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In July 2000 I left my Cincinnati law firm for the fast pace and potential rewards of an in-house position with PurchasePro.com, Inc., a Nasdaq-listed provider of procurement technology that had recently announced a strategic relationship with America Online, Inc. Two years later I resigned my position as general counsel and PurchasePro was in bankruptcy. Both the Securities and Exchange Commission and the U.S. Department of Justice were investigating the company and its dealings with AOL during the fourth quarter of 2000 and the first quarter of 2001. In January 2005, I was indicted, along with three other former PurchasePro executives and two former AOL employees, on charges of conspiracy, securities fraud, and making false statements to auditors and government agents. Six former PurchasePro senior executives have pled guilty to various felony charges over the past few years, while the other five defendants await trial later this year. On December 20, 2005, after a two-week bench trial, I was acquitted of all charges, without presenting a defense. I was represented by Bob Ullmann and Sarah Walters of Nutter McClennen & Fish, my coauthors on this article. I consider myself a whistle-blower. In May 2001, because of concerns I had about the activity of certain members of the company’s senior management team, I pushed for the creation of a special committee of PurchasePro’s board. I wanted the committee to investigate the circumstances leading up to the company’s 2001 first-quarter earnings call. As a result of the special committee’s investigation, the CEO and two other executives were fired. The company delayed filing its Form 10-Q with the SEC, ultimately reducing its stated revenue for the period by about 40 percent from what it previously announced. I felt vindicated when the judge who acquitted me said that I “did a very good job of handling an extraordinarily difficult situation.” But this vindication followed a long ordeal that no conscientious in-house lawyer should have to endure. My defense taught Bob, Sarah, and me a great deal about how in-house counsel can better protect themselves from the risks associated with being a lawyer in a public company. Here are some of the lessons we learned. The best protection for any in-house counsel is to choose his company wisely. Avoid putting yourself at risk by doing your homework and asking the right questions before accepting an in-house position. When evaluating an opportunity, consider the company’s shareholders, management, and board. The involvement of well-established venture capital firms is a good sign that a start-up’s executive team and board members are sophisticated and experienced. Take a look at the institutional investors and see what other companies they have invested in. Find out whether a significant percentage of the company’s shares are held in short positions. If so, the market may be betting against the company’s success, and the stock is sure to face downward pressure. Take a close look at the management team, especially the CEO and CFO. Do they have prior experience leading public companies? Do they take their responsibility for ethical behavior and internal controls seriously, and understand their duties � or do they view such things as red tape? If the CEO doesn’t set the proper tone from the top, there is little in-house counsel can do to change the company’s culture. If the company is run by its founders, find out whether they have significant portions of their wealth tied up in the company’s stock. If they do, the pressure to increase the stock price can be overwhelming. Consider the board. Are its members truly independent? Will they stand up to the company’s CEO? Do they seem actively engaged? A passive board that is too accommodating to management may be ill-equipped to deal with a crisis. Do the board members serve on other public company boards? There is no substitute for experience in learning what works and what doesn’t. Corporate governance ratings from organizations such as Institutional Shareholder Services can be a good guide for determining the strength of a board. Insist on talking to the auditors privately. You need to find out how they feel about their engagement and what they think about management’s integrity. After a few months at PurchasePro, the relationship with the auditors had become so bad that the auditors almost terminated the engagement. With a little more digging, I might have learned this before joining the company. After you’ve accepted an in-house position, remember that your function is to be the company’s lawyer. Don’t let your role expand beyond your expertise or you may be putting yourself at risk. Perhaps the biggest hurdle for Bob and Sarah at my trial was to overcome the government’s accusation that I had become the “de facto CFO” of PurchasePro. In fall 2000 the company’s auditors threatened to quit, in part because they had lost confidence in the integrity of certain executives. One of the conditions imposed by the auditors in order to continue their engagement was that management communicate with them through a three-man team, including me. That put me in a completely untenable position. The auditors relied on me to provide answers to questions about PurchasePro’s complex sales transactions. And the sales force looked to me to explain the rules the company had to follow to recognize revenue. I simply did not have the experience for either of those tasks. Of course, in-house lawyers often interact with both auditors and the sales force as part of their normal duties. But I had become a conduit for information between the sales force and the auditors, often collecting information from the sales force and incorporating it into memoranda for the audit files. The government used these memoranda to imply that I had a complete understanding of what happened in every department at the company � an impossible standard for any in-house lawyer. Even worse, by relying on the representations made to me by the sales force in preparing these memoranda, some of which turned out to be untrue, the government argued that I had made those misrepresentations. When furnishing the auditors with information, make sure that you distinguish between information that is based on your personal knowledge and information that comes from someone else. When a crisis does occur, solicit advice from outside counsel immediately. Make certain the law firm you choose gets its most senior experts involved. A crisis involving potential criminal violations is no time to save on legal fees. At the very least, simply talking through an issue with someone removed from the pressures of the business can help you get to the right answer. When I became concerned about the events at the end of PurchasePro’s first quarter of 2001, I sought advice from outside counsel as to what the company should do and when. That counsel testified at trial, and we believe his testimony was critical. It showed that I was elevating my concerns, and that is the antithesis of engaging in a cover-up. It served as a good indication that I was trying to do the right thing. My reliance on outside counsel proved crucial not only at the time, but ultimately when the unthinkable happened and I was forced to defend myself against felony charges brought by the United States government. Thankfully the legal fallout from the collapse of PurchasePro appears to be largely behind me. I have returned to work at Harrah’s Entertainment, Inc., which is where I was employed before I was indicted. My life is returning to normal. I’ll be explaining what happened to me for the rest of my career, and it will take years to recover from the financial impact of this ordeal, but hopefully my story will help others avoid the nightmare I’ve endured. Scott Wiegand is associate general counsel at Harrah’s Entertainment, Inc. Robert Ullmann and Sarah Walters are partners in the Boston law firm of Nutter McClennen & Fish.

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