Six months ago, few investors were likely worried about -- or had even considered -- the issue of stock-options backdating.

But in recent months, the issue has become a huge trouble spot for the markets in general and for the technology sector in particular. Dozens of companies are now under investigation by federal regulators in the scandal.

As a result, many have seen their shares plunge and some have seen upheavals in their executive suites and boardrooms.

Now officials at one company, Brocade ( BRCD), are facing criminal and civil charges. Watch out, warns Linda Thomsen, who heads the enforcement division at the Securities and Exchange Commission, there's more to come.

According to Thomsen, the issue is all about defrauding investors. Companies involved in the scandal are accused of essentially gaming the stock-options system by giving executives and employees grants to buy company stock at prices that were known months after the fact to be short-term lows.

That alone wasn't illegal; what potentially was, however, was that companies didn't disclose those favorable grants to investors or account for them correctly in their earnings reports.

After the government's press conference last week in which charges were announced against the former Brocade executives, spoke with Thomsen about how the SEC is approaching the backdating issue and where the investigations might lead. You have said that the SEC has 80 ongoing backdating investigations. If the overall backdating scandal is an iceberg, what portion of the iceberg are we seeing with those 80 probes?

Linda Thomsen: I don't think we know yet. I do think people are acutely focused on it now.

Is there any sense that the discovery of new backdating cases is winding down?

In terms of ongoing conduct, I think for a variety of reasons -- not the least of which is Sarbanes-Oxley -- it's winding down. In terms of past conduct, I'm just not certain.

The government is taking a heavy hand against the people in the Brocade case, filing criminal and civil actions against them. Will you approach each of the cases the same way, or do you see the possibility that there might be different gradations of backdating behavior? There have been reports, for instance, that some backdating was done following a favorable opinion from an auditor.

That's why we do these cases at a micro-level -- case by case, all the evidence. Our focus is going to be ... on fraudulent behavior. And we will look at all the conduct. We will look at efforts people made to comply. We will look at the roles of lawyers and accountants, at the end of the day.

We don't know where all those investigations are going to go because we haven't gotten to all the investigations. So, there are gradations, as you point out. To prove a fraud case, you need to prove fraudulent intent.

Is it possible that we're going to see actions taken against lawyers and auditors who may have given favorable opinions?

Let me go to an analogy of financial fraud generally. We have a long history of bringing financial fraud cases. And the defendants in financial fraud cases -- generalized financial fraud cases, without regard to options -- include companies, auditors, lawyers, executives. So, it really depends. Whether or not people find themselves as a defendant depends on what they did and not who they are.

Whither the Options

What happens to the backdated options held by rank-and-file employees? Assuming they were handed out fraudulently, they benefited from the fraud. Isn't that like being in possession of stolen property?

Stolen property is a very interested analogy.

Say someone robs a bank, and they pay their landlady with the proceeds of that theft, and then the landlady goes and uses that money to buy groceries. If she's not on notice, if she doesn't know anything, there's no reason to go after the landlady. If a bank robber, on the other hand, gives dye-packed money to his brother and tells him to go buy a car and then re-sells it to sort of launder the money, at some point, the brother who receives that stolen property becomes complicit in this and may have some accountability.

It depends on ... the state of mind of the people involved, whether or not they even have civil liability or criminal liability.

We have the possibility of trying to get money back. This may be more complicated in an options case because it's not necessarily realized gains yet.

But, taking your analogy with the dyed money, in many cases, you likely can see where the options went because the employees haven't exercised them yet.

Well, they may have the options, but we may not know yet, many of them may get cancelled. So, I think it's not yet known.

Where are you guys now in terms of staffing and the ability to conduct investigations or take enforcement actions?

We've got a very good, solid staff. There are still about a thousand of us in enforcement. And that seems both large and small. We're always outnumbered -- always. The notion of us ever getting to the point where we're not going to have to worry about resources and the appropriate deployment of resources I think is not going to happen.

What portion of your resources are being devoted to the backdating issue?

Well, as I said, we have a lot of investigations. But at any given time, we have, I think, on average, 2,000 investigations ongoing throughout the country. And we are keenly interested in covering the waterfront.

We have 12 offices that do enforcement work. One is in Washington, D.C., and 11 throughout the country. And different offices may have a concentration in one area because it matches what is going on in their patch.

I would imagine that the San Francisco office is devoting a lot of attention to backdating, given that the tech companies based here have represented the lion's share of companies caught up in the scandal so far.

There is a fair amount here. There's some in other places.

Besides the backdating issue, what other enforcement issues are at the fore of what you are focusing on right now?

We continue to have an interest in financial fraud generally. I think it's fair to say that we're looking at hedge funds, generally speaking -- not so much for a particular practice -- but as a place where there is opportunity for illegal behavior, just because there's tons of money in hedge funds.

You have said that there are going to be more cases coming out of the backdating scandal. Given the SEC's limited resources, do you expect to make examples of a limited number of people, or do you expect to see a large number of cases coming out of this?

We bring cases where the conduct warrants bringing the cases.

Because of things like limited resources, we try to regularly assess whether something looks like it's a good use of law enforcement resources and continually assess the evidence we have and ask, "Does this amount to a violation of the securities laws as we look at it? If it is, is it on the more fraudulent, not fraudulent, but 'technical'? Does it matter?"

Those are questions we ask ourselves all the time. For the world at large, and not with respect to the securities law in particular, there's more illegal behavior going on than law enforcement.

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