Legal Pad

For VC, $13M House Doesn't Come Cheap

You might think that venture capital big-wig Jeffrey Drazan would use the same care in picking contractors to build his $13 million home as he does promising startups.

Well, think again.

Drazan, who left Sierra Ventures in 2005 to start Bertram Capital, has been locked in breach-of-contract litigation with his contractor, Vance Brown Inc., for three years. On Thursday, a state appellate panel sided with the contractor and ordered the dispute into arbitration.

It appears that Drazan had all his venture capital wits about him when he formed his own limited liability company to manage the construction of his own home (who does that besides those LLC-happy venture capitalists?). In late 2002, work was under way on the $13 million (yes, we’ll repeat the number until we win the lottery and can finally buy a shed somewhere in the Bay Area) “residential complex” in wealthy Woodside.

But things went downhill fast.

Better Luck Next Year

When Lam Research Corp. announced this summer that it was looking into backdating, the company emphasized that it was a voluntary probe and really no big deal.

But six months into the internal probe, it seems to have gotten bigger.

On Christmas Eve, the company announced that its financial statements from 1997 to 2005 could no longer be relied upon as it expects to restate its earnings because of backdated stock options. So far, no evidence points to management chicanery, the company noted.

Lam, a Fremont-based wafer fabrication equipment supplier, is a little late to the backdating party. On the occasion, Legal Pad would like to welcome the company to the legal morass with wishes for much luck in escaping shareholder lawsuits, federal regulators and sky-high legal bills.

-- Zusha Elinson

Trash Day for McAfee

Viewers of the political drama The West Wing know that the Friday before a holiday is “take out the trash day," when you can dump news you don't want anyone to notice.

Well, it seems that software maker McAfee made a little trip to the dump to dispose of some backdating rubbish on the Friday before the Christmas Holiday.

The company -- whose former general counsel, Kent Roberts, is one of the few lawyers indicted for backdating -– restated earnings on Dec. 21 and announced the results of its internal investigation.

Of course, the 10-K filed by the company that day presented a lump of coal to Roberts for backdating his own options. It also says that “certain former members of management” were very naughty during the internal investigation: they didn’t come clean to the Howrey lawyers doing the probe AND one even gave intentionally faked documents to the special committee! It also said that “certain former members of senior management” didn’t set the right “tone at the top.” 

Insurers Take Hit on 'Post-Claims Underwriting'

Say you apply for health insurance for you and your family. Say you forget to mention a few things on your application -- like that you are married to a 285-pound husband with high blood pressure and esophageal disease. Then suppose that within three months he gets hospitalized for stomach problems -- and in an auto accident that leaves him permanently disabled.

An all-star cast of health care lawyers have been duking it out over whether Blue Shield of California, which blindly accepted Cindy Hailey's insurance application, can back out of the contract. An Orange County judge said yes, but on Monday an appellate panel disagreed, accusing Blue Shield of engaging in "post-claims underwriting." In fact, the appellate judges said [pdf], the Haileys might even have a claim for bad faith against Blue Shield.

That apparently will please the California Medical Association, the California Department of Insurance and the Califoria Department of Managed Care, which filed amicus curiae briefs for the plaintiffs, as did plaintiff heavyweights William Shernoff and Sharon Arkin. Not so happy will be Barger & Wolen; Mayer, Brown, Rowe & Mawe; Manatt, Phelps & Phillips and Epstein Becker & Green, which represented Blue Shield and amicus curiae insurance groups.

Legal Secretary Reflects on 42-Year Tenure

Lorrie Orchard’s got nothing on Barbara Pilling.

Orchard, a San Francisco legal secretary who just celebrated 40 years of working for lawyer John Browne III in September, described her role as whipping post and sounding board in a story this week. LegalPad has since learned about Pilling’s legal career. Pilling spent 42 years working for Oakland lawyer William Walters.

Russoniello Approved by Full Senate

It’s official: Joseph Russoniello is Northern California’s new U.S. attorney.

Legal Pad just got word from a Senate Judiciary staffer that the full Senate passed Russoniello’s nomination tonight by unanimous consent — just before the upper chamber is set to depart for a month-long holiday break. This came after the Senate Judiciary Committee didn’t even take a formal vote on him. According to the aide for chairman Patrick Leahy (D-Vt.), if an executive nomination doesn’t have any opposition, the committee can be discharged of its obligation and the nomination can be passed without a formal vote. That’s what happened with Russoniello.

