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June 30, 2004

Siebel in Reg FD Trouble Again --
What Were They Thinking?

You probably saw in the business news that Siebel Systems has gotten itself into Regulation FD (Fair Disclosure) trouble again. See the Securities Litigation Watch for a trenchant summary, along with links to the primary SEC documents. My own take on it is in the extended post.

This case fits into the category of "what were they thinking?" According to the SEC's complaint, the Siebel CFO and its investor-relations guy were doing a road show. They met with several different institutional investors.

At one of these investor meetings, the CFO allegedly made comments about the pipeline looking good, and then did so again at a private dinner with six investors, hosted by Morgan Stanley. This was supposedly contrary to the cautious public guidance the company had previously released.

Surprise, surprise: The stock moved up the next day. Apparently, some of the institutional investors bought in (in one case, liquidating a short position and taking a long position).

Rumors started circulating about what the CFO had said. An investor posted a message on a board, saying, "CFO speaking positively on business conditions at an event last night."

Some or all of this attracted the SEC's attention, especially since Siebel had been in Reg FD trouble already, just six months before.

The Siebel IR guy was at all these investor meetings and at the Morgan Stanley dinner. According to the SEC, the IR guy "did not assess whether Goldman [the CFO] had disclosed material nonpublic information at the meeting, did not counsel Goldman not to disclose material nonpublic information about current business conditions, and made no effort to ensure that Goldman discussed only information that had already been publicly disclosed when he appeared at the Morgan Stanley dinner a few hours later."

The SEC is suing the company, the CFO, and the IR guy, for the selective disclosure, and because they failed to follow up with a public disclosure. The SEC is seeking civil penalties against all concerned.

This case will undoubtedly settle. The settlement can be expected to involve a consent decree that requires Siebel Systems to implement stringent controls on its investor-relations program.

Moreover, the company -- and the two executives -- likely will have to disclose the settlement in 10-Ks, proxy statements, and the like for a long time to come.

June 30, 2004 in Embarrassments / Bad Career Moves, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 29, 2004

Contracts: Are Fewer Physical Pages Better?

From a paper I co-authored for an American Corporate Counsel Association panel discussion:

16. The fewer physical pages a contract has, the more aesthetically acceptable it will be to your management and to the other side. This is true even if you crowd in a lot of text with a small font. (Micro-soft’s contracts are usually done in 9-point Times Roman, a fairly small font.)

Any thoughts? If you had to review a contract, would you rather read 5 or 6 pages of fairly dense type? Or a dozen pages of a more-open layout?

June 29, 2004 in Tips for New In-House Counsel | Permalink | Comments (0) | TrackBack

New Series: Pointers for New In-House Counsel
(from an ACCA paper)

I've done a lot of bar-association CLE presentations [continuing legal education] over the years. One of my favorites was at the 2001 annual meeting of the American Corporate Counsel Association (now the Association of Corporate Counsel). My friend Bob Robinson and I did a panel discussion on "Ten Things I'm Glad I Knew -- or Wish I'd Known -- My First Year as General Counsel." Based on audience feedback results, in 2002 we were invited back to reprise the panel as one of the "Best of the 2001 Meeting," which we did with colleague (Ms.) Randy Segal..

Bob and I prepared a paper to be published as part of the course materials. It actually contained 250 pointers, not just the 10 mentioned in the presentation title. An edited version of the 2001 paper was also published as the lead article in the November-December 2001 issue of the ACCA Docket. (The ACCA Docket is a must-read resource for in-house counsel; it's accessible on-line to ACCA members only.) The 2002 version of the paper grew to more than 300 pointers.

Bob's and my original intent was to post the paper on the Web an open-source document to which other lawyers could contribute over time. Unfortunately we, meaning I, never actually made that happen; mea maxima culpa. To try to remedy that failing, I've just uploaded the 2002 version of the paper here for downloading. It's in a Rich Text Format document, which should be readable by all major word processors. In addition, I'll be periodically posting exceprts from the paper as blog entries; comments are invited.

