Read The Recorder‘s roundup of the stock-option backdating scandal. There won’t be a test later … but there might be a subpoena.
Wilson partners involved in the cases didn’t return calls seeking comment. But when it comes to Silicon Valley, Courtney Dorman, a spokeswoman for the firm, said the firm has “significantly more market-share than anybody in Northern California, by volume of our client base.”
As for Wilson’s multiple roles with Brocade, “we have a process to review conflicts, to ensure that we comply with the ethical responsibility to our clients.” Dorman declined to provide further detail.
But the advice a company got at the time of the options grant could be a big factor in SEC probes.
Speaking only in general, Helane Morrison, the San Francisco SEC district administrator, said that among the factors her agency would consider is “whether a company consulted with outside counsel in making its decisions and that would be in the company’s favor if they did get outside counsel’s advice.”
Adds Peter Henning, a law professor at Wayne State University Law School in Detroit and an expert in white-collar criminal law: “To have the law firm continue to represent the company before the government could be problematic and could involve a conflict of interest.”
Deborah Rhode, a professor at Stanford Law School and an expert in legal ethics, agreed in general that conflicts could be a problem in such a situation. “The firm has a vested interest in defending the propriety of its own conduct and advice,” she said, “and that could impede disinterested advice in settlement negotiations.”
But Rhode points out that there also could be advantages to holding onto a firm in such a situation, especially if a company � as has happened in most of the backdating cases � chooses a firm other than its normal counsel to conduct an independent investigation of alleged wrongdoing.
“There are economies of scale in having lawyers that are fully aware of all the events leading up to the charges and fully aware of the details of the transaction,” Rhode said.
Defense lawyers, and at least one general counsel in the Valley willing to discuss the issue, tend to agree.
“From the get go, we didn’t get a sense that we should change law firms,” said one prominent general counsel who declined to be identified. “This is not Enron hiring Vinson & Elkins, who set up the partnerships, to opine about whether those partnerships were correct.”
But a different Silicon Valley general counsel offered a good reason to switch: “You can imagine a situation where a law firm is perceived as having the potential to be an adverse witness.”
Law professor Henning said he didn’t think conflict issues would be as significant in civil cases as they are in the regulatory matters. And several lawyers pointed out that most criminal cases will focus on individual executives, rather than companies, also lessening the potential for conflicts.
Defense lawyers in the backdating mess say that as more facts about each case come out, companies will have to re-evaluate their choice of counsel. And, the lawyers say, facts in the cases are likely to vary enough from one company to another that some will likely retain Wilson while others drop the firm.
As that process progresses, litigators and transactional lawyers are looking at it with a mix of dread and opportunity.
“Insurers are asking if you have backdating issues and shareholders are asking,” said Skadden, Arps partner Kenton King. “It gives me no joy as a lawyer to have to deal with this.”
