Former McAfee General Counsel Kent Roberts, accused of options backdating-related misconduct, was acquitted following a criminal jury trial and the SEC later dropped its separate enforcement action against him. But that apparently is not enough for Roberts – he wants vengeance.
On September 16, 2009, he filed a lawsuit in the Northern District of California (complaint here), in which he alleges that the company, certain of its officers and directors and its outside advisors conspired to scapegoat him for the company’s backdating problems, as part of a campaign supposedly dubbed "Project Shield," to shift attention and options backdating blame away from the company and its senior officials.
Background
The events leading up to the filing of this complaint do help explain Roberts’s anger. Among other things, the criminal trial against him on fraud charges got off to a startling beginning when literally on the eve first day of trial, the company for the first time produced to prosecutors and to the defense 16 pages of previously subpoenaed documents that allegedly corroborated Roberts’ contention that he had not initiated the backdating of the options grant he received and that was the basis of the criminal prosecution.
Roberts was not the only one infuriated by this belated production – according to press reports, Judge Marilyn Hall Patel said "somewhere or another, heads will have to roll, this is outrageous." Roberts’ criminal defense attorney said at the time that the belated production underscores the defense contention that the company had engaged in a pattern of selectively releasing information in order to scapegoat Roberts for the company’s options issues.
The criminal trial nevertheless went forward, and on October 3, 2008, the jury acquitted Roberts of all charges, except one on which the jury was unable to reach a verdict. Judge Patel was quoted as having said, "I would strongly recommend against pursuing this further. This was not a case where any money was lost as a result of this."
In March 2009, the SEC dropped its separate civil complaint against Roberts (although, interestingly in light of the reputational damage allegations in Roberts’ recently filed complaint, while the SEC’s complaint against Roberts and related litigation press release can be easily found on the SEC’s website, I was unable to find anything on the SEC’s website indicating that the SEC had withdrawn the complaint. It may be there, but I couldn’t find it, which seems seriously wrong to me.)
Roberts’ Complaint
So long the accused, Roberts is now the accuser. His long, detailed and fascinating complaint is written in a febrile and vehement tone.
Roberts alleges that the company’s then-CEO and members of the company’s board "instituted a campaign of diversion, manipulation, and falsehood aimed at shifting the attention of federal authorities away from [the CEO’s] and McAfee’s misdeeds." He further alleges that the company’s board "literally dubbed the campaign ‘Project Shield,’" which he alleges was designed to make him the "scapegoat."
Roberts not only contends that he was scapegoated, but he also alleges that he was offered up in order to divert attention from actual, and much more significant, options backdating allegedly connected to company officers and board members. Among other things, Roberts alleges that the company’s board "engaged in a deliberate effort to divert attention onto Roberts in order to protect more senior company officers and directors whose conduct with respect to stock options was extensive and potentially unlawful."
As part of this alleged process, Roberts alleges, the company, its senior officers and its outside advisors orchestrated a campaign to selectively provide information and documents to government investigators to cast blame on Roberts and draw attention away from other company option grant related activity. He alleges that this selective and slanted provision of information to the government resulted in his criminal prosecution and in the SEC enforcement action against him. He also alleges that the CEO and board members provided "false accounts" in SEC depositions about conversation that had with Roberts.
The complaint alleges that McAfee "employed delay, misinformation, and selective disclosure to slant the evidence" away from the company grants "to depict Roberts to federal investigators as the individual behind the wrongdoing." The complaint further alleges that the company’s dealings with the governmental authorities were "deliberately tainted with deception, misinformation and withheld information."
As further detailed in a September 17, 2009 article by Ross Todd on the AmLaw Daily (here), Roberts’ complaint also contains a number of very specific allegations against McAfee’s outside attorneys and against the counsel to the board’s special litigation committee.
Roberts alleges that the company’s "manipulation of evidence through Project Shield was a substantial factor in causing Roberts’ unwarranted prosecution" that "substantially and irreparably damaged Roberts’ career." Roberts accuses the company of malicious prosecution, defamation and false light invasion of privacy, and seeks to recover unspecified compensatory and punitive damages.
