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Few, if any, general counsel of the Securities and Exchange Commission have had as much impact on publicly traded corporations as Giovanni Prezioso, who left the agency in January. When Prezioso first took the job in April 2002, it was during corporate America’s nadir. The Enron Corp. and WorldCom, Inc., scandals had ignited a flurry of lawmaking activity in Congress, including passage of the Sarbanes-Oxley Act of 2002. It fell to Prezioso’s 120-person legal staff, nearly all lawyers, to implement the unprecedented enforcement and regulatory provisions of SOX within the strict time frame set by Congress. Under the act, his office also established formal standards of professional conduct for attorneys representing public companies. The new rules clarify the role of legal counsel regarding their true clients � the companies themselves. Prezioso says he is leaving public service in order to better provide for his family as his children approach college age. (Brian Cartwright, a Latham & Watkins partner, succeeded him.) At press time Prezioso was still considering his job options, including in-house possibilities. Prezioso, 47, previously was a partner and securities lawyer in the Washington office of Cleary Gottlieb Steen & Hamilton. In an interview with Corporate Counsel senior reporter Sue Reisinger, Prezioso talked about the hardest parts of the job, his legacy, and the SEC’s continuing interest in rooting out attorney misconduct. (By SEC policy, these remarks solely represent Prezioso’s views and not necessarily those of anyone else at the agency.) Q. In the past three years, we have seen an increase in enforcement actions against public companies, and against their general counsel. Why do you think that is happening? A. My sense is that the increase in actions against general counsel, while still a small absolute number, corresponds to the increase in actions against public companies. Overall, the enforcement program of the commission has been more active across the board in the last three years. Lawyers don’t have an exemption when they engage in illegal conduct. There is also a push in our office to implement the mandate of Sarbanes-Oxley on lawyer professional misconduct. No question. We are more active on that. Q. Do you expect that trend to continue? A. The trend of increased investigations for professional misconduct will continue. We are very active in that area. Q. In a speech in April 2005 before a forum of general counsel, you said your office needed to strengthen its investigative role into lawyer misconduct, beyond reporting issues. Could you talk about what other types of lawyer misconduct cases you think the SEC should investigate? And did Congress intend for that to happen? A. The way I look at what Congress intended is that these rules are about who does a lawyer represent � management or the institution? And if you focus on what the commission has done � and I try to underscore this point a lot when I speak � it is to create an environment, for both inside and outside counsel, where lawyers would be as strong as possible in asserting the interests of the institution. Lawyers do have the obligation to get issues in front of a company’s board if they feel that significant steps to address wrongdoing have not been taken, and inside lawyers have the whistle-blower statutes to protect them in an extreme case. . . . The strengthening of lawyers allows lawyers to play a more active role in assuring an ethical corporate culture. Q. Aren’t there already legal mechanisms in place for dealing with issues like subordination of perjury and alteration of documents and such? Why would the SEC need to become involved? A. There are allegations of this type of lawyer misconduct in front of us right now in some of our investigations. Our authority in these cases was strengthened in Sarbanes-Oxley. The commission has an independent concern about protecting the processes of this agency, and protecting the community of public and regulated companies that find themselves depending on these lawyers. [Also] . . . the standards for sanctioning lawyers for perjury may be different, and the priorities of local bars and state and federal prosecutors differ from ours, by necessity. So submitting false testimony in an SEC administrative proceeding is important to them, but it may not be their highest priority. But it is for us. Putting It All Together Q. Recalling your first few weeks in office, what was your biggest surprise about the job? A. The hierarchical organization of this agency � and the government in general � compared to being in private practice. Is that good or bad? A little bit of both. When you have something you need to handle urgently, the ability to muster your resources quickly to your priorities is great. But when you want to get staff to push back � to test your opinions � you have to let them know you really want to hear their genuine views. I was used to a law firm, where everybody argues with you all the time. Sometimes here, because of the hierarchy, staff think, “You’re the boss, so it must be right.” Q. Could you talk more about how Sarbanes-Oxley changed the role of your office? A. I’d say it has had the most significant impact in two areas. First, it really created dramatic pressure on the commission and our office to implement an aggressive regulatory agenda in