Off the record - Page 3

Billion-dollar software company Mercury Interactive wants to keep details of a backdating scandal under seal

Petitions submitted to the court regarding the sealed portions of the case are public and were obtained by the Guardian last week.

The defendants' attorneys said the investors signed a confidentiality agreement early in the suit so that evidence could be more freely exchanged with Mercury during discovery, and they want that promise kept.

"The plaintiffs in the [Santa Clara] suit are not roving attorneys general who are tasked with pursing every defendant who they believe has done something wrong or caused harm to someone else," Brandon Wisoff, a defense attorney in the case, said in a phone interview. "The purpose of a derivative suit is for a shareholder to recover on behalf of a corporation in which he or she owns stock, because he or she is indirectly impacted by any harm that allegedly occurred to the corporation."

The Santa Clara suit's status as a derivative claim could lead Judge Kleinberg to toss it out, since HP has purchased Mercury. For that reason, Wisoff says, documents produced before the sale aren't going to be used in court and so shouldn't be accessible to the public.

"Non-defendant third parties also would have their identities revealed and be implicated in the alleged misconduct" if the records were opened, attorney Thomas Martin wrote in a declaration to the court. In other words, the documents could suggest how much was known about the problems with backdating at Mercury. And that might be of concern to more than just the company's investors.

Martin, who declined to comment over the phone for us, is representing Kenneth Klein, a former Mercury chief operating officer who left the company in 2003 and has not officially been linked by Mercury to backdating problems but is nonetheless listed as a defendant in the Santa Clara suit.

Thomas and the other defense attorneys argue the investors' court filings openly cite sealed discovery material, which presumably includes references to Klein's alleged involvement in or knowledge of backdating, given his status as a defendant, as well as the names of others possibly listed in the documents. They're arguing Mercury and its executive defendants could not publicly rebut suggestions made by the media about their involvement.

While Kleinberg seemed sympathetic to the notion that the press doesn't always do the best job reporting on civil allegations, he said it's a fact of life that most civil complaints — even ones that say "very outrageous things about people and institutions" — fall into the public domain.

But Amber Eck, an attorney for the investors who are now advocating for the filings to be opened, says the complaints made in the suit are far from frivolous and the company's own board investigation identified who had participated in the misconduct and who knew about it. She said the whole story hasn't been told.

"There's a lot saying there was backdating and the amount of the [SEC financial] restatements," Eck said in a phone interview. "But what I was explaining to the judge was that as far as the details on the manner and the process in which it happened ... that isn't really out there yet, and that's contained in our complaint and the exhibits."

Janet Guyon, an editor at Bloomberg News in New York who has watched the options backdating scandal unfold, told the judge in a declaration that the public deserves a "window into this litigation" to ensure fairness for investors who are expected to trust promises of transparency made by public companies.

"More than 80 companies have announced earnings restatements totaling over $8.8 billion, including $84 million most recently by Apple Computer, which admitted it forged documents recording a directors' meeting to award its CEO backdated options," Guyon stated. "At least 65 executives or directors have resigned and 300 lawsuits have been filed against 100 companies.

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