Sonsini Under Scrutiny
Larry W. Sonsini has always been Mr. Untouchable in Silicon Valley. While luminary clients such as Steve Jobs, Carly Fiorina, Marc Andreessen, and Scott McNealy have all had their messy ups and downs, Sonsini's star has always shone with a steady glow. And the publicity-shy superlawyer has been a genius at steering clear of controversy. Says one Valley leader who has worked with him for many years: "Larry is Teflon."
Until now. Sonsini has been nicked by his involvement in HP-Gate, the possibly illegal investigation into home phone records at Hewlett-Packard Co. (HPQ ). While he evidently knew nothing of the probe before it was completed, Sonsini later told one outraged board member that "pretexting" -- impersonating a person to get access to their phone records -- was "within legal limits." That's drawn a chorus of boos from privacy experts. The criticism only grew louder when the news broke that Sonsini helped run an HP board meeting on how to manage the pretexting scandal, notwithstanding his earlier role in the affair.
The scrutiny of the 65-year-old attorney is likely to grow only more intense. Separate from the HP imbroglio, the law firm he leads, Palo Alto-based Wilson Sonsini Goodrich & Rosati, represented about half of the 32 Silicon Valley companies now being investigated for possible options accounting violations. And Sonsini was on the board of one of those clients, Brocade Communications Systems Inc. (BRCD ), which used to be run by Gregory L. Reyes, the first CEO to be criminally indicted for backdating options. Reyes told BusinessWeek earlier this year that Sonsini O.K.'d the unorthodox compensation system that got him into the legal mess -- one that gave Reyes the power to grant options at his sole discretion. (A Sonsini spokeswoman contests this account.)
While the HP and backdating scandals differ in important ways, they both raise unexpected questions about Sonsini's judgment. Why didn't he sound alarms when he first found out about pretexting? Why didn't he recuse himself from the board's deliberations about the scandal? Shouldn't his firm's lawyers have noticed the widespread sloppiness, if not fraud, in the way options were doled out? The issue is not whether pretexting or backdating is illegal. It is whether Sonsini was giving his clients the most sensible advice.
Sonsini is under especially intense scrutiny because he is, without a doubt, the most important lawyer in Silicon Valley. Soon after arriving there as a young attorney four decades ago, he cultivated the technology companies that were sprouting in the shadow of Stanford University and picked up an unrivaled roster of clients, including Advanced Micro Devices (AMD ), Seagate Technology (STX ), Sun Microsystems (SUNW ), multiple venture capital firms, and every investment bank that mattered in the digital world. He took Apple Computer Corp. (AAPL ) public in 1980 and Google Inc. (GOOG ) public in 2004.
As Wilson Sonsini grew, its lawyers fanned out and took top positions at these companies. Larry Sonsini's word became virtually unassailable in the rich little kingdom situated between San Francisco and San Jose. "Everyone in Silicon Valley has a speed dial to Larry for whenever they have a sticky problem," says Sun Chairman Scott G. McNealy, who incorporated the company in Wilson Sonsini's office in 1982.
Such loyalty is a tribute to Sonsini's lawyering skills. Clients rave that he is knowledgeable about the law, available at all hours, cool under pressure, and brilliant about the tech industry. He's so good and so well-connected, in fact, that over the years he has become much more than a typical corporate counselor. Customers rely on Sonsini as a strategic adviser, governance expert, and dealmaker.
And, critics contend, that's where the problems start. He often finds himself wearing multiple hats and trying to navigate between clients with conflicting agendas. In a post-Enron age, corporate watchdogs argue that Sonsini's and the Valley's cozy practices, while legal, may no longer pass the smell test. Looking beyond the HP and options brouhahas, Sonsini and his law firm have a history of doing deals and investing in clients in ways that some find troubling. "Sonsini is a symptom of an incestuous governance culture," says Ralph D. Ward, publisher of the online newsletter Boardroom Insider. "Everybody is in bed with each other. It clashes very much with the Sarbanes-Oxley environment."
Perhaps, but it's worth noting that Sonsini's clients have historically performed exceptionally well financially. A Wilson Sonsini spokeswoman denied that Sonsini or any of his partners have handed out illegal or unethical advice. "The job of a lawyer is to protect the interests of his or her clients. If that means taking some criticism in the press, that's part of the job," says spokeswoman Courtney Dorman.
The HP drama provides ample evidence of how complicated life can be for him. The company has long turned to Sonsini for crucial advice. He counseled former CEO Lewis Platt when HP spun off its electronics instruments business in 1999; he helped ex-CEO Carleton S. Fiorina win an epic proxy battle against Walter Hewlett in 2001; then last year he was in the room when Fiorina was told that she had been fired. What's more, his firm employs the husband of HP General Counsel Ann O. Baskins, who oversaw the phone records inquiry and is now under investigation.
Given all of these close relationships, it is hardly surprising that the board asked for Sonsini's assistance steering through the phone pretexting fiasco. But his performance has won few admirers. Companies make mistakes all the time. When they do, there is a template for cleaning up the messes, which involves thoroughly investigating the problem, firing any wrongdoers, and airing the misconduct before others do it for you. This is the path a strong outside counsel is supposed to recommend -- and the one that critics believe Sonsini erred in straying from. Now HP is paying the price with an embarrassing story that won't go away.
