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When word of a Securities and Exchange Commission investigation reaches a company’s executive suite, the general counsel often makes a predictable move: He grabs the phone and hires a big-shot former SEC lawyer. Both the Enron Corp. and WorldCom Inc. tapped Wilmer, Cutler & Pickering’s William McLucas, the highly regarded former head of enforcement at the SEC, for expert advice when scandal broke. And the Federal Home Loan Mortgage Corp., Freddie Mac, turned to Baker Botts’ James Doty, the commission’s former GC. But it’s not just besieged companies that are calling former SEC regulators for advice these days. Increasingly, healthy companies are hiring them to scrutinize their disclosure and filing procedures, examine accounting calculations, and question senior executives � just to make sure everything’s in order. After all, who better than a former commission insider to ensure that companies are following the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange’s new listing rules � and to prescribe a quick fix if they aren’t? Maybe so. But critics say that securities specialists don’t know enough about corporate governance to be effective, and that the SEC isn’t likely to be impressed even if one of its alumni has blessed a company’s books. But a growing number of businesses � including heavyweights such as the NCR Corp. and the Aramark Corp. � are bringing in high-priced lawyers to search out and eliminate red flags. Occasionally, these “audits” are triggered by a niggling worry that a long-standing company practice, such as a specific tax deduction or accounting treatment, might provoke SEC suspicion. More often, however, companies will start a lawyer-led audit out of the blue, as an added prophylactic measure. Gaining the extra peace of mind can be tough work. Paul Huey-Burns, a partner at Philadelphia’s Dechert and former SEC lawyer, says his firm’s audits often resemble SEC investigations, replete with comprehensive document requests and cross-examination-style interviews of senior executives. “It’s not pleasant, but it’s effective,” he says. Take the experience of Dayton-based NCR. After the Enron scandal broke in the fall of 2001, NCR decided to undertake a comprehensive review of its corporate governance policies. “We had some questions and wanted to make sure that, compared to other companies, we weren’t the nail sticking out of the wood,” recalls vice president of law Nelson “Ned” Greene. Greene hired Baker Botts’ Doty to lead the investigation, a project that ballooned in scope with the passage of Sarbanes-Oxley. Greene won’t divulge what NCR spent but concedes that it was a “significant expense.” Adds Greene: “If it ensures that we’re in compliance with the law, it pays for itself a dozen times.” June 2003 changes in the New York Stock Exchange’s listing rules prompted Aramark GC Bart Colli to review the company’s corporate governance setup. So he called Seth Taube � a partner with Newark’s McCarter & English and former chief of enforcement in the SEC’s New York office � to review the Philadelphia-based company’s governance processes. Taube implemented procedures that assured Colli that Aramark was complying with Sarbanes-Oxley’s Section 302, which requires CEOs and CFOs to certify all financial statements, and Section 307, which requires lawyers to report evidence of wrongdoing. “Those sections are the reasons behind why my phone won’t stop ringing,” he says. Taube says his audit-related work has grown 200 percent since 2002. The audits are not always initiated by lawyers. Soon after learning that, under Sarbanes-Oxley, the SEC would review a public company’s filings at least once every three years, the directors of Daytona Beach, Fla.’s International Speedway Corp. asked for a thorough examination of the company’s corporate governance practices. “The board wasn’t concerned with anything specifically,” says Glenn Padgett, the company’s chief counsel for operations. “But they wanted extra assurance that we were following the right path.” Padgett hired Doty, who took a team of lawyers to Florida and dug into ISC’s public filing procedures. Doty’s findings, according to Padgett, “basically confirmed that we were doing the right thing. It put a lot of us at ease.” Perhaps, but should it have? The SEC won’t comment on the value of a stamp of approval from one of its former lawyers. But Michael McAlevey, the chief corporate and securities counsel at the General Electric Co., has questions about this type of report’s worth. “It has never been a defense to say, ‘My lawyer said it was okay,’ ” he says. “ The SEC really shouldn’t be impressed by a report card.” McAlevey should know. From 1998 to 2001, he was the deputy director of the SEC’s Division of Corporation Finance. And critics like John Liftin, GC of Newark’s Prudential Financial Inc., wonder if SEC lawyers are the right ones to be calling in the first place. Liftin points out that prior to Sarbanes-Oxley, corporate governance was policed by Delaware state law. He hasn’t done a governance audit for Prudential. But were he to do so, Liftin says, he would hire a corporate governance expert, not a securities lawyer. “All this insistence on former SEC attorneys points to a limited understanding of what they’re capable of doing,” he says. Maybe so. But that was then. “The SEC enforces Sarbanes-Oxley, not the Delaware attorney general,” says ISC’s Padgett. “So we think it’s important to learn how they think.” Ashby Jones is a staff reporter at the American Law Media magazine Corporate Counsel, where this article first appeared in the March 2004 issue.

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