June 29, 2004 in Tips for New In-House Counsel | Permalink | Comments (0) | TrackBack

June 25, 2004

Bibliolatry versus Trust in God

On my other blog, The Questioning Christian, I've posted comments (and no, they weren't supportive comments) about a recent essay by a traditionalist Episcopal priest. For those who don't know, in recent years there's been an on-going battle in the Episcopal Church, of which I'm a member, about the proper role of Scripture. I would guess most Episcopalians take Scripture quite seriously, but not as the be-all and end-all. (This befits what a [woman] fellow parishioner describes as "the thinking man's church.") Traditionalists, on the other hand, are quite upset by the prospect of gay and lesbian clergy and of committed same-sex relationships. They claim these things are contrary to Scripture and therefore are per se unacceptable. They have been fighting an aggressive rear-guard action against the church majority, whom they brand as liberal revisionists. It seems clear to me that they intend to split the church if they can't have their way.

June 25, 2004 | Permalink | Comments (0) | TrackBack

June 19, 2004

The Symphony as Fighter Squadron

Fascinating NYT article by a reporter and amateur clarinetist who gets to play with the New York Philharmonic.

. . . As a reporter, I was getting the chance to experience what it felt like to play in a great orchestra, an organism that at its best has the might of a jet engine, the delicacy of an eye-surgeon's laser and the coloristic nuance of a Monet painting.

* * *

. . . I was also struck by how the players invested even the simplest phrases with expressiveness. If Mr. Maazel held a beat here, or pushed forward there, they reacted instantly, like fighter pilots adjusting a wing. It was surprisingly easy to play with them. The solidity of their intonation, rhythm and musicality were like beacons that had only to be followed.

I envy those who get to participate in such an "organism."

June 19, 2004 | Permalink | Comments (0) | TrackBack

June 18, 2004

Hang Up the *#*$ Speakerphone

From Securities Liltigation Watch's description of a California appeals court decision:

Three Marvell employees--Marvell's general counsel; its VP of engineering, and in-house patent attorney--gathered to call a person at Jasmine, a company with which Marvell was negotiating to purchase some technology. Using a speakerphone, the three left a message on the Jasmine employee's voicemail. However, after leaving the initial message, they failed to hang up the speakerphone, and proceeded to have a conversation that also was recorded on the voicemail.
. . . As summarized by the California Court of Appeals (Sixth District), the contents of the inadvertent voicemail "demonstrate[d] [Marvell's] theft of Jasmine's trade secret, the potential consequences and the planned cover up."

I once had a close call along somewhat the same lines (although in that case the recorded conversation was essentially harmless). At the time, we had a new phone system which many of us were still learning to use.

A colleague came to my office to call another party from my conference-table speakerphone. We wanted to talk to the other party about a transaction we were negotiating with him.

The other party wasn't there. My colleague left a brief voice-mail message and disconnected the call. (Or so he thought.)

My colleague and I chatted in my office for a few minutes about the negotiation. He left my office; I went back to work at my desk.

A few minutes later, to my shock, I heard a female voice on my conference-table speakerphone. The voice announced, "If you have finished recording, you may hang up, or press 0 to reach an operator."

Damn. We had inadvertently recorded our entire conversation about the negotiation on the other party's voice mail. What to do?

Fortunately, I retained enough presence of mind to realize that the female voice on the speakerphone was familiar: The other party evidently used the same voice-mail system as my law firm.

I quickly pressed the keys to delete the message. With great relief, I heard the voice announce, "Your message has been deleted."

Lesson: After leaving a voice-mail message, make sure you've actually hung up the phone.

June 18, 2004 in Embarrassments / Bad Career Moves | Permalink | Comments (0) | TrackBack

June 16, 2004

ABA Project: Model Case Management Orders
for Patent Cases

Several years ago, I chaired a special committee of the American Bar Association's Section of Intellectual Property Law. We set out to develop some model orders for implementing "best practices" in managing patent litigation cases.

(Of course, many of the model orders could be used in non-patent litigation as well.)

We adopted many of the provisions in the model orders from local rules of various federal district courts. The model orders reflect many practices that are already somewhat routine among experienced patent litigators. They also include provisions to help reduce administrative and mechanical costs.

