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Executives at McAfee and CNet Are Out

A widening scandal over backdating of option grants claims two CEOs and a president.

October 12, 2006|Josh Friedman | Times Staff Writer

The leaders of two technology companies stepped down Wednesday amid the widening scandal over stock option practices, moves analysts said suggested corporate boards were rushing to clean house before potential crackdowns by federal regulators or prosecutors.

At McAfee Inc., a Santa Clara, Calif.-based maker of antivirus software, George Samenuk retired as chairman and chief executive, while President Kevin Weiss was fired. At San Francisco-based CNet Networks Inc., which runs a network of tech and entertainment websites, co-founder Shelby Bonnie resigned as chairman and CEO.

More than two dozen executives have quit or been fired in recent months at companies swept up in the probe, which centers on the backdating of stock option grants to enrich company insiders.

"In this day and age, it's important for a board to send a message that the corporation is honest -- and if people are not, you're going to get rid of them," said David S. Ruder, professor of law at Northwestern University and former Securities and Exchange Commission chairman. "This also may reflect that boards themselves are really angry that disclosures weren't made to them."

Federal prosecutors have brought criminal fraud charges against former executives at Brocade Communications Systems Inc. and Comverse Technology Inc., and the SEC has said more than 100 companies nationwide were being scrutinized by the agency.

More than 130 companies, many of them based in Silicon Valley, have announced internal investigations. Last week, Apple Computer Inc.'s former chief financial officer, Fred Anderson, stepped down from the board after the company disclosed "serious concerns" about how options had been handled.

Backdating can reap windfalls for insiders because it allows them to purchase shares at older, lower prices and pocket a bigger difference when the shares are sold.

As internal probes wind down at other companies, more executive purges are sure to come, said Joseph Grundfest, law professor and director of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University.

In stock market trading Wednesday, CNet shares tumbled 76 cents, or 7.7%, to $9.14. McAfee gained 85 cents, or 3.3%, to $26.64.

Traders believe that McAfee may fare better under new leadership but that CNet could struggle without Bonnie, who had been with the company since 1993, Grundfest said. Bonnie was a "high-profile, charismatic leader deemed important to the company's brand," he said.

CNet promoted Neil Ashe, who has been with the company since 2002, to CEO and named Jarl Mohn as non-executive chairman. McAfee appointed director Dale Fuller, former CEO of Borland Software Corp., as interim CEO and president, and named Charles Robel as non-executive chairman.

Samenuk and Bonnie expressed regret for the improper accounting of options that took place during their tenures. The irregularities will force McAfee and CNet to erase reported profits and could lead to fines or other penalties if authorities determine that laws had been violated.

Securities lawyers said directors at many U.S. companies might be concerned about the creative accounting that executives apparently allowed -- or they could be acting aggressively in hopes of impressing regulators and staving off shareholder lawsuits.

"Boards can't afford not to do something now that everybody is aware of what has been going on for years," said George Newhouse, securities and corporate lawyer at Thelen, Reid & Priest in Los Angeles. "Even outside directors who turn a blind eye could at least face potential civil liability. That's why we're seeing this chain reaction."

Said Henry Hu, a corporate and securities law professor at the University of Texas in Austin: "One cannot dismiss entirely the possibility that image reasons may have played a role in one or more of these firings."

Nevertheless, shareholder activists said they were pleased to see boards taking steps to ensure that abuses would be less likely.

"Boards have been very aggressive in launching investigations themselves," said Amy Borrus, deputy director of the Council of Institutional Investors, which represents 140 public and private pension funds. "That's heartening. Of course, that's what the boards are there for -- not to run the companies, but to be watchdogs."

Borrus also said several boards have adopted a policy her group endorses to ensure fairness: Granting options on a uniform date companywide, with no input from management.

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josh.friedman@latimes.com

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