X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The body count keeps rising: from telecommunications concerns Global Crossing Ltd. and WorldCom, Inc., to Enron Corp. and Arthur Andersen LLP, corporate scandals have meant unusually dark summer days for Wall Street. And demanding times, to say the least, for in-house counsel. Confronted with a mistrustful public and sinking stock market, politicians and regulators are rallying behind the call for corporate reform. The Securities and Exchange Commission has proposed new rules requiring executive and financial officers to certify the veracity of their companies’ financial filings. Already, in late June, the agency ordered executives at 945 businesses with more than $1.2 billion each in annual revenues to submit sworn statements about their most recent financial reports. At press time, congressional legislation to strengthen corporate accountability, including stiffer penalties for company officers found guilty of criminal violations, was edging toward passage. Those developments mean that the job of general counselindeed, of all lawyersat public companies is about to change. Moreover, shareholders and the press are sitting up and paying attention. That will likely lead to increased scrutiny of GCs’ doings, from the financial documents they approve for release to the advice they dispense that becomes public. The Andersen trial gave an inkling of what may lie ahead: The guilty verdict turned on the advice of in-house lawyer Nancy Temple, who suggested to Andersen partner David Duncan that he make some questionable changes in a memo. It’s too early to tell what such heightened vigilance will ultimately mean for legal departments. But in the interest of providing some assistance, Corporate Counsel contributor Margery Gordon asked associate general counsel Marc Gary, legal ethics expert Stephen Gillers, and securities litigator Jonathan Tuttle to weigh in. Gordon talked to the trio about the proposed new rules, as well as the sort of guidance corporate counsel should give senior executives. In particular, we asked our experts whether in-house counsel, now suddenly in the spotlight, should look over their shoulders and mull over how the advice they give will play in the press. What follows is basic common sense to get in-house lawyers through uncertain times. A general counsel is officially supposed to report to the board, not the CEO. How would proposals to criminalize the actions of CEOs and other senior executives alter the GC’s allegiances and responsibilities? Marc Gary, vice president and associate general counsel, BellSouth Corporation: The paramount obligation of a general counsel is to protect the interests of the corporation rather than any of its officers. Fortunately, those interests rarely conflict, but when they do, a general counsel who forgets where her true allegiance lies will disserve both her client and herself. The reform proposals that have the effect of expanding the potential criminal liability for CEOs and CFOs do not alter a general counsel’s fundamental allegiances, but they do affect the general counsel’s responsibilities vis-�-vis these senior officers. With more focus on the personal involvement of senior management, we can expect that general counsel will insist on more elaborate compliance and due diligence procedures, as well as better documentation that such procedures were followed. Stephen Gillers, vice dean and professor, New York University School of Law: A general counsel reports to the corporate agents whom he or she serves. The board is the highest authority empowered to act for the company, but the general counsel does not have to report to it as a rule, unless there’s a reason to do so. Efforts to criminalize certain executive conduct will not change the counsel’s duties. As of today, an executive’s criminal law violations will have to be reported to the board, if the violation is not stopped by superiors and if it is serious and could result in substantial harm to the company. Jonathan Tuttle, partner, Debevoise & Plimpton: Theoretically, the addition of tougher criminal sanctions should not alter any aspect of a general counsel’s responsibilities. A general counsel must always represent the interests of the corporation, even (or especially) in dealing with fellow members of management. Practically, the increased penalties and heightened scrutiny on corporate officials should give general counsel greater incentives and stronger arguments to address issues that could lead their senior executives and their companies onto the front page of the paper, the caption of an SEC enforcement proceeding, or the starring role in an indictment. In light of the Andersen verdict, how should general counsel, as well as rank-and-file in-house lawyers, change their behavior? For example, should they take into account how their advice may be perceived by the public, and presented in the press, and not just whether it follows the letter of the law? Gary: The biggest mistake general counsel and other in-house lawyers can make in the wake of the Andersen verdict is to overreact. Advice rendered by lawyersparticularly the immediate, focused, and succinct advice that in-house lawyers are asked forrarely lends itself to the type of full explication and context that would render it fit for publication to the general public. It is simply not feasible to do away with that form of abbreviated legal advice out of fear that someday it will become public and be misunderstood. This is not to say that in-house lawyers should not be careful about how they express themselves, whether in written or oral form. What is good advice for our clients is excellent advice for ourselves: Write precisely what you mean to say; don’t exaggerate, embellish, or use inappropriate language or characterizations; and emphasize the need to consult further if facts or circumstances change. Gillers: The single most important lesson for general counsel from the Andersen trial is the need for specificity and clarity when instructing other corporate agents of their responsibilities with regard to document retention. If a legal matter is foreseeable [i.e., if there seems to be a problem], don’t simply say, “Comply with our document retention policies.” [Instead, say] “Our document retention policies require that you preserve all documents having to do with this matter.” Tuttle: Rather than worry about public or media perceptions or expectations, which are difficult to predict, general counsel should continue to be guided by the factors that have always guided the most successful in-house and outside lawyers: the law, common sense, and the best interests of the company and its shareholders. The easy