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Corporate scandals were a boon for a cadre of Washington white collar lawyers in 2003. But for at least two local law departments, a company’s alleged misdeeds meant upheaval. MCI’s top lawyer, Michael Salsbury, resigned his job in June, and Freddie Mac’s general counsel, Maud Mater, followed quietly in August. Neither has been charged with wrongdoing. Salsbury’s departure came after two reports portrayed the MCI Corp.’s legal department as providing inadequate safeguards against senior management’s misconduct — namely, inflating earnings by nearly $4 billion since 2001. The telecom company, formerly known as WorldCom Inc., is on course to emerge from the largest bankruptcy in U.S. history, and it is clear that the public message of its law department changed with the arrival in August of Salsbury’s replacement, Anastasia Kelly. “We want to do things right and will do things right,” said Kelly shortly after she was hired. “When we see something that’s wrong, we’ll fix it, and when we’re doing it right, we’ll be the first to stand up and defend ourselves.” Freddie Mac, which is being probed for understating its net income by nearly $5 billion from 2000 to 2002 in an effort to smooth earnings, lost its longtime general counsel when federal regulators ordered Mater’s ouster in late summer. An internal report commissioned by the company’s board and released in July was slight in its criticism of the legal department’s role in Freddie’s wrongdoing. But earlier this month, the Office of Federal Housing Enterprise Oversight (OFHEO) issued its own, much harsher review of where Freddie Mac went wrong, faulting Mater and other top executives for fostering a “less is more” disclosure policy. Freddie Mac has agreed to pay $125 million in civil fines to OFHEO, leaving a criminal investigation by the Justice Department and a civil inquiry by the Securities and Exchange Commission to be resolved. Mark Biros, a D.C. partner at Proskauer Rose who specializes in corporate investigations and criminal defense, says it’s not surprising that the role of in-house attorneys was so closely scrutinized in 2003 — given new requirements under the Sarbanes-Oxley Act. But with the notable exception of Franklin Brown, the former Rite Aid Corp. chief counsel convicted of conspiracy and obstruction of justice stemming from a $1.6 billion profit overstatement and represented by Steptoe & Johnson’s Reid Weingarten, in-house lawyers took a back seat to the continuing sagas of fallen chief executives in 2003. And one of the most high-profile CEOs facing charges tapped two D.C. lawyers as his trial counsel. When federal prosecutors indicted HealthSouth Corp. founder and former CEO Richard Scrushy in early November, the Alabama native chose Thomas Sjoblom and fellow Chadbourne & Parke attorney Abbe Lowell to defend him. Sjoblom has represented Scrushy since April, following the SEC’s allegation that Scrushy and other HealthSouth executives inflated earnings by at least $1.4 billion since 1999. Scrushy, who also made history in 2003 as the first executive to be accused of violating the Sarbanes-Oxley Act, was indicted on 85 criminal counts ranging from money laundering to mail and securities fraud and is scheduled to face trial in a Birmingham courtroom Feb. 2. The continuing trial of Tyco International Ltd.’s former chief executive, L. Dennis Kozlowski, and its former chief financial officer, Mark Swartz, on charges of grand larceny and enterprise corruption have been dominated by details of startling extravagance — most infamously a $6,000 shower curtain and a $15,000 umbrella stand. The two, on trial in Manhattan’s State Supreme Court, are accused of stealing more than $600 million from the company. Former Tyco General Counsel Mark Belnick, has also hired Steptoe’s Weingarten. Belnick, who is facing charges including grand larceny and falsification of business records, is tentatively set for a trial of his own March 29. Other parables of white collar misbehavior came to a close this year. Henry Blodget, a former star Merrill Lynch, Pierce, Fenner & Smith Inc. analyst represented by Foley & Lardner D.C. lawyer Samuel Winer, in April settled charges that he allegedly privately disparaged stocks that he publicly recommended, generating investment banking fees for Merrill. In a joint action by the Securities and Exchange Commission, the National Association of Securities Dealers, and the New York Stock Exchange, Blodget was fined $4 million and barred from the securities industry for life. And the Rite Aid Corp. accounting imbroglio that prosecutors say started in the late 1990s — well before scandals at Enron or WorldCom exploded — ended in two guilty pleas and a conviction for three executives. In June, former Rite Aid CEO Martin Grass pleaded guilty to accounting fraud, and former Chief Financial Officer Frank Bergonzi pleaded guilty to conspiracy. William Jeffress of Baker Botts was counsel to Grass. O’Melveny & Myers D.C. lawyers Ira Raphaelson, Jeffrey Kilduff, and Bruce Hiler — who also counsels former Enron CEO Jeffrey Skilling — represented Bergonzi. In many ways, the message from prosecutors and regulators to corporate America in 2003 was clear: Intense scrutiny and strong medicine for wrongdoers are still the order of the day.

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