Brocade Communications will not be alone.
Last week's civil and criminal charges against former executives at Brocade, a maker of data storage networking products, were the first in a widening investigation into the manipulation of stock options. No one expects that they will be the last.
But given the number of companies now under scrutiny - more than 80 - and how varied were their practices in granting options, it is unclear where investigators will draw the line. Some practices may turn out to be perfectly legal, others simply overly aggressive or sloppy and still others may be found to have been fraudulent.
Government investigators seem to be focusing their efforts now on cases involving falsified documents and similar accusations. A result may be that the vast majority of the options-backdating cases will wind up being pursued and settled on a civil basis with the Securities and Exchange Commission, lawyers say.
"Only the top end of these cases, namely forgery and intentional deception, should have criminal interest for the Justice Department,'' said Brian J. Lane, a former director of corporation finance with the commission who is now with Gibson Dunn & Crutcher in Washington. "The next tier will likely involve action by the S.E.C. only."
And while prosecutors in San Francisco, Manhattan and Brooklyn have opened 33 cases so far, it is likely only a handful of those will result in criminal charges, said lawyers involved in talks with investigators.
One aspect of the options-backdating investigation that strikes some lawyers as unusual is the high degree of cooperation and coordination that appears to be occurring among the S.E.C. and federal prosecutors in three districts.
Many were not surprised that the United States attorney in Northern California took the lead in filing the first case against the former Brocade executives. Many of the tech companies under investigation for their options-backdating practices are based in its backyard: Silicon Valley. Still, the lack of turf wars among regulators may simply show that there are probably enough cases to go around, some lawyers said.
The reason the government may pursue cases involving false documents or statements is that it is usually easier to show intent in those cases, lawyers said.
"If you have a situation where you have falsified documents, forged documents or even misleading backdated documents, which are false in different ways, those are the kind of things that prosecutors or enforcement lawyers are going to react to," said Christopher Wray, the chairman of King & Spalding's government investigations practice and a former head of the Justice Department's Criminal Division. "I believe that there are enough truly criminal cases to bring that they shouldn't have to pursue gray-area ones."
Underscoring the import the government is placing on this investigation, the S.E.C. is devoting plenty of employees to witness interviews; requesting that crucial documents be turned over in a matter of days or a few weeks; and demanding that witnesses show up for interviews on extremely short notice, said lawyers representing clients under investigation.
"I think tactics and demands from investigators that were rare before Enron are much more common now. Whether that's a good thing or a bad thing remains to be seen," said Michael N. Levy, a former assistant United States attorney who is a white-collar criminal defense lawyer with McKee Nelson.
The issue of options backdating has only recently reached the public eye, but in some cases it has been closely scrutinized by regulators for several months. Many investigations have been opened after internal investigations by boards of various companies.
Yet, what makes so many of these cases complex and difficult to define in black-and-white legal terms is that the practice appears to have been widespread; it often received the blessing of auditors and law firms; and it mostly involves grants of options during the 1990's and through 2002, when the Sarbanes-Oxley Act required more timely reporting of options grants.
Still, while the options may have been given years ago and may not have even enriched the participants, disclosure of the backdating activity is occurring when the public is becoming increasingly outraged over executive compensation. Already, many class-action lawsuits have been filed against companies that have disclosed inquiries into their options practices.
The fallout from internal and government investigations at several companies has already been swift and fierce. At several companies, the corporate suites, including the chief executives, chief accounting officers and even general counsels, have been emptied. And those who typically are more insulated from investigations, like directors, auditing firms and even law firms that counseled companies under investigation, are squirming under the microscope as well these days.
US: Investigations Are Sifting Good, Bad and Only Ugly
Brocade Communications will not be alone.