Second Indictment by Northern California Stock Options Backdating Task Force
SAN FRANCISCO – LAWFUEL – US Attorney News – A federal grand jury today indicted the former general counsel of McAfee, Inc. (formerly Network Associates) in connection with the fraudulent dating of stock option grants in 2000 and 2002. Kent Roberts, 50, of Dallas, Texas, is charged in a seven count indictment with devising a scheme to defraud by granting himself and others valuable in-the-money stock options while hiding the true nature and value of the stock option grants from Network Associates, its Board, its shareholders, its auditors, the public, and the SEC. These charges are the result of an investigation by the FBI and the U.S. Attorney’s Office for the Northern District of California.
U.S. Attorney Scott N. Schools stated, “It is integral to the public trust in our financial markets that transactions affecting a company’s financials are recorded honestly, particularly by those who are responsible for regulatory compliance. I thank the FBI and the prosecutors on the case for their diligent work in this investigation.”
The indictment charges that beginning in 2000, Roberts fraudulently granted himself extra compensation by causing the grant date for his stock option grant to be changed in Network Associates’ books and records so that the exercise price of the grant would be lower and so that it would appear that the grant was made on the new fabricated date.
According to the indictment, the Board of Directors for Network Associates granted Roberts the option to buy 20,000 shares of Network Associates’ stock at the strike price of $29.62, the closing price on February 14, 2000. In late 2000, Roberts was concerned that the grant was “underwater,” that is, the $29.62 exercise price of the grant was more than the market price for Network Associates’ stock. Roberts allegedly caused Network Associates’ then-controller to change the grant date and exercise price in the computer system that recorded stock option grants for employees. In particular, he caused the grant date to be changed to April 14, 2000, with a new exercise price of $19.75.
The indictment further charges that Roberts fraudulently concealed and failed to disclose the fraudulent change that he caused to be made to his February 2000 stock option grant. For instance, in February 2002, Roberts began an investigation into allegations that the same then-controller had caused the exercise price for stock option grants to certain consultants to be lowered in Network Associates’ books and records. As a result of the investigation, Roberts recommended, and Network Associates’ management agreed, to remove the then-controller from his position in the finance department. In April 2002, Roberts participated in a conference call with the SEC during which he described the then-controller’s conduct with respect to stock options, the decision to remove the controller from his position in the finance department, and the compensation expense that Network Associates would take for the stock options that the controller re-priced.
Although Roberts led the investigation into the then-controller’s conduct relating to stock options, and reported that conduct to the SEC, he concealed and failed to disclose to Network Associates’ management, its Board, its internal auditor, its independent auditor, and others that the same then-controller had changed the exercise price and grant date of Roberts’ February 2000 grant.
Roberts is further charged with making a false entry in Board meeting minutes that purported to reflect a grant date for a stock option grant to the then-CEO and Chairman of Network Associates when the closing price of Network Associates’ stock was relatively low, when in fact the Board did not intend to make the grant effective on that date. Specifically, on January 15, 2002, the Compensation Committee for the Board met and granted the then-CEO the option to purchase 420,000 shares of Network Associates’ stock at the closing price on January 15, which was $27.19. On the following day, Roberts decided to price the then-CEO’s stock option grant at the closing price on January 16, 2002, which was $25.43. Roberts then allegedly prepared minutes of the January 15, 2002 meeting to falsely reflect that the Board intended for the options to be granted at the closing price on January 16, 2002.
According to the indictment, Network Associates’ public filings represented that it accounted for its stock option grants in accordance with generally accepted accounting principles (GAAP). GAAP provided that a company was not required to record any compensation expenses for an employee stock option grant where, among other things, the exercise price of the grant was equal to the market price of the company’s stock on the date of the grant. Such stock option grants are “at the-money” because they have no intrinsic value on the date of the grant. In contrast, a company was required to record a compensation expense for a stock option grant where the exercise price of the grant was less than the market price of the company’s stock on the date of the grant. Such stock option grants are “in-the-money” because they have intrinsic value on the date of the grant. Likewise, a company was required to recognize a compensation expense if it re-priced an existing stock option grant.
Roberts joined Network Associates in May 1998 and became the General Counsel and Secretary of Network Associates in 2001. Roberts was also Network Associates’ corporate compliance officer regarding SEC reporting rules, and in 2002 became one of the three founding members of the Ethics First Committee, which was charged with investigating any fraudulent conduct reported by employees. In May 2006, Network Associates’ finance department discovered the fraudulent change to Roberts’ February 2000 promotion grant and Roberts was terminated effective May 30, 2006.
Roberts is charged with two counts of mail fraud, one count of wire fraud, three counts of making false SEC filings, and one count of falsifying books, records, and accounts of Network Associates.
The maximum statutory penalty for each count of mail and wire fraud, in violation of 18 U.S.C. §§ 1341, 1343, and 346, is 20 years in prison and a fine of $ 250,000, plus restitution. The maximum statutory penalty for each count of making false SEC Filings, in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. § 240.10b-5, is 20 years in prison and a fine of $ 5,000,000, plus restitution. The maximum statutory penalty for the count of falsifying books, records and accounts, in violation of 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff and 17 C.F.R. § 240.13b2-1, is 20 years in prison and a fine of $5,000,000, plus restitution. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.
An indictment contains only allegations against an individual and, as with all defendants, Mr. Roberts must be presumed innocent unless and until proven guilty.
This case was indicted by Assistant U.S. Attorney Christopher J. Steskal and will be prosecuted by Assistant U.S. Attorneys Eumi Choi and Timothy Lucey.