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“Although we expect internal investigations to be thorough, we do not expect companies to aimlessly boil the ocean,” assistant attorney general Leslie Caldwell said in a speech in
 November 2014. A law firm’s challenge is to be so thorough as to please the regulator without alienating the client. Facing the same dilemma, Dechert and Sullivan & Cromwell made opposing choices. Now each is drawing scrutiny of its own.

Eurasian Natural Resources Corp. hired Dechert in 2011 to probe Kazakh corruption allegations, but the law firm broadened the focus of its investigation to Africa. Dechert billed ENRC $23.5 million. Whether because Dechert was too honest about what it found, or because, in ENRC’s words, the firm engaged in “systematic and gross overcharging,” ENRC fired Dechert in 2013, shortly before the Africa report was due. Challenging the fees in court, general counsel Beat 
Ehrensberger testified that “Dechert made decisions regarding the methods and scope of investigation for the principal purpose of expanding the work to generate higher fees.” More colorfully, the GC testified that Dechert’s Neil Gerrard reportedly referred to himself as being “in rape mode.”

Michael Koehler, a law professor and expert on the Foreign Corrupt Practices Act, warns that “these things morph easily into a boondoggle for FCPA Inc.” Investigative fees routinely exceed fines several times over, he says, but most fee disputes are resolved quietly in arbitration.

Dechert not only fought for its fees in open court—but asked to waive attorney-client confidentiality.

On April 20, the English Court of Appeal agreed that Dechert had no legitimate reason to waive its privilege. So what was Dechert thinking? Observers speculate that the firm aimed to pressure its client to pay in full, betting that the company would prefer not to see corruption allegations against it aired in public. The judges noted that the U.K. Serious Fraud Office, which has opened a criminal inquiry, would obviously attend an open hearing. ENRC said that it would be forced to drop its fee fight if the court made the fee fight public.

“This is one of the most grotesque and cynical tactics ever used by a law firm against its own client,” argues a lawyer with knowledge of the case. “They basically tried to turn the Serious Fraud Office into their bill collector.” Of course, we shouldn’t forget that the bribery alleged against the client is infinitely worse. “The claims that ENRC has made against Dechert are completely unfounded,” states a Dechert spokeswoman, “and Dechert is defending itself vigorously.” (After this article was published, Dechert had more to say here and I responded here.)

A different problem

Sullivan & Cromwell and Slaughter and May find themselves in a different kettle of fish.

In 2010, Standard Chartered Bank hired Sullivan & Cromwell and Slaughters—including the revered corporate rainmakers H. Rodgin Cohen and Nigel Boardman—to probe its compliance with U.S. economic sanctions. Sullivan & Cromwell retained Promontory Financial Group as a regulatory consultant to prepare an independent report for the New York Department of Financial Services. Promontory identified only 
$14 million in problematic Iranian transactions. That did not go over well with the regulators, who later found $250 billion worth of questionable transactions, or almost 18,000 times as many.

Standard Chartered initially settled with assorted American authorities for $667 million in 2012. Then the monitor discovered more old transactions that merited scrutiny. In 2014 the DFS fined the bank $300 million for not having disclosed accounts that were vulnerable to money laundering. As my colleague Susan Beck has reported, the DFS in 2015 fined Promontory $15 million for displaying a lack of independent judgment by “softening” its reports at a law firm’s suggestion, for instance by making its language “more bland.” Regulators didn’t buy Promontory’s argument that by “more bland,” the law firm meant “more accurate.” Beck confirmed at the time that the firm was Sullivan & Cromwell.

Then the U.S. Department of Justice dropped a bombshell on the law firm world. In January, Bloomberg reported that the DOJ sought emails from Sullivan & Cromwell and Slaughters to investigate whether, during the first Standard Chartered investigation, the firms improperly counseled the bank to withhold information relevant to certain Iran sanctions offenses. The firms have not been accused of wrongdoing, and they didn’t respond to a request for comment.

It should be noted that, unlike Promontory, the firms are not reportedly under investigation for soft-pedaling their reports. That wouldn’t necessarily be an offense anyway. In contrast to accountants or regulatory consultants, lawyers do not have an ethical obligation to be objective. “The internal investigator’s role is to be a zealous advocate for the client,” says legal ethicist Bruce Green of Fordham Law School. “They’re not deputies or junior FBI agents.”