Discussion
Roberts’ complaint is a fascinating document. Regardless whether or not his lawsuit succeeds, he will always have the option of selling the movie rights to his story, which reads like a Grisham novel. I found particularly compelling his account of the series of separate meetings with the CEO and board members in which (he contends) he himself brought to their attention an incident in which the company’s comptroller changed the date of one of Roberts’ option grants, and the next thing he knew he was being terminated and escorted out of the building. The company’s conduct (at least as depicted in Roberts’ obviously self-serving account) comes off as hasty and ill-considered.
But it is important to put these events in context, particularly the pressure and scrutiny McAfee and other companies were under at the time. The companies were under enormous pressure to demonstrate (under the then-applicable McNulty Memo and its predecessor the Thompson memo, about which refer here, specifying the guidelines for corporate prosecution) that it was "cooperating fully" with government officials. One of the criticisms of these guidelines at the time was that they forced companies to offer up its employees in order to try to avoid its own potential criminal prosecution – not to say that that necessarily happened here, but the circumstances as portrayed in Roberts’ complaint certainly do suggest that possibility.
For all the feverish tone of Roberts’ complaint, it probably should be noted that, at a minimum, he was aware of and went along with the backdating of his options grant. According to the press reports linked above, the jury did conclude that Roberts had breached his fiduciary duty to the company, even if they also concluded that the government had not proved that he had set out to defraud the company. To me, this seems like important context within which to consider Roberts’ outrage.
The complaint does raise some interesting insurance questions. The only defendant named in the complaint is the company itself. Because the typical public company D&O insurance policy covers the company only for securities claims, and because Roberts has not filed a securities claim against the company, there likely would not be coverage under the typical D&O insurance policy for Roberts’ complaint as it currently stands (although Roberts does allege a variety of allegedly misleading statements in the company’s disclosure documents, which could raise some interesting issues). I express no views here whether or not the company’s Commercial General Liability policy would provide coverage.
Though no individuals are named as defendants, several individual directors and officers are expressly alleged to have engaged in a variety of supposedly wrongful actions. The possibility that the complaint could be amended to name the individuals as defendants does suggest that the complaint could at least represent a potential claim under the D&O policy.
The more interesting question is whether any claims against individual directors and officers based on the complaint’s allegations would be covered claims. Many (but not all) D&O policies contain omnibus exclusions, often within the policy exclusion for bodily injury and property damage, intended to preclude coverage for personal injury claims. These exclusions, when they appear, are not uniform. At a minimum, the kinds of claims asserted in the Roberts complaint underscore the need to consider the language of these personal injury exclusions carefully, if they cannot be removed altogether. Given the breadth and variety of Roberts’ allegations, at least some of his claims, if extended to individual defendants, might not be entirely excluded even by a D&O policy that had a personal injury exclusion. Obviously, the argument for coverage would be stronger if there were no personal injury exclusion.
But in the end, what makes the filing of this complaint so interesting is the way that Roberts’ tale manages to retrace the precise arc of the entire options backdating scandal – from the early, overwrought days when the scandal first emerged, to the long, slogging process that followed, with its by a proliferation of lawyers and prosecution of legal claims, to the empty void left when all was said and done, presenting a question of what the whole thing was really all about to begin with.
To be sure, there were some significant options backdating settlements, including the recent $118 million Broadcom settlement (about which refer here). But the fact that the Broadcom settlement was just about options backdating related attorneys’ fees merely serves to underscore the question of what the whole options backdating frenzy has accomplished in the end. (The options backdating derivative lawsuit filed with respect to McAfee settled for approximately $30 million, refer here.)
The one thing that the options backdating scandal unquestionably did was create an enormous amount of work for lawyers. As Roberts’ complaint itself illustrates, once these kinds of forces are unleashed, they continue to expand outward indefinitely like some fundamental force of physics. I guess Roberts’ complaint just represents the inevitable next phase of that process – litigation about litigation.
Hat tip to the Courthouse News Service for a copy of the complaint.