• SEC Underlines Value of Cooperation in KLA-Tencor Stock Options Settlement
  • July 31, 2007 | Authors: Jordan D. Hershman; Roger P. Joseph; Neal E. Sullivan
  • Law Firms: Bingham McCutchen LLP - San Francisco Office ; Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - Washington Office
  • The SEC announced settlement of stock options backdating claims against KLA-Tencor Corporation on July 25, 2007. As with other companies, the SEC charged that KLA-Tencor filed false financial statements that failed to reflect hundreds of millions of dollars of compensation expense resulting from grants of backdated or in-the-money-stock options. 

    Resolution of these charges represents the SEC’s third settlement with a company over stock options backdating, and the SEC clearly used this occasion to send a message.

    The Message Is: “Cooperate”

    The SEC announced its first two company settlements of stock options backdating claims on May 31, 2007 with Brocade Communications Systems, Inc. and Mercury Interactive LLC, pursuant to which those companies paid $7 million and $28 million, respectively. In sharp contrast, KLA-Tencor was required to make no payment at all but did agree to a permanent injunction against further violations of the reporting, books and records and internal controls provisions of federal securities laws.

    The SEC made clear the reasons for the distinction. It declined to charge KLA-Tencor with fraud or to seek a monetary penalty “based in part on the company’s swift, extensive and extraordinary cooperation  in the Commission’s investigation, as well as far-reaching remedial measures.”1 As the Associate Regional Director of the SEC’s San Francisco Regional Office put it, “KLA-Tencor went to great lengths to clean house after discovering the fraud, and their cooperation greatly facilitated the government’s investigation.”2

    The SEC Has Used The Fruits Of KLA’s Cooperation

    The SEC also filed a complaint against KLA’s former CEO, Kenneth Schroeder. The complaint evidences no inclination to allow Mr. Schroeder to settle by accepting an injunction against future misconduct. The SEC alleges thirteen claims for relief, including claims for securities fraud and proxy violations and seeks an officer and director bar, disgorgement, civil penalties and repayment of bonuses and stock profits. 

    KLA’s cooperation is reported to include detailed disclosure to the SEC of the results of its internal investigation and targeting of those deemed responsible for the backdating.3 It may be that the company felt and responded to government pressure to, in the words of Stanford Law Professor Joseph Grundfest, “throw wrongdoers under the bus.”4  

    The SEC appears to be making use of that information, because its complaint against Schroeder describes the alleged scheme in considerable detail.  The complaint describes, for example, the precise instructions a KLA executive allegedly gave the company’s human resources department in June 1999 on the steps required to backdate stock options.5  It also describes emails in which Schroeder allegedly rejected the caution of KLA’s general counsel against backdating stock options without proper accounting and disclosures.6


    The SEC may have taken into account other factors in determining to seek no penalties against KLA-Tencor. That the SEC specifically identified only the company’s cooperation as contributing to that decision, however, cannot be ignored and must add to the already considerable incentive for boards of directors to conduct prompt and thorough investigations of any potential problems at their public companies.


    1 SEC Charges Former KLA-Tencor CEO With Fraud For Improper Stock Options Backdating, SEC Press Release 2007-143.
    2 Id.
    3 KLA Escapes Tough Penalty For Backdating, The Recorder, No. 144 (ALM July 26, 2007).
    4 http://www.forbes.com/wallstreet/2007/06/13/legal-grundfest-milberg-weiss-biz-wall_cz_nw_0614legal.html
    5 SEC v. Schroder, Complaint ¶ 23.
    6 Id. ¶¶ 31-33.