At the same time, if a law firm gives faulty advice to a regulated entity on its disclosure obligations, it may be liable for incompetence; and if it does so with venal intent, it may be prosecuted for aiding and abetting fraud.

The facts here are unknown, and lawyers of towering accomplishment deserve a very strong benefit of doubt. But in merely opening the probe, the DOJ was sending a shot across the bow of investigative counsel, to remind them that—in practice—they serve two masters. Though lawyers owe professional duties only to their clients, their value to clients in this space (and their referrals) depends on their reputation as people the regulators can trust.

Historically, the two most controversial law firm investigations were conducted by Vinson & Elkins for Enron in 2001; and by Simpson, Thacher & Bartlett for Global Crossing in 2002. Each firm downplayed the accounting improprieties that ultimately led to the company’s collapse. V&E’s report was derided as a “whitewash” at the Enron trial. Simpson Thacher’s was condemned as inadequate in a follow-up report commissioned by Global Crossing’s board.

There are large and numerous distinctions between those imbroglios and the Standard Chartered counsel inquiry, which may very well lead nowhere. But a common lesson of Enron and Global Crossing bears remembering: A company may lose the benefit of independent advice if it turns for investigation to a law firm that it’s already close with.

“Slaughters is traditionally Standard Chartered’s main global adviser,” Legal Week noted in 2011; and it’s not unusual for Slaughters to collaborate with Sullivan & Cromwell outside the U.K. For instance, the two firms advised Standard Chartered on the 2008 acquisition of American Express Bank, and a $6.3 billion tender offer this March. More broadly, Sullivan & Cromwell has staked out the dominant position in bank sanctions investigations, even as it maintains deep ties to the financial industry in all major categories of legal advice. The onus is now on the firm to prove to the government and the market that it can be trusted to rigorously investigate banks.

To paraphrase the DOJ: You don’t have to boil the ocean. But 30 seconds in the microwave is not enough.

“Although we expect internal investigations to be thorough, we do not expect companies to aimlessly boil the ocean,” assistant attorney general Leslie Caldwell said in a speech in
 November 2014. A law firm’s challenge is to be so thorough as to please the regulator without alienating the client. Facing the same dilemma, Dechert and Sullivan & Cromwell made opposing choices. Now each is drawing scrutiny of its own.

Eurasian Natural Resources Corp. hired Dechert in 2011 to probe Kazakh corruption allegations, but the law firm broadened the focus of its investigation to Africa. Dechert billed ENRC $23.5 million. Whether because Dechert was too honest about what it found, or because, in ENRC’s words, the firm engaged in “systematic and gross overcharging,” ENRC fired Dechert in 2013, shortly before the Africa report was due. Challenging the fees in court, general counsel Beat 
Ehrensberger testified that “ Dechert made decisions regarding the methods and scope of investigation for the principal purpose of expanding the work to generate higher fees.” More colorfully, the GC testified that Dechert ‘s Neil Gerrard reportedly referred to himself as being “in rape mode.”

Michael Koehler, a law professor and expert on the Foreign Corrupt Practices Act, warns that “these things morph easily into a boondoggle for FCPA Inc.” Investigative fees routinely exceed fines several times over, he says, but most fee disputes are resolved quietly in arbitration.

Dechert not only fought for its fees in open court—but asked to waive attorney-client confidentiality.

On April 20, the English Court of Appeal agreed that Dechert had no legitimate reason to waive its privilege. So what was Dechert thinking? Observers speculate that the firm aimed to pressure its client to pay in full, betting that the company would prefer not to see corruption allegations against it aired in public. The judges noted that the U.K. Serious Fraud Office, which has opened a criminal inquiry, would obviously attend an open hearing. ENRC said that it would be forced to drop its fee fight if the court made the fee fight public.