Last month I participated in a panel discussion on local court rules in patent cases. The panel took place at the spring continuing-legal-education meeting of the American Intellectual Property Law Association. Several people asked me where to get an electronic copy of the model orders. Here they are:

Download model_case_management_orders_1998.12.08.rtf

June 16, 2004 in Intellectual Property, Litigation | Permalink | Comments (3) | TrackBack

June 15, 2004

Corporate Governance Changes
as Settlement Currency?

An article by Stephen Taub in today's Compliance Week ($) gives some examples of how companies seem to be using their executive compensation and other corporate-governance policies as "settlement currency" to help resolve shareholder lawsuits. The article's list of companies includes Cendant, Citrix, Enterasys, MCI, Sprint., and Siebel Systems.

The article says:

While denying that the actions taken were improper, [Cendant chairman and CEO Henry] Silverman and the other defendants agreed to significantly alter his existing contract. He agreed to move up the expiration date by five years, to Dec. 31, 2007, and reduced severance to no more than 2.99 times the prior year's compensation.

In addition, a significant majority of Silverman's bonus will now be subject to the attainment of certain performance-based earnings per share goals. Also as part of the compromise, the cash compensation portion of a post-employment consulting contract was reduced from life to a period of five years.

(Even the new contract still seems pretty rich to me, but hey, I don't move in those circles....)

We're likely to see more of this phenomenon, according to the article:

"It is definitely a growing trend," says Richard Koppes, of counsel to Jones Day Reavis & Pogue and former general counsel of Calpers. "It's beginning to happen in a fair amount of cases."

"It does seem like something that is gathering momentum," adds Bruce Carton, executive director of Institutional Shareholder Services' Securities Class Action Services.

A couple of years ago, I heard a speaker suggest that the street-smart company will deliberately hold back on some reforms of this kind. That way, if litigation should ever come to pass, the company will still have something to offer in settlement discussions. This was in a panel discussion on the law of sexual harassment, not corporate governance, but the principle would seem to be be the same.

I'm not sure where I come out on that idea: if a particular reform makes sense, I wonder whether you might be better off implementing the reform on your own initiative, before litigation, in the hope that it will help prevent litigation-causing events in the first place.

June 15, 2004 in Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

Civil War Among the Educated Class?

Fascinating NYT column by David Brooks. He postulates that the educated elite in this country can be divided into two subclasses: Knowledge workers, and managers. These two classes, he says, "happen to be engaged in a bitter conflict about everything from S.U.V.'s to presidents."

Knowledge-class types are more likely to value leaders who possess what may be called university skills: the ability to read and digest large amounts of information and discuss their way through to a nuanced solution. Democratic administrations tend to value self-expression over self-discipline. Democratic candidates — from Clinton to Kerry — often run late.

Managers are more likely to value leaders whom they see as simple, straight-talking men and women of faith. They prize leaders who are good at managing people, not just ideas. They are more likely to distrust those who seem overly intellectual or narcissistically self-reflective.

Republican administrations tend to be tightly organized and calm, in a corporate sort of way, and place a higher value on loyalty and formality. . . .

Brooks readily agrees that his hypothesis doesn't explain the variety of subcultures within the Democratic and Republican parties:

This contest between rival elites certainly doesn't explain everything about our politics. But with their overwhelming cultural and financial power, these elite groups do frame the choices the rest of the country must face. If not for the civil war within the educated class, this country would be far less polarized.

It's a thought-provoking idea none the less.

June 15, 2004 in Politics | Permalink | Comments (0) | TrackBack

June 14, 2004

Counseling an Employee for Poor Performance?
Consider Getting a Signed Written Acknowledgement

In an age-discrimination lawsuit against American Airlines by a former employee, the court recently denied American's motion for a summary judgment dismissing the case. The court's reason offers a lesson for managers and HR personnel.

The former employee, one Walker, claimed he had been fired during a post-9/11 reduction in force because of his age. American Airlines responded with evidence that Walker had been a poor performer. Walker replied that American's performance argument was merely a pretext.