Legal Pad called Russoniello for comment, and we wound up informing him of the news. He was mingling at the San Francisco Law School’s holiday party at the yacht club. “Well thanks very much!” he said.

Russoniello said he had been planning to go out of town tomorrow, but said he might change those plans because he would like to be sworn in as soon as possible. He said he would be in the office no later than Monday, Jan. 7.

“I’m looking forward to it and I’m very excited,” he said.

Russoniello takes office after an interim tenure by Scott Schools, who returns to Washington to take a top Justice Department slot. He will have a full plate of cases waiting for him in the office, including some possible investigation targets. Of course, whether Russoniello personally handles those cases, or recuses himself because of his personal stock holdings, will be worth watching!

—  Dan Levine

Feds: Reyes Statements Should Increase Term

Per a Wednesday order (.pdf) from Judge Charles Breyer, federal prosecutors finally got a peek at sworn statements made by former Brocade CEO Gregory Reyes before his backdating trial.

The feds had to have been happy with what they read.

In a declaration, Reyes claimed he told HR chief Stephanie Jensen that the dates on employee stock options reflected when Reyes actually decided to grant them. Translation: they were not backdated. Reyes made those statements in March, part of a successful attempt to help Jensen sever her trial from his. 

But the government points out (.pdf) that these pre-trial Reyes claims are different than what his counsel advanced during trial. At that time, Skadden Arps partner Richard Marmaro claimed Reyes did backdate, but had no knowledge he was committing a crime, and did it in full view of the finance department.

Now, this discrepancy is nothing new. Reyes told the Morrison & Foerster lawyers who completed Brocade’s internal investigation that he didn’t backdate, and that contention was thrown back at him during trial. A jury convicted Reyes on ten counts.

The difference now is that Reyes made a sworn statement, so the government wants to raise an obstruction argument as a way to enhance Reyes’ prison sentence. Reyes is likely to face between 15 and 21 months in jail.

Asked via e-mail about the government’s contention that Reyes’ inconsistent statements warrant enhancement, Marmaro replied with a succinct note.

“The govt is wrong,” he wrote.   

—  Dan Levine

Quinn Retreat Risked Karaoke Before Job Offers

Several months ago, we ran a story on CalLaw about Quinn Emanuel’s innovative approach to recruiting: inviting all the recruits for a weekend in Deer Valley instead of the traditional call-back interview.

This week, Legal Pad checked in with partner Bill Urquhart to find out how that much-discussed weekend went, during which 48 recruits schmoozed with 30 Quinn attorneys.

“It went smoother than a wedding,” Urquhart said.  “It couldn’t have been nicer.”

Lawyers' Holiday Card Is Funnier Than Reruns

Attorneys Michael Olecki and Allen Grodsky start brainstorming their firm’s holiday card as early as July.

The pressure starts building early on because the four-lawyer litigation shop has a tradition of creating witty, entertaining, and relevant cards. Around October or November, Olecki and Grodsky really hunker down and come up with the concept.

“We think way outside the box,” Olecki said. “Ultimately, when we feel it’s good, we show it to other people. We know it’s right when everyone laughs.”

This year, they considered current events in the L.A. and the theme quickly emerged: the ongoing writers’ strike. “At least in L.A., it’s on everyone’s mind.” Grodsky explained.

Brother, Can Ya Spare a Fund Formation Lawyer?

Remember how Wilson Sonsini lost its fund formation group to Goodwin Procter’s voracious new Palo Alto office in October?

At the time, Wilson downplayed the loss, much like any law firm would do. But now it looks like they’re missing Jonathan Axelrad and company.

Sources confide in Legal Pad that some of the company’s loyal venture capital fund clients are telling Wilson they’d like to keep their fund formation work with the Valley juggernaut — if the firm can get a fund formation lawyer to do the work, that is.

So, Wilson’s been on the prowl for a fund formation lawyer or two, our sources say. Problem is that while venture capital deal lawyers are around every corner in Palo Alto and Menlo Park, fund formation lawyers are a little more scarce, so they haven’t landed one yet. What do you think? How much does the firm care about rebuilding the fund formation practice? How much should it care?

—  Zusha Elinson