“This is one of the most grotesque and cynical tactics ever used by a law firm against its own client,” argues a lawyer with knowledge of the case. “They basically tried to turn the Serious Fraud Office into their bill collector.” Of course, we shouldn’t forget that the bribery alleged against the client is infinitely worse. “The claims that ENRC has made against Dechert are completely unfounded,” states a Dechert spokeswoman, “and Dechert is defending itself vigorously.” (After this article was published, Dechert had more to say here and I responded here.)

A different problem

Sullivan & Cromwell and Slaughter and May find themselves in a different kettle of fish.

In 2010, Standard Chartered Bank hired Sullivan & Cromwell and Slaughters—including the revered corporate rainmakers H. Rodgin Cohen and Nigel Boardman—to probe its compliance with U.S. economic sanctions. Sullivan & Cromwell retained Promontory Financial Group as a regulatory consultant to prepare an independent report for the New York Department of Financial Services. Promontory identified only 
$14 million in problematic Iranian transactions. That did not go over well with the regulators, who later found $250 billion worth of questionable transactions, or almost 18,000 times as many.

Standard Chartered initially settled with assorted American authorities for $667 million in 2012. Then the monitor discovered more old transactions that merited scrutiny. In 2014 the DFS fined the bank $300 million for not having disclosed accounts that were vulnerable to money laundering. As my colleague Susan Beck has reported, the DFS in 2015 fined Promontory $15 million for displaying a lack of independent judgment by “softening” its reports at a law firm’s suggestion, for instance by making its language “more bland.” Regulators didn’t buy Promontory’s argument that by “more bland,” the law firm meant “more accurate.” Beck confirmed at the time that the firm was Sullivan & Cromwell .

Then the U.S. Department of Justice dropped a bombshell on the law firm world. In January, Bloomberg reported that the DOJ sought emails from Sullivan & Cromwell and Slaughters to investigate whether, during the first Standard Chartered investigation, the firms improperly counseled the bank to withhold information relevant to certain Iran sanctions offenses. The firms have not been accused of wrongdoing, and they didn’t respond to a request for comment.

It should be noted that, unlike Promontory, the firms are not reportedly under investigation for soft-pedaling their reports. That wouldn’t necessarily be an offense anyway. In contrast to accountants or regulatory consultants, lawyers do not have an ethical obligation to be objective. “The internal investigator’s role is to be a zealous advocate for the client,” says legal ethicist Bruce Green of Fordham Law School. “They’re not deputies or junior FBI agents.”

At the same time, if a law firm gives faulty advice to a regulated entity on its disclosure obligations, it may be liable for incompetence; and if it does so with venal intent, it may be prosecuted for aiding and abetting fraud.

The facts here are unknown, and lawyers of towering accomplishment deserve a very strong benefit of doubt. But in merely opening the probe, the DOJ was sending a shot across the bow of investigative counsel, to remind them that—in practice—they serve two masters. Though lawyers owe professional duties only to their clients, their value to clients in this space (and their referrals) depends on their reputation as people the regulators can trust.

Historically, the two most controversial law firm investigations were conducted by Vinson & Elkins for Enron in 2001; and by Simpson, Thacher & Bartlett for Global Crossing in 2002. Each firm downplayed the accounting improprieties that ultimately led to the company’s collapse. V&E’s report was derided as a “whitewash” at the Enron trial. Simpson Thacher ‘s was condemned as inadequate in a follow-up report commissioned by Global Crossing’s board.

There are large and numerous distinctions between those imbroglios and the Standard Chartered counsel inquiry, which may very well lead nowhere. But a common lesson of Enron and Global Crossing bears remembering: A company may lose the benefit of independent advice if it turns for investigation to a law firm that it’s already close with.

“Slaughters is traditionally Standard Chartered’s main global adviser,” Legal Week noted in 2011; and it’s not unusual for Slaughters to collaborate with Sullivan & Cromwell outside the U.K. For instance, the two firms advised Standard Chartered on the 2008 acquisition of American Express Bank, and a $6.3 billion tender offer this March. More broadly, Sullivan & Cromwell has staked out the dominant position in bank sanctions investigations, even as it maintains deep ties to the financial industry in all major categories of legal advice. The onus is now on the firm to prove to the government and the market that it can be trusted to rigorously investigate banks.

To paraphrase the DOJ: You don’t have to boil the ocean. But 30 seconds in the microwave is not enough.