Instead of quickly identifying pretexting as a privacy invasion that would offend regulators and the public, Sonsini helped HP circle the wagons. When Director Thomas J. Perkins quit the board in a huff over the methods the company used in its probe and the dismissal of a fellow director, Sonsini was asked to help prepare the Form 8-K required when a board member leaves. Rather than advise HP to issue the version of the form required when there is a major disagreement, he allowed the company to file one that could have led people to believe Perkins simply stepped down for personal reasons.
In an e-mail exchange, Sonsini also warned Perkins, a famed venture capitalist and longtime acquaintance, about the dangers of violating a director's duty of confidentiality: "Tom, be careful of your discussions about the inquiry." He later sent a message informing Perkins that pretexting was "not generally unlawful." Next, he helped broker a deal in which nonexecutive board Chairman Patricia C. Dunn agreed to resign her post but stay on as a director. It was a compromise that satisfied few HP critics. Sonsini "could not have been a worse choice" to advise the board, says Yale School of Management professor Jeffrey A. Sonnenfeld.
One of the reasons Sonsini seems so omnipresent in Silicon Valley is that his firm, by its own estimate, represents 50% of the region's tech companies. No other law firm on Wall Street, K Street, or any other street, for that matter, dominates such a huge chunk of such a vital industry. That is certainly one of the reasons why Wilson Sonsini has become so enmeshed in the backdating scandal.
While the precise advice that the firm's lawyers gave clients on options is still unknown, a clearer picture has emerged in the Brocade case. Former CEO Reyes has said that Sonsini, a director of the company, advised other board members in 1999 to make Reyes solely responsible for issuing options, a critical recruiting advantage during the boom.
But it also meant that Reyes was not subject to ordinary controls. At most companies, options are granted by compensation committees, which operate under detailed rules. Reyes earlier this year told BusinessWeek that neither Sonsini nor the other directors provided guidance on how to properly document an options grant, and that his alleged crimes are no more than paperwork miscues. Add it all up, and it appears as if Reyes is laying the groundwork for an "I trusted Larry Sonsini" defense. Dorman points out that lawyers often earn project fees on big mergers, and says the hat Sonsini was wearing in this negotiation was as a Brocade board member.
TOO MANY HATS?
The brocade case could also shine a light on other controversial aspects of Sonsini's legal practice, among them his multiple roles in corporate deals. Consider the many hats that the legendary Valley lawyer wore in the aborted sale of Brocade to Cisco Systems Inc. (CSCO ) in 2004. As a member of Brocade's board, he was a corporate insider. As Wilson Sonsini's chairman, he was also the most prominent partner at the company's outside counsel. Sonsini was one of former Brocade CEO Reyes's closest personal advisers and a friend of Reyes's father, a longtime chip executive. According to two sources familiar with the talks, he also acted a lot like an investment banker by seeking a success fee if the deal went through. "You couldn't tell if he was the lawyer for Reyes, the lawyer for the company, a board member, or the investment banker," recalls an individual familiar with the talks. Dorman points out Sonsini broke no legal or ethical rules.
That appears to be true -- but other corporate attorneys rarely have to juggle so many opposing interests. Another factor that further complicates Sonsini's professional life is that he and his firm often receive lucrative stock and options grants from clients. One example is the sticky situation that arose when Wilson Sonsini client Pixar Animation Studios Inc. was sold to Walt Disney Co. (DIS ) earlier this year.
The merger agreement banned Pixar from soliciting rival bids from other potential acquirers, requiring investors to accept on faith that Disney had made the best offer. That's open to question, but there's little doubt that it was a great deal for several Pixar directors, including Sonsini. Upon consummation of the sale, directors' stock options would immediately vest, allowing them to buy Disney shares at discounts, sell them at market prices, and pocket the difference. Sonsini stood to gain about $2.4 million, much of which will likely go into a Wilson Sonsini partners' fund should he exercise the options.
According to regulatory filings, the only firm lawyer who gave presentations at Pixar board meetings during the negotiations was Sonsini. It's not clear, however, whether he was speaking as a Pixar director, outside counsel, or both. As outside lawyer, he was obligated to give his client, the Pixar board, unbiased counsel, including opinions it may not have wanted to hear. But given his stake in the merger, could he really have offered such advice?
More accustomed to asking tough questions than answering them, Sonsini will nonetheless find himself on the receiving end of some very tough questions in the state and federal probes of the HP scandal. First up: a congressional hearing on Sept. 28.
Editor's note: Co-author Peter Burrows is one of the reporters whose private phone records were sought by investigators for Hewlett-Packard.
|Corrections and Clarifications In "Sonsini under scrutiny" (News & Insights, Oct. 2), a caption pointing to a photo of former Hewlett-Packard Co. CEO Lew Platt incorrectly implied that Platt, rather than lawyer Larry Sonsini, "was under fire for his role" in the current leak scandal at HP. Platt, who died in 2005, left HP years before the spying scandal began.|
By Peter Burrows and Robert D. Hof, with Justin Hibbard in San Mateo and Susan Zegel and Michael Orey in New York