Stock Options Backdating Probe Hits McAfee Boardroom

The security software maker says its chairman and CEO will retire, and that it has fired its president as a result of internal and SEC investigations over stock options backdating policies.

McAfee, largely recognized at the worlds No. 2 maker of security applications, announced on Oct. 11 that it has fired its president, Kevin Weiss, and that its chairman and chief executive, George Samenuk, will resign as a result of an investigation into stock options reporting procedures employed by the company.

Santa Clara, Calif.-based McAfee, which trails only market leader Symantec in the security software segment, said that it also expects to restate as much as $150 million in previously reported earnings, covering the companys last 10 years of results, based on the widening scandal.

In light of the executive departures, McAfee said that it has named Charles J. Robel as its new chairman.

Robel, who is the chief operating officer for San Francisco-based venture capital firm Hummer Winblad Venture Partners, only recently joined the McAfees board in June 2006.

McAfees directors have also named Dale Fuller as the firms interim CEO and president. Fuller joined the McAfee Board in January 2006 and previously served as CEO and president of Borland Software. Robel also sits on Borlands Board of Directors.

The executive shakeup comes after an internal investigation into the McAfees stock option reporting policies over the past 10 years.

The company said it has specifically determined that it will be forced to restate financial statements to record additional non-cash charges for stock-based compensation expensing over that period.

The company said in a statement that it would also further review SEC (Securities and Exchange Commission) guidelines to determine the exact amount of its earnings eventual restatement.

McAfee reported that the SEC first subpoenaed its options granting records in June, and that it had subsequently fired McAfee General Counsel Kent Roberts as a result of the investigation.

In a conference call with members of the media, McAfee Chief Financial Officer Eric Brown declined to give any further details of the executive firings or the companys continued investigation into stock options "backdating."

The practice of stock options backdating, or the assignment of options at a price other than their worth on the date they are granted, has become a controversial issue with investors and regulators worldwide.

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The SEC is believed to currently be investigating as many as 120 U.S. companies for using the practice, which is typically employed to allow option recipients to claim options at a more lucrative rate than their companys current stock price.

On the same day as McAfees announcement, IT media company CNET Networks announced that its CEO, Shelby Bonnie, had stepped down as the result of a similar investigation into backdating of company options.

Other high-profile executives who have lost their jobs based on accusations of backdating include Amnon Landan, CEO of software maker Mercury Interactive, and Jacob Alexander, CEO of software maker Comverse Technology.

Alexander is currently imprisoned in Namibia, where he is awaiting extradition to the United States to face related SEC charges.

McAfee indicated that its board has appointed a search subcommittee to immediately begin looking for a permanent CEO replacement, and that intends to consider both internal and external candidates for the job.

Weiss had been with McAfee since October 2002 and was appointed president of the company in March 2006.

At that time, McAfee also said that it was giving more executive power to CFO Brown, who took on the additional responsibilities of chief operating officer.

In a statement released by McAfee, Samenuk, who served as the companys chairman for just over six years, expressed "regret that some of the stock option problems identified occurred on my watch."

The controversy comes at a troubling time for McAfee, which is working aggressively to redefine its business as the market for anti-virus software, long its primary source of revenue, becomes increasingly commoditized.

As Microsoft readies its next-generation Vista operating system, which promises significant anti-virus capabilities onboard, McAfee has been pushing further into market sectors such as regulatory compliance management, in which it has made a series of recent acquisitions.

If the company had been expecting the departure of the top-level executives as a result of the investigation, it had not let on publicly, using Samenuk as its chief spokesperson in public battles with Microsoft over the design of some Vista security features as recently as one week before his announced retirement.

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