulings like those in the Brocade and Maxim cases, companies are starting to face a different dynamic with the government over privilege waivers, according to Friese.

"It's a much tougher judgment call for companies to decide to cooperate," he said.

Ex-KLA CEO Schroeder's lawyers sat down with former GC Stuart Nichols in late January to depose him. Nichols could be a crucial witness in the case, because the SEC alleges he warned Schroeder about the implications of backdating, but Schroeder went ahead with it anyway.

Schroeder's DLA Piper attorneys say in court papers they scheduled the deposition on a Sunday at Nichols' request. Still, they didn't get far.

"To the extent that a question that you ask would reveal in Mr. Nichols' answer privileged information," Hemann said at the Jan. 27 deposition, "privileged under either the work-product doctrine, the attorney-client privilege, we've asked Mr. Nichols to decline to answer the question."

Within days, DLA partner Shirli Weiss and her colleagues argued in a motion to dismiss that the SEC should not be allowed to base its lawsuit on Schroeder's communications with company attorneys -- which were disclosed to the government -- and then suffer no consequences when the company prohibits the attorneys from talking to the defense.

Schroeder's lawyers also want to inquire about the advice Wilson Sonsini Goodrich & Rosati lawyers gave to Nichols on stock options.

"KLA's broad assertions of privilege have resulted in a situation where the SEC is relying on privileged communications to make its case in court (and in the press)," DLA lawyers wrote, "while KLA is preventing Mr. Schroeder from inquiring about those communications with the obvious acquiescence of the SEC."

A hearing on that issue is scheduled for March.