Ideas from the Front
A Tell-All Approach
Opening Corporate Investigations Fosters Credibility With the Feds
Posted May 1, 2004 4:18 PM CDT
By Molly McDonough
Attorney-client privilege is a keystone of the legal profession. So when the Sarbanes-Oxley Act of 2002 came along with the mandate that corporate lawyers report wrongdoing up the ladder, the legal profession understandably bristled.
Not New Jersey lawyer Edwin Stier. For him, opening the company books to government investigators to restore public confidence is nothing new. For the past 20 years, he has advised clients to waive privilege to prove they are sincere when they say they want to root out problems, no matter what an independent investigation reveals.
So far, he says, his strategies have worked. The former prosecutor developed his independent counsel-style approach in 1983, when he was conducting an investigation for General Public Utilities, then-owner of the infamous Three Mile Island nuclear reactor in Pennsylvania. He found this method was necessary to achieve his goal: to get at the truth, no matter what was revealed.
Over the years, he’s watched versions of his signature practice style develop into a more common—though controversial—approach. Now, it is being used by a growing number of private lawyers and being sought by some federal prosecutors, especially in the wake of Sarbanes-Oxley and public reporting scandals linked to megacorporations like Tyco, Enron and MCI WorldCom.
In this changing climate, law firms now devote entire practice groups to fact-finding, independent investigations and corporate governance. Not long after President Bush signed Sarbanes-Oxley into law, firms announced they had carved out these multidisciplinary practices as a more efficient way to help clients map out acceptable compliance strategies and investigate allegations of wrongdoing.
“It’s amazing how far this idea has come,” says Stier, “from something that was totally unrecognized to something that has now become a standard service that lots of major law firms offer major corporate clients.”
But few are willing to go quite as far as Stier.
For Stier and his clients, taking an open-book approach helps to foster credibility and trust with regulatory and law enforcement agencies. “Before I issue a report, I want the key people on the other side of the table to know that the process has been thorough and professional,” he says. “That’s key to getting the report accepted.”
But securities lawyer Michael l. Jamieson, who heads Holland & Knight’s corporate governance group in Tampa, Fla., shares the pervasive view that tinkering with attorney-client privilege is a dangerous trend. He argues that pressuring clients to waive privilege is likely to make clients less candid if they believe their lawyers will turn into agents of the government.
And while the U.S. Department of Justice has made clear that cooperating companies are looked upon more favorably if privilege is waived, Jamieson says it would be rare for his practice group to recommend such a move.
“I think it’s a serious threat to our constitutional liberties,” Jamieson says. “The attorney-client privilege, like the Fifth Amendment and the First Amendment, is a fundamental right that we ought not to chip away.”
University of Illinois law professor Richard W. Painter agrees to a certain extent, but argues that companies ought to have the option to hire a whistle-blower lawyer if they want.
By hiring a lawyer to expose wrongdoing, if it occurred, a company may be able to send the right messages to regulators, investigators and investors that “everything’s clean,” Painter says.
This might be particularly alluring to a company that is weighed down by regulators. If regulators know there is a whistle-blower lawyer at work on an internal investigation, they may back off from their own probes, Painter says. And companies can feel relieved that “regulators aren’t clamoring all over the place bothering” them, too.
A clean client might decide, however, that it’s best to have the investigation done privately, and when the lawyer is finished, open up the report.
Stier says this approach—cloaking an investigation with attorney-client privilege—can raise unwanted suspicion. “If you give [government] agencies bits and pieces, they’re immediately suspicious of whatever you’re not disclosing,” he says.
HONESTY DRIVES POLICY
Ira H. Jolles, a former general counsel for General Public Utilities, says Stier’s approach was right for Three Mile Island, which was swimming in debt after its infamous nuclear accident in 1979, the worst in U.S. history. “These are not matters of purely private concern,” says Jolles, who is now at Thelen Reid & Priest in New York City. “When one is dealing with an entity subject to pervasive regulation ... one must assume that the matter will be public in terms other than litigation.”
On the four-year anniversary of the accident, the company was battling accusations that it systematically violated safety procedures during the cleanup. Congress, the Nuclear Regulatory Commission and the Department of Justice all were investigating or preparing to investigate. The company was incurring millions of dollars in fines and heading for bankruptcy, Stier says.
Top company officials pushed for Stier to do what he could to restore GPU’s reputation. So he made the findings of his second investigation of the company available in near real time to the Nuclear Regulatory Commission and other investigating agencies. “Ultimately the NRC accepted my report as the basis for action that the NRC was going to take,” Stier says. GPU’s candid stance paid off in the public relations realm as well—the company’s reputation improved enough that it was able to restore its undamaged reactor at the plant and was spared from bankruptcy.
Stier continues this open-book approach today. In a recent commodities trading case, he says his office was dealing with an “extremely skeptical” prosecutor. The company’s audit committee agreed to waive privilege so the firm could share all the witness statements and calculations with regulators. Federal regulators went so far as to sit in during the company’s calculations, Stier says.
The positive result then and now, he says, is more control for the investigated company. “The company gets a chance to take corrective action and get credit for initiating the investigation,” Stier says.
Despite Stier’s reported success, there is a clear risk with this strategy, and even he doesn’t advocate that it be used across the board.
Stier notes that waiving privilege is a viable strategy primarily when the client already is going to be responding to a government agency aware of the underlying issue.
Jolles says Stier’s brand of independent counsel work fits in well with today’s investigations of corporate decision-making. If there are allegations that internal controls are inadequate or are being circumvented, Jolles says, management and especially an audit committee would want to fully investigate whether the allegations are true. It’s important to find out what’s going on inside the company so the company can fix the problem, he says.
On the other hand, if the information being examined will never be public, Jolles says the company may be better off keeping an internal investigation completely in-house.
Painter, who first explored some of these issues in a 1995 George Washington Law Review article, says the big question for him is whether a company in a case like this can back out and reinstate privilege once an investigation begins.
That happened once for Stier. His firm was hired by a board to investigate whether the company could be held responsible in a murder case. After some preliminary work, Stier says he advised the company to stop the investigation and retain defense counsel.
“I do investigations on the belief that it’s in the company’s best interest to have the information surface,” he says. “In this case, I believe that strategy would not work and in fact might cause the company to be convicted of murder.”
He declined the company’s request to sign on as defense counsel.
Stier, who is eager to see how this practice area develops, contends that independent investigations need to be approached with a fundamentally different attitude as compared with other legal services provided to clients. “If we don’t do that, and these investigations become another form of advocacy, then I think the whole idea of corporate self-policing will be set back,” he says.
“It’s really up to the bar to set standards to create some kind of structure for these kinds of services if the idea of corporate self-policing and the role of lawyers is going to grow and become refined.”