Today’s stringent reporting standards, more aggressive investigations and the general trend toward prosecuting individuals instead of corporations have led to an unprecedented level of personal criminal exposure for in-house counsel.
“Getting in trouble civilly in the past was common,” says Dennis Codon, a partner at Robins, Kaplan, Miller & Ciresi, and a former general counsel of Unocal, “but now we’re talking bigger stakes.”
GCs face danger on all sides. Those who try to mislead the SEC or dance around outside investigators could
see civil proceedings quickly morph into criminal charges. Those who fail to stare down management in borderline situations will find the liability passed to them internally.
The bottom line is that the toughest scenarios general counsel face now come with harsher consequences than ever. Increasingly, the unwary or faint of heart find themselves behind bars.
Clear as Mud
There are really two layers to criminal exposure for in-house counsel. The first is when counsel are direct participants in corporate wrongdoing–be it accounting fraud, improper disclosure or backdating–or commit crimes on their own, such as insider trading. But what’s gotten thornier lately is the secondary exposure: the way in-house lawyers react to scandals.
“If you are involved in helping to keep a lid on something that turns out to be white hot later, there’s going to be a problem,” says Cary Feldman, a partner at Feldesman, Tucker, Leifer, Fidell. Feldman focuses on white-collar crime. “We’re not talking about bright lines here. This is really an art, not a science.”
General counsel must tread carefully when responding to government investigations or even to internal indications of malfeasance. These situations require them to reconcile their responsibility to defend the company with their compliance and reporting duties.
Counsel who try to skirt the edges in an investigation may find themselves charged with obstruction of justice. A string of recent criminal convictions of legal officers for their roles in directing or responding to investigations shows just how severe the penalties can be for mistakes.
“This is a gray area. Federal obstruction of justice statutes are about as clear as mud,” says Kurt Stitcher, a partner at Levenfeld Pearlstein and a former Assistant U.S. Attorney. “When in-house counsel is anything less than forthcoming, the allegation can arise that you have intentionally obstructed a government investigation.”
This is becoming especially problematic, Stitcher says, because prosecutors have essentially taken the position that the outside counsel who now routinely conduct internal investigations are surrogates for the federal investigation.
“The government may come after general counsel and say, ‘Hey, you lied to outside counsel as they were conducting an investigation.’ Because you knew they would turn that information over to the government, you have obstructed a government investigation,” he says.
Stuck in the Middle
All the focus on reporting and cooperating with investigations doesn’t mean counsel still aren’t pressed by parties within the company to “manage” the truth.
“Disclosure is an area where there’s an enormous amount of pressure on general counsel,” says Codon. “Management may have reasons not to disclose a particular fact in a particular quarter. When you get into situations where there’s pressure to smooth earnings, the GC has to know what the business is all about. He or she needs to be independent, needs to stand tall.”
It’s not always easy, and lawyers who lack the backbone to stand up to internal pressure could pay for their lack of fortitude in jail. Codon describes one case in which an in-house counsel initially refused to approve a questionable action. The company chairman leaned on him hard, and the lawyer eventually gave in. When the act came under investigation, the liability was in the lawyer’s lap.
“Even though he objected to it, the violation was his,” Codon says. “There can be a sales job on the general counsel. Then when the investigation happens, the executives can say, ‘We relied on counsel. They said it was OK.’ It shifts a lot of the burden to the lawyer.”
The advice of counsel defense has gained a lot of traction with executives as individual prosecutions have ramped up in recent years. For unwary general counsel, this can mean getting sucked into others’ misdeeds.
“You are the legal expert, the fact that you let it slide puts you in the hot seat,” says Stitcher.
Of course in-house counsel can pass that blame one step further, and show that they in turn had relied on the advice of outside counsel, but those who can’t produce an opinion letter can find themselves holding the bag.
In the end, secondary criminal liability comes down to core competency. If they don’t want to get you snared, in-house counsel must have a working understanding of accounting practices, the resolve to stand firm in difficult circumstances and a solid grasp of what is actually happening in the company.
“When I was a GC I went to every audit committee meeting, but some general counsel don’t,” Codon says. “I know general counsel who don’t go to board meetings, which is shocking to me. You have to be in there understanding what’s going on.”