McAfee Did Not Make Former GC Backdating Scapegoat, Ninth Circuit Holds
Susan M. Greenwood | Bloomberg Law
The U.S. Court of Appeals for the Ninth Circuit held that McAfee, Inc. (McAfee) did not maliciously prosecute and defame its former general counsel Kent Roberts in an alleged “attempt to deflect attention from large-scale backdating of stock options within the company.” The Court held that Roberts’ claims of malicious prosecution do not survive under California’s anti-Strategic Litigation Against Public Participation (anti-SLAPP). It further held that his claims for defamation and false light invasion of privacy are time-barred.
Stock Option Backdating
The Ninth Circuit chronicled three instances implicating Roberts in backdating stock option grants. First, in 2000, Roberts received a grant of 20,000 stock options in connection with a promotion (Promotion Grant). Terry Davis, McAfee’s controller and senior vice president, allegedly backdated the Promotion Grant with Roberts’ knowledge. In 2002, McAfee’s compensation committee voted to grant stock options to new employee Art Martin (Martin Grant). Although Martin did not commence employment until December 2001, the committee voted to date the options as of October 30, 2001. Roberts then allegedly approved corporate disclosures that misrepresented Martin’s start date as October 31, 2001. Also in 2002, the compensation committee approved a grant of stock options to CEO George Samenuk (Samenuk Grant). The committee approved the Samenuk Grant on January 15, 2002, but Roberts purportedly re-priced the options when McAfee’s stock price fell on January 16.
McAfee’s backdating came to light in a May 2006 study by the Center for Financial Research and Analysis (CFRA), which identified five suspicious option grants by the company. McAfee and the Securities and Exchange Commission (SEC) both commenced investigations. McAfee concluded that Roberts was culpable with respect to the Promotion Grant and terminated his employment. In a press release (Press Release) posted on the company’s website, McAfee disclosed that “Roberts had been fired because of an ‘improper’ incident related to employee stock options.” McAfee also shared its conclusions with the SEC, specifically Roberts’ involvement in the Promotion Grant, Martin Grant, and Samenuk Grant. In response, the SEC filed a civil lawsuit against Roberts while the Department of Justice (DOJ) brought criminal proceedings. According to the Court, however, the evidence against Roberts was mixed and he was acquitted of criminal fraud charges. As the jury was unable to reach a verdict on the other charges against him, the DOJ dismissed the remaining counts. The SEC subsequently dismissed its civil case as well.
McAfee moved to strike Roberts’ malicious prosecution claims under anti-SLAPP. This statute, the Ninth Circuit explained, requires (1) the defendant to make a prima facie showing that plaintiff’s lawsuit arises “‘from an act in furtherance of the defendant’s rights of petition or free speech,’” and (2) that upon defendant’s prima facie showing, “‘the plaintiff . . . demonstrate a probability of prevailing on the challenged claims.’” On appeal, the Court continued, the only issue was whether Roberts demonstrated a “probability of prevailing” on his malicious prosecution claims. The Ninth Circuit held that he did not.
A claim for malicious prosecution, said the Court, requires a showing, among other things, that a prior action “‘was brought without probable cause.’” The Ninth Circuit acknowledged that many of the facts surrounding stock option backdating at McAfee “are disputed,” but the “undisputed facts establish that McAfee had probable cause to accuse Roberts of participating in the illegal backdating of three option grants.”
Starting with the Promotion Grant, the Court explained that Roberts confessed to the backdating years after it occurred, and after (1) he led an investigation of Davis for alleged fraud, (2) McAfee investigated Davis for issuing and repricing stock options without authorization, and (3) the SEC began to investigate McAfee in 2006. The Court continued:
While these facts are far from conclusive of Roberts’ culpability, they at least gave McAfee reason to suspect that Davis lacked the authority to revise the grant, that he and Roberts changed the grant just to make it more lucrative, and that the criminality of the act caused Roberts to keep mum about it during the Davis investigation.
The Court rejected Roberts’ contention that McAfee engaged in malicious prosecution because it allegedly “falsified and withheld evidence to make his culpability seem clearer than it really was.” Taking Roberts’ allegations as true, the Ninth Circuit conceded that “McAfee behaved inexcusably.” Nevertheless, “lying about the facts is not enough to destroy probable cause.” The Court concluded that “even if McAfee misrepresented certain aspects of the Promotion Grant to make Roberts look worse, it was also aware of other facts that, on their own, provided objectively reasonable suspicion that Roberts had committed a crime.” Moreover, even Roberts’ success at defeating the criminal and SEC actions against him did not destroy McAfee’s reasonable suspicion.
Similarly, the Ninth Circuit found sufficient evidence that gave McAfee probable cause with respect to the Martin Grant and Samenuk Grant. Emails written by Roberts purportedly reveal that he made a unilateral decision to change the date of the Samenuk Grant. Roberts also admitted to approving documents misrepresenting when Martin commenced employment. Accordingly, “McAfee had reason to suspect that Roberts participated in wrongfully backdating . . . the Samenuk Grant, and the Martin Grant.” The district court, thus, erred in dismissing McAfee’s motion to strike under anti-SLAPP.
Defamation and False Light Claims
The Ninth Circuit further agreed with the district court that Roberts’ claims for defamation and false light invasion of privacy are time-barred under the applicable one-year statute of limitations. Roberts’ claims, the Court explained, stem from McAfee’s publication of the Press Release in 2006. However, he did not file his lawsuit until 2009. Under California law, the statute of limitations is tied to the first publication of the offending communication. This single-publication rule, the Ninth Circuit continued, has been applied to websites consistently, making Roberts’ claims untimely.
Roberts also argued that McAfee’s failure to remove the Press Release from its website constituted a “republication” that restarted the statute of limitations. The Ninth Circuit, noting that this theory “undermines the single-publication rule,” explained that continuing to “host” the Press Release is not a republication.
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