Two internet chiefs take the backdating bullet

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The departure of chief executives of McAfee, the virus software maker, and Cnet, the online publisher on Wednesday underlined the difficult choices faced by corporate boards as they struggle to manage the aftermath of the stock options backdating scandal that has ensnared at least 100 companies.

The resignations of George Samenuk of McAfee and Shelby Bonnie of Cnet came less than a week after Steve Jobs, the chief executive of Apple Computer, was allowed to hold onto his job in spite of admitting that he knew about options backdating in “a few instances.”

Some experts say a lack of communication by federal regulators over how aggressively they intend to pursue companies involved in Silicon Valley’s biggest scandal since the dotcom collapse has contributed to confusion over how best to handle the mess.

“At this point there has been very little guidance from the SEC or the US attorney’s office about what constitutes a serious options violation,” says Jim Sanders, a former SEC attorney and partner at McDermott, Will & Emery.

“There’s not a standard here that says everybody who has touched an option here has touched a third rail and needs to be fired,” he says. “A company has to decide if a given fact pattern rises to a level that requires the executives to be let go.”

The result has been a hodgepodge of disciplinary action, ranging from mea culpas to firings.

Apple said last week that Mr Jobs did nothing wrong because he was unaware of the accounting implications of backdating and did not benefit personally from the practice.

On Wednesday, Mr Bonnie resigned from Cnet even though the company’s own internal probe had concluded that he was not guilty of any wrongdoing.

McAfee said its internal probe had not come to a conclusion about any wrongdoing, but in a statement accompanying news of his resignation on Wednesday, Mr Samenuk said he had decided to step down because it would be “in the best interest of the company, its shareholders, and employees.”

Of more than 100 companies that have been caught up in investigations over backdating, thus far only a handful have sacked their top managers. They include Brocade Communications Systems, a networking equipment maker, and Comverse Technology, a maker of voicemail software, whose top managers are alleged to have engaged in some of the most egregious cases of options abuse. The former chief executives of both groups are facing charges of securities fraud.

With dozens of companies preparing to report on the findings of their own investigations into backdating in the coming weeks, more top-level departures are likely.

Henry Hu, a professor at the University of Texas law school, says that until all the facts are in, it would be premature to draw conclusions about companies’ differing approaches to the backdating scandal.

“When you talk about backdating, there is a whole range in terms of degrees of culpability,” says Prof Hu. “It may well be that the kind of backdating at Apple was different than the kind of backdating at McAfee.”

Mr Hu says that, except in clear-cut cases of fraud, company boards have leeway when it comes to meting out punishment. “Consciousness of wrongdoing is very important,” he says. “Where it’s more of a gray area, boards have some discretion.”

Mr Sanders, the former SEC attorney, says that, when it comes to less clear-cut cases, it may fall to the US securities regulator to draw the line. “[The SEC] are going to have to make a decision about whether knowledge that somebody’s options are backdated is sufficient to bar [an executive] from running a public company.”

Whether that will happen remains unclear, but one thing is certain: The fallout from backdating is far from over.

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