Green Lawyers Can Rile SOX Enforcers
Five years ago last week, the Sarbanes-Oxley Act took effect, giving the government a whole new set of tools to fight corporate corruption.
Its anti-fraud provisions immediately affected public companies with tougher auditing requirements for officers, directors and outside advisers, including accountants and lawyers. For the first time, prison became a realistic possibility for those who attempted to deceive the investing public about a corporation’s financial condition.
The act also placed premiums on independent internal corporate investigations and cooperation with the government as the best ways to avoid onerous criminal and civil penalties. So if executives think their company may have a problem, it’s crucial to select the right folks for the job, a panel of lawyers with long experience in internal probes agreed Saturday.
“A lot of them are being conducted by attorneys who aren’t really experienced,” former federal prosecutor Daniel Bookin of San Francisco told the audience at the discussion sponsored by the Litigation Section.
Even when supervised by veterans, inexperienced lawyers sometimes have their ways of riling officials at the Securities and Exchange Commission and the Justice Department, the primary Sarbanes-Oxley enforcement agencies. Helane L. Morrison, the SEC regional director in San Francisco, becomes especially irked at lawyers who overdo it in claiming attorney-client or work-product privilege.
“We’re now seeing some over broad assertions of privilege,” Morrison said.
Green lawyers, for example, often make the mistake of claiming privilege for e-mails and other documents simply because they were copied to a lawyer. Not only do unending and poorly supported privilege claims sour the dispositions of the government lawyers who have to sort them out, they can become expensive, especially if thousands of e-mails are involved.
“You don’t want to make a bad problem worse,” said moderator Brad D. Brian of Los Angeles.
Another good way for company lawyers to get on the government’s bad side is to show up when its lawyers attempt to conduct their own witness interviews, which sometimes authorities view as attempts to intimidate.
“We wonder why they would be doing that,” said section chair-elect Judith A. Miller, San Francisco-based general counsel for Bechtel Group Inc.
Perhaps most important, the lead investigative lawyer needs to act the part.
“You have to have one person who is in charge,” Bookin said. “You have to have one person who’s accountable and who makes decisions.”
And that can include going behind the backs of top management and even a company’s in-house counsel if the lawyer in charge uncovers misconduct at those levels. Bookin would quietly go straight to the company’s audit committee.
“Once it looks like senior management is involved, you have to do things a lot differently,” he said.
Los Angeles lawyer Bart H. Williams instead prefers to directly approach the general counsel, often the executive who hired the investigators in the first place. He would frame the situation something like this: I’m taking this to the audit committee. Are you with me?
“What we’re talking about is a moment of truth for the general counsel,” Williams said.
Some companies are beginning to question the value of running expensive investigations when their fates wind up in the hands of the SEC and Justice Department anyway. But the government still wields a strong hand. It’s also getting better at its job, some say.
“Certainly the federal government is much more organized,” Miller said.
Though executives often want results quickly and on the cheap, skimping on internals can be risky business—especially early on before investigators really get a handle on a problem’s nature and scope.
“You still have to staff it at the outset with the understanding that it may turn into a much bigger problem,” Miller said.