Walker supported his pretext contention in part with his affidavit that he never knew he had received low performance marks. (He also introduced evidence that other, younger employees in comparable positions had serious employment problems yet were not terminated.) The court concluded that Walker had produced enough evidence of pretext to entitle him to have a jury hear his case; it denied American's motion for summary judgment.

POSSIBLE LESSON: If you're counseling an employee because of poor performance, consider 1) writing up an accurate summary of the counseling, 2) asking the employee to sign it, 3) giving him or her a copy, and 4) keeping the signed original for the employee's personnel file. (If the employee refuses to sign, consider making a written note of the employee's refusal.) That should provide at least some ammunition to help refute a later claim that the employee never knew about the performance issues.

CITATION: I couldn't find the court's opinion on-line. The case is Walker vs. American Airlines, Inc., No. Civ.A 4:03-CV-46-Y (N.D. Tex. June 9, 2004), summarized in this BNA Corporate Law Daily report ($).

June 14, 2004 in Leadership and Management, Litigation, Record-keeping | Permalink | Comments (0) | TrackBack

That $1.45 Million House May Not Look So Great Now

You're a public-company officer. Your company's been having -- or will soon have -- financial troubles. You've had a hankering for a million-dollar home in Florida. You might want to think twice about buying that house. A former officer of Homestore, Inc., who is now a defendant in a variety of securities lawsuits. recently learned that his purchase of a $1.45 million home in Florida could eventually be found to constitute a sheltering of his assets from creditors, which in turn could make him ineligible to have the company advance his defense costs in various securities lawsuits. See the opinion by the Delaware Chancery Court. (Link via BNA Corporate Counsel Weekly [$])

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Here's what happened. Homestore.com's corporate bylaws contain a fairly typical indemnification provision. The provision is designed to protect the company's officers and directors if they are sued for their actions or omissions in that capacity. Under that provision, the company is required to indemnify the officer or director, and to advance the defense costs for the suit.

But there's a catch. To be entitled to indemnification, the officer must have "acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or Proceeding, had no reasonable cause to believe the person's conduct was unlawful." If the officer is ultimately found not to be entitled to indemnification, he or she must repay the company for the defense-cost advances.

Homestore's former officer, one Peter Tafeen, sued the company to get an advancement of his defense costs in the securities litigation. Homestore contested Tafeen's suit. It noted that, during the time that the alleged securities frauds were supposedly taking place, Tafeen had built a $1.45 million house in Florida. It argued that what Tafeen really had in mind was to shelter his assets, so that, if he were ultimately found not to be eligible for indemnification, he could avoid repayment of the company's advances of defense costs. This, the company said, constituted "unclean hands" that justified the company's refusal to advance defense costs.

The court agreed that this was a possibility. It said it could not determine Tafeen's intent without a trial (presumably including Tafeen's testimony and cross-examination). The court therefore denied Tafeen's motion for a summary judgment.

June 14, 2004 in Litigation, Securities law, SEC regs / actions | Permalink | Comments (1) | TrackBack

Build Floors, Not Walls

From an on-line Q&A; with NYT columnist Thomas Friedman on the subject of outsourcing:

My motto is build floors not walls. Build stronger foundations so more people can compete without walls. But putting up walls will only impoverish everyone.

June 14, 2004 | Permalink | Comments (0) | TrackBack

June 09, 2004

Adelphia Vendors Motorola, Scientific-Atlanta Implicated in Executives' Securites-Fraud Trial

Today's WSJ ($) reports that, in the trial of two former Adelphia executives, an email and witness testimony have implicated Adelphia vendors Motorola and Scientific-Atlanta as "allegedly help[ing] Adelphia cook its books."

According to [prosecution witness Jarmes R.] Brown's testimony in U.S. District Court in Manhattan, Adelphia in mid-2000 realized it was going to miss its earnings targets, in part because of higher-than-expected expenses related to the rollout of new set-top converter boxes -- the equipment that generally sits on top of cable subscribers' televisions -- that it had purchased from Motorola and Scientific-Atlanta.

