October 20, 2006
Can a General Counsel Be Too Young?
Posted by Christine Hurt

I have blogged about the ongoing criminal investigation and civil lawsuits involving Peregrine Systems before.  Just one legal issue in this case was whether the California insider trading law could be applied to a corporation headquartered in California but incorporated in Delaware.  An appellate court in California said that it could, and the California Supreme Court denied review, as did the U.S. Supreme Court.  (Tim Glynn's Concurring Opinions commentary here.)  However, the main subject of the criminal and civil cases involves an agressive accounting change proposed by management and approved by the board which did not follow GAAP and helped management paint a false picture of the newly-public firm's finances.  At law.com today, an article spotlights the former general counsel of Peregrine, who was indicted this summer, Richard Nelson.

Nelson, who was a KPMG accountant in Houston before attending law school at Iowa, was an associate at Jackson & Walker in Houston for just a few years before becoming the general counsel at Peregrine.  When confronted about his role in the accounting errors, as well as approving insider sales when non-public negative information was staring them in the face, Nelson pleads naivete and ignorance:

He told investigators that he had no prior experience as GC and limited corporate and SEC reporting experience. To make up for that, he said he relied heavily on the advice of Peregrine's main outside counsel, Wilson Sonsini Goodrich & Rosati. . . . In other areas, Nelson insisted his role was circumscribed. As corporate secretary, a position he retained even after he was no longer GC, Nelson viewed himself as a scrivener at board meetings, not a participant. In other words, he didn't try to educate the board about legal or governance matters. Likewise, both as a lawyer and business executive, he saw his role as a mere implementer of management's M&A initiatives. Despite his accounting background, he disclaimed detailed knowledge and experience on revenue recognition. He might have been asleep at the switch, Nelson acknowledged, but he never intentionally failed to disclose material information.

I can't imagine that this defense will be very successful, but we'll have to see. Note also that although he was a mere "scrivener," he received over $10 million between 199-2002 in salary and stock. Bartleby never had it so good.

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Comments (1)

1. Posted by Dave! on October 20, 2006 @ 10:55 | Permalink

"Young" is a bad choice of words. "Inexperienced" would be more appropriate, and I believe, yes, a GC can certainly be too inexperienced--regardless of their age.

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