answer in many difficult situations is “the law allows us to do ‘x,’ ” where x is something that everyone knows carries some degree of risk. The best counsel, however, will ask whether x really makes sense and whether it is the best decision for the corporation or client in the particular situation. As can be seen in the Andersen verdict and in many other current situations, others may have a different view of the law, of x, or of some other factor that could, or should, have been considered. When you try to walk a fine, technical line with the law, any misstep (perceived or real) can be a problem. The traditional legal advice of “Don’t put it in writing” itself became a liability for Andersen. Are these five words falling out of favor? Should company lawyers be more cautious about making and keeping a paper trail? Gary: There is simply no universal rule of thumb about documenting legal advice. That was true before Andersen and that is certainly true now. With the advent of some of the reform proposals, however, documenting the advice given and the procedures followed will become increasingly important. Indeed, the failure to have a record of legal advice given on critical issues and a written description of how that advice was implemented could have catastrophic results if the corporation is subsequently accused of not obtaining the necessary advice or not heeding that advice. Gillers: If in fact the jury’s sole basis for convicting Andersen, as some jurors have said, was Nancy Temple’s suggestion to David Duncan that he should omit certain language from a draft file memorandum, then the conviction is bizarre indeed. Lawyers always help clients draft documents and often suggest that particular phrasing is inappropriate or a particular conclusion uncalled for. “Don’t put it in writing” is often legitimate legal advice, and the Andersen verdict doesn’t change that. Tuttle: I’m not sure that “Don’t put it in writing” was ever the best, or even good, advice where it concerned matters relating to companies. The most successful companies in avoiding and defending litigation, especially securities-related litigation or SEC enforcement matters, tend to have effective internal accounting controls and compliance policies, which usually involve documentation of significant issues. One unavoidable reality in conducting internal investigations and defending these matters is that the worst fact always emerges. Someone either wrote it down (now usually in an e-mail) or recalls it in vivid detail that they are anxious to share with you, the SEC, and the plaintiffs counsel. People make mistakes and some people violate rules. Companies protect themselves by having good compliance policies and procedures to deter and to catch violations and mistakes. Documentation of the basis for a difficult decision and the process by which that decision was made can be an invaluable asset in defending the decision and the decision makers. Thus, the better legal advice for companies is “Document your decision, but don’t do anything [improper] that you wouldn’t want in writing.” Before the recent wave of scandals broke, GCs signed off on financial documents on a pro forma basis. Will they have to do more due diligence going forward, especially if senior executives are required to personally swear under oath to the validity of financial filings? Gary: The principal role of the general counsel and his staff will be to ensure that the appropriate procedures are in place and are followed that will enable the CEO and CFO to meet their due diligence obligations before certifying the financial filings. The GC has to impress upon them the importance of their responsibilities and the exposure they personally face and that the company faces if they fall short. Company lawyers need to monitor the process to ensure that the CEO and CFO are actively participating; that they have access to the information and people they need to form the required judgments; and that they discuss the due diligence process and their conclusions with the audit committee. Finally, the GC needs to ensure that the company keeps a written record that demonstrates the adequacy of the review. Gillers: Sure, it’s just common sense and good lawyering. Signing your name pro forma is always suspect, especially if the document is important and has significant legal implications. Tuttle: Although the proposed certification rules (and the recent certification requirement) require only the principal executive officer and principal financial officer to sign the certifications, general counsel will certainly have increased responsibilities. At a minimum, many companies are considering the prospect of internal certification programs to give assurances to their senior executives responsible for the SEC certifications. Another important aspect of the proposed SEC certification rule is a requirement that companies “must have sufficient procedures to bring potentially material information to the attention of management.” In most companies, general counsel, along with senior financial executives, will bear the primary responsibility for designing, implementing, and maintaining these procedures. Company lawyers increasingly have been taking on the role of risk managers. Can recent events be expected to accelerate this shift toward a preventive approach to practicing law in-houseand away from a defensive stance that leaves counsel in damage control mode? Gary: An in-house legal department that had not adopted a preventive law approach well before Enron, Andersen, and WorldCom was not fulfilling its most important function. A legal department should never choose to adopt a damage control mode; it should only be forced to adopt that mode when its principal strategy of prevention and compliance has failed. Gillers: It’s often cheaper and less stressful to avoid problems than to solve them. Prevention beats mop-up. Tuttle: In today’s environment, the damage control mode is really crisis management. By the time most companies are faced with a problem, the question is not how to resolve the crisis, but how to avoid catastrophe. As the penalties for companies that stumble increasewhether imposed by the government, private plaintiffs, the media, customers, liability insurers, or the marketso do the incentives (and, ultimately, the rewards) for prevention. Already we are beginning to see companies marketing their compliance efforts and their integrity as a way of distinguishing themselves. Forgotten (at least for now) are the praises and premiums for the ultra-competitive, aggressive companies, while exalted are the “conservative” companies adopting reforms not yet mandated.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.