SEC v. Schroeder: No Director Ban for KLA-Tenor CEO

Director bans have become common in SEC cases.  But when litigated, they are not automatic as the decsion in Securities and Exchange Commission v. Schroeder, No. C 07-03798 JW (N.D. Cal. Nov. 17, 2010) shows.  The district court denied the SEC’s motion to bar Kenneth Schroeder (“Schroeder”) from serving as an officer or director of a public company for five years.

In July 2007, the Securities and Exchange Commission (“SEC”) filed a complaint against Schroeder, the CEO of KLA-Tenor Corporation (“KLA”), alleging that he violated Section 10(b) of the Securities and Exchange Act of 1934 and various SEC rules. The complaint stated that Schroeder illegally backdated KLA employee stock options from 1999 to 2002.  It further alleged that Schroeder also illegally backdated stock options in 2005 in order to enhance KLA’s income and hide expenses from investors. In June 2010, Schroeder consented to a partial final judgment against him without admitting or denying the allegations of the complaint and agreed to pay a civil penalty of $275,000. In the Consent Agreement, the parties disagreed whether or not a director bar would be appropriate and reserved the judgment for the court to decide.

On November 17, the court denied the SEC’s Motion for an Order Barring Defendant from Serving as an Officer or Director of a Public Company. Under 15 U.S.C. § 78u(d)(2), a district court may prohibit a person who engaged in security fraud from acting as an officer or director of a public company if the person’s conduct demonstrates unfitness to serve as an officer or director. The court may consider: (1) the egregiousness of the underlying securities law violation; (2) the defendant’s “repeat offender” status; (3) the defendant’s role or position when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that misconduct will recur.  15 U.S.C. § 78u(d)(2); id. (quoting SEC v. First Ca. Bancorp., 142 F.3d 1186, 1193 (9th Cir. 1998)).

In considering the SEC’s motion, the court held a hearing on November 1, 2010, but mainly relied on evidence found in the Consent Agreement. While the court found that the alleged backdating occurred multiple times, it noted that there was also evidence that someone had altered Schroeder’s signature on some of the backdated documents. Therefore, the court held that the SEC had not proven that Schroeder’s degree of scienter, or intent or knowledge of wrongdoing, was enough to impose a director bar. In addition, the court commented that Schroeder had not been able to obtain regular employment since KLA had made the allegations against Schroeder public in 2006, and as a result he had been “effectively barred from his profession for four years.” Given that the SEC could not prove the adequate level of scienter and Schroeder’s inability to find employment since 2006, the court denied the SEC’s motion for a five year bar. 

The primary materials for this case may be found on the DU Corporate Website.