Tuesday, November 8, 2011
Court Rejects Lawsuit by Former McAfee General Counsel
Panel Says Company Had Cause to Believe Lawyer Involved in Backdating Options
By KENNETH OFGANG, Staff Writer
An employer with an objectively reasonable belief that an employee knowingly participated in a fraud cannot be held liable for helping initiate the resulting criminal prosecution, even if it falsified or withheld evidence in order to bolster the government’s case, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
The panel ordered that Kent H. Roberts’ malicious prosecution claim against McAfee, Inc. be stricken under the anti-SLAPP statute. While reversing U.S. District Judge Phyllis J. Hamilton’s order denying McAfee’s special motion to strike, the panel affirmed the striking of Roberts’ claims for defamation and false light invasion of privacy.
Roberts, former general counsel for the Santa Clara-based software maker formerly known as Network Associates, was acquitted in 2008 of fraud charges related to allegations he allowed the corporate controller, Terry Davis, to backdate thousands of stock options in 2000. The options had been awarded to Roberts in connection with a promotion.
The options were authorized on July 5, 2000, but dated Feb. 14, the date of the promotion. The controller changed the date of the grant from Feb. 14 to April 14, effectively lowering the “strike” price—the price on the date of the grant—by about $10 per share.
Fraudulent if Unauthorized
Senior Judge A. Wallace Tashima, writing for the Ninth Circuit, explained that such backdating is not illegal per se. But it becomes fraudulent where the company has not authorized it—thus increasing the cost of the option without shareholders’ permission—or where the company does not report the backdating as a compensation expense, resulting in an overstatement of earnings, which misleads investors.
Roberts’ involvement in the backdating came under scrutiny in 2006, when the Center for Financial Research and Analysis, an independent forensic accounting organization, published a report identifying McAfee as one of 17 companies for whom data on the number and timing of stock options were suggestive of widespread backdating.
That led to an internal investigation, as well as to a probe by the Securities and Exchange Commission, and to a series of conversations in which Roberts disclosed the backdating to company officials. He subsequently claimed that he did not perceive, and did not acknowledge, any problems with the backdating; the company, however, told the SEC and the Justice Department that Roberts described “agonizing” over the issue and admitted wrongdoing.
The company was forced to restate its earnings by more than $137 million.
Four days after Roberts told the company’s chief executive of the backdating, the board voted to fire him. He was indicted, as well as sued by the SEC, in February 2007.
During the criminal trial, the defense presented evidence to support its claims that Roberts had not acted improperly, and that the backdating was designed to correct an error rather than perpetrate a fraud. Jurors acquitted him of two counts of fraud, while deadlocking on two others, which were dismissed the next day on the prosecutors’ motion.
The SEC suit was dismissed several months later, with Roberts stipulating that he would not seek attorney’s fees from the government. Roberts sued McAfee in the Northern District of California in 2009.
The company moved to strike all of the claims. Hamilton ruled that, for purposes of the anti-SLAPP statute—which applies to diversity cases in federal courts in California—all of the claims arose from protected activity, but that Roberts demonstrated a probability of prevailing on the malicious prosecution claim.
Tashima yesterday acknowledged that “[i]n the anti-SLAPP context, ‘probability’ is a low bar,” because the plaintiff need only demonstrate a prima facie case; the court does not weigh the strength of conflicting evidence. But even assuming the truth of Roberts’ allegations that the company falsified and withheld evidence, the judge said, he did not make out a prima facie case of malicious prosecution because “under California law, lying about the facts is not enough to destroy probable cause.”
Tashima said the company had “objectively reasonable suspicion that Roberts had committed a crime.” By the time it alerted the government, Roberts had admitted that he and Davis had reduced the strike price months after the grant; Davis had been convicted of fraud; and the company had investigated Davis for repricing options without authorization, the judge noted.
The company had additional reasons to be suspicious, he said, because Roberts had led the internal investigation into Davis’ conduct, yet waited about four years before telling the company that he was himself the beneficiary of a change in an option date.
Roberts’ successful defense of the criminal and civil actions does not preclude a finding of probable cause, the judge said. “Indeed,” he wrote, “even the facts as known today do not immediately suggest a compelling explanation for why Roberts thought it appropriate for the Controller to lower by one-third the strike price of options that had already been ratified by the Compensation Committee. The facts upon which Roberts won acquittal may give rise to reasonable doubt, but they do not destroy reasonable suspicion.”
Tashima, whose opinion was joined by Senior Judge Betty B. Fletcher and Judge Stephen Reinhardt, went on to conclude that Roberts’ privacy and defamation claims were barred by the statute of limitations.
Both claims arose from a press release posted on the company website in May 2006. While the release remained on the site as late as November 2009, Tashima explained, Roberts was required by California’s “single publication” rule to sue within three years of the posting date.
Because he did not sue until September 2009, the judge said, the claims are time-barred.
The case is Roberts v. McAfee, Inc., 10-15561.
Copyright 2011, Metropolitan News Company