quite a short time period. It drove a lot of the work of the agency and our office � coordinating the effort, getting the different pieces to fit together, and meeting the statutory deadlines. Almost within 24 hours of the law’s enactment [on July 30, 2002], we developed a list of all the deadlines it established. We built backward from there � developing a time and responsibility chart of who would do what, with everybody’s phone numbers on the back, and weekly meetings and status updates each week � just as if you were putting together a big corporate deal. It set the agenda for commission reforms and our office for a significant period of time. Second, by mandating attorney-conduct rules, the statute gave our office a new dimension. Q. Those attorney-conduct rules, which your office drafted, have been in effect now since August of 2003. How do you think the rules are working? A. Reasonably well. We know lawyers have put in place procedures to make sure “reporting up” happens. Also, I have heard of specific examples of lawyers who have reported information about wrongdoing up to the board and precipitated corrective action at public companies. [And] I have heard of cases where the board acted only after the lawyer invoked the “permissive disclosure” provisions of our rules, which say a lawyer has the option of reporting certain of a company’s legal violations to the SEC . . . I know some lawyers have relied on the permissive disclosure provision, saying to the board, “Please act to fix this problem, and if you don’t act, I am authorized under SEC rules to disclose the violation to the SEC.” These have been outside lawyers in almost every case. Inside lawyers have principally been involved in whistle-blower cases. If a company takes retaliatory action against a whistle-blower employee who is [an inside] lawyer, [that] lawyer is now in a position to bring an action based on any illegal retaliation under [SOX]. And these proceedings can raise an interesting question about attorney-client confidentiality. The question is: If the lawyer is a whistle-blower and the company retaliates, may the lawyer use confidential information obtained in representing the company to prove his case? It was presented in the Willy case [Willy v. Administrative Review Board, U.S. Department of Labor]. In that case, in-house counsel at an oil company was allowed to introduce a report he wrote for his client citing environmental violations; he was fired when he refused orders to delete references to the violations from the report. While everyone understands that a lawyer can use confidential or privileged information defensively if sued by a client, the debate out there is whether it can be used offensively, as the lawyer in Willy sought to do. That decision gives in-house counsel the same ability to file whistle-blower cases against their employers that other employees have. The appeals court reasoned that the ethical requirement to maintain client confidence conflicts with a lawyer’s ability to assert his judicial rights to obtain protection under whistle-blower statutes. Obviously there is a policy interest in protecting confidentiality, but there is also one in allowing access to the judiciary to resolve disputes. The appeals court said the lawyer can use the confidential information to assure that access. There is a related SEC piece . . . [and that is] in our attorney-conduct rules we included provisions in which a lawyer may permissively disclose information that otherwise would be confidential to the public company when necessary to protect against substantial injury to shareholders. They also contain a very specific provision that [states that] an attorney may use any record of reporting up the ladder that may be relevant in any proceeding in which the attorney’s compliance with our professional conduct rules is an issue. Those reports, for example, under our rules could be used by an attorney in an OSHA whistleblower proceeding. Q. The Washington State bar and a committee of the California bar believe the permissive disclosure rule conflicts with their states’ rules requiring attorney-client confidentiality. They claimed that since permissive disclosure was merely an “option,” attorneys in their states should not exercise that option. Your letter in response to the Washington State bar made it clear that you expect their state rules to give way to the federal rule. Has any more happened; has there been any case law yet? A. Nothing more has happened. There have been a few cases in California [involving preemption of state arbitration rules] that have been very broadly favorable toward preemption and suggest that the SEC attorney-conduct rules would be entitled to preempt inconsistent state laws. In one of these arbitration cases, the court specifically noted that when federal rules give you an option to do something and a state rule mandates only one choice � thereby eliminating the option � there is still a conflict [Credit Suisse First Boston Corp. v. Grunwald]. So there is some good case law developing for the SEC in the context of the California rules on arbitration. We have heard from at least one outside lawyer who was practicing in a state that had a similar provision. . . . I won’t say what state, but he was seeking advice [and support for making] . . . a permissive disclosure. Ultimately the company, when informed of the lawyer’s intention, decided