Susan Skaer was the top lawyer at Silicon Valley high-flier Mercury Interactive for five years. Today, the recently-married Skaer sells real estate in Palo Alto, California, under her new name of Susan Tanner.

Skaer is just one of a plethora of Silicon Valley in-house lawyers whose careers were turned upside down by backdating – the widespread and illegal practice of companies picking stock option grant dates after the fact and not accounting for them properly.

The scandal – which has unfolded over the past decade – shook in-house lawyers with unprecedented force. Legal Week's sister title The Recorder surveyed 39 Silicon Valley companies that restated financial results because of backdating and found that just three general counsel (GCs) remain in their positions at those companies.

"I cannot think of another industry-wide crisis that hit so hard on general counsel," observes David Anderson, a Pillsbury Winthrop Shaw Pittman white-collar defence lawyer, who is set to join the US Attorney's Office.

Of the 30 companies that had GCs during the backdating period, 14 GCs were directly caught in the fallout. Four were charged by the US Government – though none has been convicted – and another 10 either shouldered the blame for their company, stepped down or were fired at the time of an internal or Government investigation.

"I personally have not seen a genre of cases in which GCs played such an important role in the wrongdoing," says Michael Dicke, assistant regional director of the Securities and Exchange Commission (SEC) in San Francisco.

Taking the fall?

On the flip side, some speculate privately that certain GCs took the fall for their superiors. Defence lawyers in some cases have argued that outside counsel were actually to blame. And many lawyers say they believe few GCs blessed backdating – or some semblance of it – knowingly.

Regardless, washing off the stink of backdating has been difficult for some, even for those who were not charged. At least 12 of the 31 GCs surveyed for this article currently appear not to be practising, such as former Apple GC Nancy Heinen, who is facing SEC charges. Although Heinen probably does not need the work – she has cashed out at least $50m (£25.5m) in Apple stock -others have found it tough to move on, legal recruiters say.

"A lot of these people were innocent, but the reality is that boards became so skittish on this issue that they did not want to take a chance on being second-guessed if they hired a 'tainted' general counsel," says Robert Major, a veteran in-house recruiter at Major Lindsey & Africa.

Even so, seven of these GCs have managed to get other jobs practising law, either in-house or at law firms. Four had already obtained other jobs before the backdating mess became public, but three have moved on since. For those three, a premium seems to have been put on having cleaned up or resisted backdating – as in the case of Stuart Nichols, former GC at KLA-Tencor, who became the top lawyer at MIPS Technologies last fall.

Three others, like Mercury's Skaer, who is fighting SEC charges, have since chosen less traditional careers.

The scandal has also changed the role of in-house lawyers in Silicon Valley. Some of the nine companies that did not have a GC at the time that the backdating occurred have added one as a way to remedy the situation. Other companies, such as BEA Systems, have given the top lawyer's position more authority since the scandal, according to public filings. "It has reaffirmed how important the legal function is," says Stephen Debenham, GC at Asyst Technologies.

Debenham, along with Foundry Networks' Cliff Moore and Maxim Integrated Products' Charles Rigg, are the three who have remained in their positions. None of them took any blame for the options problems at their companies.

GCs were used to being the ones asking the questions. The backdating scandal cast them as suspects in the eyes of their company audit committees and government investigators.

Marcia Sterling retired from her role as GC at Autodesk after more than a decade in March 2006. Five months later, her company launched an internal investigation that would reveal that options had been improperly handled at times over an 18-year period ending in 2006. Autodesk took a $35m (£17.8m) charge and did not place any blame on the former GC.

Even so, Sterling says, she is glad she retired when she did. "My timing was fortunate," she says. "I know it is been a trying time for a lot of general counsel, for sure."

Smaller fry

The trying times were well-documented at companies like Apple and KLA-Tencor, but GCs at less well-known companies such as Blue Coat Systems also felt the heat. Cameron Laughlin, who had risen from corporate counsel to general counsel in a matter of months in 2004, was put on the spot during Blue Coat's 2006 internal investigation.

The special committee concluded early last year that Laughlin was aware that grant dates were being chosen with the "benefit of hindsight" and should have known better. She also received backdated options herself. Other executives also shared the blame and the company took a $49m (£25m) charge.

The committee did note that Laughlin, a former associate at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian and GC at two private companies, "had limited public company securities and corporate governance experience prior to joining us". They recommended that Blue Coat get a new GC but said Laughlin could remain with the company. Laughlin, who now serves as associate GC at Blue Coat, declined to comment.

Some GCs were blamed by their companies and resigned, such as CNET's Sharon LeDuy, who was never charged. Others were blamed even after they had left the company. Mike Ross, the former Atmel GC, was fired after an investigation into travel funds amid a struggle for corporate control at the company in 2006. A year later Atmel laid the blame for backdating on Ross, among others.

Efforts at appeasement

White-collar defence lawyers say that some companies were spooked by government investigators and moved quickly to get rid of GCs or others higher up in an effort to appease them.

"There is a difference between the SEC putting pressure on, and companies feeling like they needed to be responsive to perceived pressure for the SEC," says Jordan Eth, a securities lawyer at Morrison & Foerster. "But what better way to do it than to serve up a senior officer?" The SEC's Dicke said that if a company took "swift remedial measures" it was taken into account in decisions about penalising companies.

In all, the SEC charged or settled with 14 individuals from seven Silicon Valley companies in backdating trouble. Four of them were GCs – Skaer, Heinen, McAfee's Kent Roberts and Lisa Berry, formerly of KLA-Tencor and Juniper Networks. All four have denied wrongdoing and are fighting the charges in court.