Mr. Brown testified that Timothy Rigas, one of the former Adelphia executives on trial, suggested capitalizing the marketing and advertising expenses associated with the rollout of the equipment. That would stretch out the expenses and boost Adelphia's earnings.

The article notes that "the Securities and Exchange Commission has taken a harder line on suppliers, customers, bankers and others who knowingly helped companies commit accounting fraud."

See also SEC Hammers Company's Customers for Securities-Fraud Participation.

June 9, 2004 in Criminal Penalties, Finances, Litigation, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 04, 2004

After-the-Fact Contract Changes, Side Letter,
Lead to Federal Fraud Indictments

The Department of Justice recently announced that several former Enterasys executives had been indicted for securities fraud and wire fraud. According to the Justice Department, the accused executives altered an already-signed contract to change its terms -- after the close of the quarter -- so that revenue could be recognized in the quarter. One of the executives also allegedly drafted and signed a secret side letter giving a customer an exchange right, and insisted that the exchange right not be referenced in the customer's purchase order, so that revenue could improperly be recognized.

According to the Justice Department press release:

The Indictment further alleges that, several weeks after the close of the quarter and after learning that Enterasys’ outside auditors had selected the Ariel transaction for review, the conspirators allegedly caused the Letter of Agreement to be altered to delete or change the problematic terms. The altered Letter of Agreement was then backdated to create the false impression that it had been executed before the close of the quarter, and a new secret side letter reinstating the deleted terms was issued to Ariel. According to the Indictment, some of the conspirators caused the altered and backdated Letter of Agreement to be sent to the company’s outside auditors in connection with their review of Enterasys’ quarterly financial statements. Neither the original Letter of Agreement nor the side letter were provided to Enterasys’ outside auditors. Some of the conspirators also allegedly caused Enterasys to issue a press release and to make an SEC filing which included the fraudulent revenue and contained related false statements. After the fraud was uncovered, the company restated its earnings and reversed all of the revenue associated with the Ariel transaction.

The Indictment also charges Spence in connection with an additional transaction between Enterasys and SAP AG, a German commercial computer solutions company. According to the Indictment, SAP sought an eighteen month right to exchange $1 million in computer products it was purchasing from Enterasys in the final days of the quarter ending December 29, 2001. Enterasys allegedly agreed to the right of exchange even though it was not consistent with revenue recognition under relevant accounting principles. The Indictment alleges that Spence and a “very senior” Enterasys official insisted that SAP not refer to the right of exchange in its purchase order, promising instead to put that term in a secret side letter. The Indictment further alleges that Spence then drafted and signed such a side letter and sent it to SAP.

The maximum sentences associated with conspiracy, mail fraud and wire fraud at the time of the offenses was five years per count. The maximum sentence for securities fraud is ten years per count. The offenses also carry with them the possibility of substantial criminal monetary penalties.

June 4, 2004 in Criminal Penalties, Finances, Sales, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack

June 03, 2004

Good News -- I Guess

The Associated Press reports that today the U.S. Attorney's office announced criminal indictments against seven former employees of Symbol Technologies for securities fraud. Symbol's home page announced, "No Criminal Complaint Filed Against Symbol." Imagine being a customer and seeing that on a vendor's home page. (The Symbol home-page item is linked to this press release.)

It all reminds me of an old Navy joke: A ship was visiting a foreign port after a long stretch at sea. On liberty, the captain imbibed a bit too freely. Returning to the ship, he stumbled across the gangway, gave a slurred acknowledgement to the young seaman who had the gangway watch, and staggered off to his cabin. The seaman dutifully recorded in the ship's log, "The Captain returned to the ship drunk." The seaman's supervisor, a grizzled chief petty officer, chastised him for his lack of discretion. Two nights later, the captain went on liberty again but, having learned his lesson, he drank only tea and made an early night of it. As luck would have it, the same seaman had the gangway watch again. He, too, had learned his own lesson -- this time he recorded in the log, "The Captain returned to the ship sober."

June 3, 2004 in Criminal Penalties, Finances, Securities law, SEC regs / actions | Permalink | Comments (0) | TrackBack