to take remedial action on its own. Q. Whatever happened to the noisy withdrawal rule? [This proposed rule would require an attorney who knows of corporate wrongdoing, and who works for a company that fails to correct it, to resign and to tell the SEC why.] Is that rule dead? Under what circumstances might it arise again? A. It’s still pending and open. I view it as a situation of watchful waiting � seeing how existing rules are functioning in practice, and determining if the noisy withdrawal rule is needed, or would cause more harm than good. Q. What was your toughest decision, the one you agonized over the most? A. The one I can tell you about without violating attorney-client privilege [chuckles]? The noisy withdrawal provision, and the attorney-conduct rules in general. Those were the toughest decisions. Q. As a lawyer yourself, you must have some ambivalent thoughts about the SEC seeking to pierce attorney-client privilege? A. There are some very difficult issues. I am a strong supporter of the privilege, and I believe in its underlying policy rationale. We rely on the attorney-client privilege here at the SEC. People subpoena documents from us all the time. You need to keep in mind what the commission has really tried to do, which is to come back to the principle that the privilege belongs to the company, not to management or to an individual. Permissive disclosure, as provided in the commission’s rules, is consistent with the rules of 40-some states. It is not new. Second, in the enforcement context, people have raised questions about the waiver of privilege under the commission’s Seaboard guidelines [a 2001 SEC press release that set self-reporting and correction of financial problems, along with cooperating with law enforcement, as conditions for avoiding an SEC enforcement action] and under the Justice Department’s guidelines set out in the Thompson Memorandum [written by then � deputy attorney general Larry Thompson in 2003 that spells out when the government should charge a corporation with a crime, as well as what type of cooperation is expected from a corporation to avoid criminal charges]. We have seen over and over again that many companies want to cooperate. They want to waive the privilege, and they want to have credit for that cooperation. Often it is new management that wants to cooperate, and old management is gone. So if we give them credit for cooperation, then some people will say, “Well, you are pressuring them to waive the privilege, and that will chill the dialogue between lawyers and their clients.” We have processes in place to assure that we’re not unduly pressuring anyone. This includes the tone with which the issue is raised; it must be respectful, such as asking, “Would you consider waiving the privilege in this case?” Further, there are mechanisms for objecting to any perceived abuses by the commission staff, including by identifying any potential concerns to senior lawyers in the enforcement division, to lawyers in our office, or directly to the commission. My main point remains, though: Whose privilege is it? Most assuredly not the CEO’s, as an individual. Assessing the Impact Q. What do you see as the lessons of the Enron scandal, and has the SEC and/or corporate America learned them well enough? A. One of the lessons I would draw is that if professionals always limit themselves to viewing issues in the narrowest possible way, and pushing those issues to the extreme, they will find themselves letting their clients make mistakes that are illegal and facilitating conduct that is harmful to shareholders. It appears that at Enron and many other companies, the lawyers, the accountants, and the board and management of the companies took a very narrow view of what their individual roles were. A lot of those folks pointed to others and said, “That’s an accounting issue,” or “That’s a legal question,” or “That’s a business question.” No one was stepping back and saying, “Wait a minute.” Q. Looking back from this distance, and putting aside the impact the scandal had on people’s lives, do you think the Enron scandal ultimately was a good thing for corporate America? A. I can’t say the scandals were a good thing. Would Sarbanes-Oxley have happened without Enron? I don’t know. I think we would have been better off if people had tried to improve corporate governance and corporate standards without having gone through that. The scandals were very pervasive and widespread, and created a great distrust of corporate balance sheets. It’s hard to view that as good. Q. What was the best advice you received when you started the job? A. To make sure I took time to get to know the office and the commission before accepting the many offers of speaking engagements. Q. What is the most important lesson you learned about being a general counsel? A. I think the point we’ve been talking about in the area of attorney-client privilege holds true for this job and others � you represent the institution and not any particular individual. It’s probably the same situation whether you are an in-house lawyer in the government or at a public company. Q. How important is the credibility of a general counsel today? A. It’s critical for a public company’s general counsel to have a reputation for dealing honestly with regulators. It’s always been important, but it’s really true now.

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