Making a new start has not been easy. For those fighting SEC charges, a new job may be out of the question. Roberts, who was also charged by the Justice Department, Berry and Heinen appear to have laid down the law books for now. But Skaer has found a new career as a real estate broker for the time being. According to the SEC, Skaer was forced to resign from Mercury in 2005. But in early 2006, she obtained a broker's licence and now works at Dreyfus Properties in Palo Alto. She was married in the summer of 2006. Skaer did not return repeated phone calls seeking comment and her lawyer declined to comment.

For GCs who were not charged, the road has been easier – especially for those who were perceived to have cleaned up or at least resisted backdating.

KLA-Tencor GC Nichols stepped down in late 2006 after the company admitted to backdating. But in a much-publicised 2001 email exchange, Nichols warned KLA executives about backdating, according to the SEC. That warning earned him the now-famous emailed scolding from chief executive officer (CEO) Kent Schroeder, according to the SEC's complaint. "Help me, don't just tell me how to follow a strict interpretation of rules," Schroeder wrote. "I need a 'wartime counsellor', not someone who can recite page and verse."

Nichols was hired as GC at MIPS Technologies – which faced its own backdating issues last autumn.

Likewise, Thomas Lavelle was embraced as Rambus' new GC in 2006. His former company, Xilinx, restated $2.2m (£1.1m) in earnings due to misdated options, but due to administrative errors and not misconduct, according to the company. Xilinx successfully got all shareholder lawsuits dismissed.

"There was a very small adjustment as a result of few clerical errors," Lavelle says. "Truthfully, I may have got undue credit for making the allegations go away."

Better prospects

It appears in general that the more minor restatements – especially where there was no foul play – did not dampen career prospects. Michael Heafey, an intellectual property lawyer who was GC at Sunrise Telecom when the company had issues with options, has just been appointed partner at Orrick Herrington & Sutcliffe. The company took a $5.5m (£2.8m) charge and found that the irregularities were from administrative errors in the granting process, not any misconduct.

"It was an accounting error," says Heafey, who left Sunrise long before the issues came to light, "not backdating".

Another GC, Tyler Wall, was at Chordiant Software, which took an $8m (£4.08m) charge, but found no intentional misconduct. In 2005, Wall found a home at Brocade Communications Systems, which had already had huge backdating problems before he arrived.

But others have been lost to the winds. Verisign's former GC, James Ulam, was asked to sign a termination agreement two days before the company claims it found out it might have backdating issues in 2006. The legal department was criticised by the audit committee for being lax, but it did not name him personally. Today, Ulam is listed as inactive on the Mississippi State Bar website.

Others also appear no longer to be practising, including CNET's LeDuy and Atmel's Ross.

"A number of general counsel have left and my understanding is that some of them have not been able to be employed since – that's pretty severe," says Rambus' Lavelle.

Lessons learnt

The lesson of the troublesome option grants was a hard one for GCs, but some companies say they have learned and strengthened the GC position.

BEA Systems, which had a huge $425m (£216m) restatement, said last February that it would get a new GC to replace Robert Donohue, who stayed on as a vice president in the legal department. The audit committee recommended that the new GC report directly to the CEO and also have responsibility to report to the board's nominating and governance committees. That arrangement may now be moot because the company has since been taken over by Oracle.

In particular, more GCs have now been given – or simply taken – more responsibility for the stock options granting process. At Sunrise Telecom, the chief legal and compliance officer now attends all compensation committee meetings, records the minutes and makes sure grants are in line.

"General counsel feel that the compensation committee is no longer just the domain of the vice president of human resources," says Kate Rundle, GC at Bookham, which did not have backdating problems. "Back in the days when most of this was happening, the whole stock thing was sort of considered an administrative matter."

Nine companies surveyed did not have GCs at the time that options were being improperly handled. Since then, four of those companies – Sanmina-SCI, PMC-Sierra, Zoran and Trident Microsystems – have introduced the position. Trident hired a GC, David Teichmann, specifically as a remedy for its issues with options, the company said in a regulatory filing.

For in-house lawyers themselves, the lessons may be more grim. The Association of Corporate Counsel (ACC) put out a report last September ominously entitled 'In-House Counsel in the Liability Crosshairs'. The report concluded that, especially with the fallout from the backdating scandal, "changes in the potential liability environment" have become "tangible and real".

"One enduring lesson is 'get outside help when you're in over your head' – but even then it might not be enough," says ACC general counsel Susan Hackett. "They would much rather target the in-house lawyer than the outside counsel or the auditors."

The report also highlighted the tension between expectations from the SEC that GCs be 'gatekeepers' and the need to represent their companies.

"There has been a lot of discussion about who we work for," says Asyst's Debenham. "There is a lot of pressure to police the conduct of companies; there is sometimes a tension between that and properly advising your clients."

Another change may be that management and boards of directors will become more sceptical of their lawyers' advice. Lionel 'Lon' Allan, the president of the local chapter of the National Association for Corporate Directors, said directors have been reminded to think for themselves.

"The punchline is that regardless of the expertise or the intellectual calibre of inside and outside counsel, directors realise that just because the lawyers say it is legal, or waffles a little, does not mean it is," Allan says.

On the other side, the SEC's Dicke says the whole scandal has taught lawyers not just to go along with higher-ups.

"I can tell you from [being] out giving speeches, it has certainly caught the attention of in-house lawyers and their outside counsel that they have to be vigilant to not get sucked into schemes like backdating," he says.

Ultimately, the message from the backdating scandal may be a far more personal one for general counsel.

This article first appeared in Corporate Counsel magazine, a US sister title of Legal Week.