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The independent examiner report has become a modern art form. And while the Enron and WorldCom editions may have drawn more attention, the highest expression of that form may be the dramatic account of the failure of Spiegel Inc. by Stephen Crimmins of Pepper Hamilton in Washington, D.C. The dramatis personae in his Grishamlike narrative include Kirkland & Ellis and White & Case, both of which now face possible malpractice actions. Spiegel, the catalog company based in Downers Grove, Ill., is being sued in federal court in Illinois by the Securities and Exchange Commission for alleged violations of securities laws. The company is also in Chapter 11 proceedings in the Southern District of New York. Kirkland & Ellis is counsel to Spiegel’s U.S.-based management; White & Case represents the company’s sole voting shareholder, based in Hamburg, Germany. As the curtain goes up on Crimmins’ tale of corporate intrigue, it’s 2000, the economy is faltering, and Spiegel is trying “desperately” to renegotiate its financing. But the company can’t “weather the storm.” (All quotes are from Crimmins’ report unless otherwise attributed.) The crisis peaks in March 2002, when Spiegel is told by auditor KPMG L.L.P. that it must include a statement in its annual 10-K report that there’s “substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time.” In order to avoid that filing, Kirkland’s Carter Emerson prepared an SEC form in April 2002 blaming the failure to file a 10-K on Spiegel’s bank negotiations. The company made similar statements throughout the rest of the year. “Of course, as Kirkland knew, the real reason why Spiegel was not filing its periodic reports was that it did not want to disclose KPMG’s going concern qualification.” Emerson declined to comment. Garrett Johnson of Kirkland says that the form is a “notice” document, not a “disclosure” document, and that Kirkland was under no obligation to reveal the going-concern opinion. At the same time Emerson was telling the SEC that Spiegel couldn’t file, he was telling the company’s management that the failure to do so could result in civil and criminal penalties. At a meeting of the company’s Illinois management in May 2002, company officials, one of whom had brought “a newspaper photo of the executives of another public company being paraded before the press in a ‘perp walk,’ ” agreed to do so. But the filing was never made, and Urs Aschenbrenner of White & Case’s Hamburg office was a big reason why, according to Crimmins. The examiner cites an incident shortly after the May management meeting, when Emerson’s “heated” advice to file was rejected by the Spiegel audit committee, then the board, after “intensive discussion, careful deliberation, and consultation with . . . White & Case.” Philip Schaeffer, White & Case’s general counsel, says that the firm wasn’t retained on securities matters, and that neither the audit committee nor the board ever looked to Aschenbrenner for advice on the filing. Crimmins’ report also questions statements that Spiegel made to third parties. As a result of the failure to file, Nasdaq began delisting proceedings against the company. At a May 2002 hearing, Spiegel told Nasdaq officials that the company was only days away from completing its refinancing. In fact, some of the banks had already told Spiegel they wouldn’t agree, according to Crimmins. Nasdaq delisted Spiegel on June 3; afterward the company issued a press release saying that negotiations with the banks were “far advanced,” and that an “overwhelming majority” favored refinancing. Ultimately, those banks refused to renegotiate. Crimmins points out that Aschenbrenner attended the Nasdaq hearing and that he suggested the language for the press release. Schaeffer responds that Aschenbrenner was silent at the Nasdaq meeting and that those statements were true at the time. The SEC investigation is continuing. Theodore Sonde of D.C.’s Crowell & Moring represents five members of the Chicago management. He says their position at this point is essentially that “we were just doing what Kirkland told us to do.” In November the bankruptcy court authorized D.C.’s Zuckerman Spaeder to look into possible malpractice suits against Kirkland and White & Case, as well as KPMG, the company’s auditor. Partner Norman Eisen is in charge of the inquiry; he declined to comment on its status. These events occurred before the Sarbanes-Oxley Act took effect, and the “noisy withdrawal” rule � requiring lawyers to resign and report clients that persist in wrongdoing � has never been adopted. Still, Crimmins, a former SEC enforcement official, writes that it’s “useful” to consider what effect they would have in this case. In doing so, he finds both firms wanting. Neither Kirkland nor White & Case, he writes, “seriously raised the nonfiling of the Form 10-K” after Spiegel decided not to file in May. In addition, neither firm withdrew from representing the company “noisily or otherwise.” Schaeffer and Johnson say that their firms complied with Sarbanes-Oxley and they “climbed the ladder,” as required. But those at the top decided not to file. Was reporting up the ladder enough? Not in this case, Crimmins concludes: “The advice from the lawyers was rejected by Spiegel’s audit and board committees, and the material information that should have reached investors was kept under wraps.” That statement is no doubt destined to be quoted regularly by those who believe that lawyers should be required to “report out” when they discover violations by a client. Paul Braverman is a staff reporter at The American Lawyer, where this article first appeared in the January issue.

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