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BOSTON-Corporate counsel are starting to look over their shoulders. When the U.S. Securities and Exchange Commission (SEC) went after Biopure Corp. and its executives for misleading public statements about the U.S. Food and Drug Administration’s review of its products, the biopharmaceutical company escaped without financial repercussions. But the Cambridge, Mass., company’s general counsel ended up with a $40,000 civil penalty this month. The government’s cases against Biopure’s former president and CEO and former senior vice president of regulatory affairs and operations are ongoing. But the SEC’s settlement with General Counsel Jane Kober illustrates the escalating government scrutiny of so-called “gatekeepers,” including general counsel responsible for safeguarding shareholder’s interests. In-house counsel and their law firm advisers say they’re increasingly concerned about potential liability faced by in-house lawyers, who are stepping up their documentation of advice and even taking on additional professional liability insurance as precautionary measures. Biopure, which settled its case without admitting or denying the SEC’s charges, agreed to an injunction against future violations of securities laws and hired an independent consultant to overhaul the company’s disclosure policies. The company did not return calls for comment, but in a Sept. 12 statement, Chairman and CEO Zafiris Zafirelis said that the settlement “removes a cloud over the company.” Kober, who also settled with the agency without admitting or denying allegations, also did not return calls for comment. Increased GC scrutiny General counsel are increasingly scrutinized for their actions, said Karl Chen, co-chairman of the securities committee for the Washington Metropolitan area chapter of the Association of Corporate Counsel. Chen, who is also a lawyer with Arlington, Va.-based recruiting company Watson Wyatt Worldwide Inc., pointed to a 2004 SEC order against John E. Isselmann Jr., former general counsel of Electro Scientific Industries Inc. of Portland, Ore. The SEC did not charge Isselmann with involvement in a fraudulent accounting scheme hatched by other corporate executives. But it brought a case against him for failing to provide information about a transaction to the company’s board, auditors and audit committee. That omission, which the SEC believes allowed other executives to hide the fraud from the auditors and board, resulted in the false reporting of a profit instead of a loss during a quarter in 2002. Isselmann settled the case with the agency for $50,000 and agreed to cease and desist from causing violations of SEC rules. “If [the SEC] finds or believes there was a failure to convey material information they’re certainly going after them and penalizing them,” said Chen. “You probably have to fully document advice you provide.” Although he doesn’t believe that the SEC treated him fairly, Isselmann said he was glad he resolved the case without litigation or a finding of wrongdoing. He now practices government law and administrative law at his Vista Strategies consulting company in Salem, Ore. Whatever the outcome, lawyers say their professional credibility is on the line from the first day the SEC brings such a case. “It’s not just your company at stake, it’s your reputation at stake,” said Lee Braem, president-elect of the New Jersey Corporate Counsel Association. Braem said general counsel need to be concerned about rulings like Biopure because as officers and executives of companies, they “fit into that category of individual the government is allowed to go after.” The government often overreaches when it brings criminal charges against lawyers and accountants who are trying to fix problems in their companies, said white-collar defense lawyer Robert Ullmann of Boston’s Nutter McClennen & Fish. “Just because a lawyer or an accountant doesn’t quit or doesn’t do enough fast enough in the government’s eyes, that’s not a proper basis for a criminal charge,” Ullmann said. ‘Scriveners’ no more The current mindset at enforcement agencies is that general counsel need to protect the shareholders’ best interests, not just do the management team’s bidding, said William Schuman, a securities litigation lawyer in McDermott Will & Emery’s Chicago office. “The days when in-house lawyers were thought of [as] scriveners are over,” Schuman said. “We’re seeing more inquiries and investigations where the conduct of in-house counsel is being examined every bit as much as the businesspeople’s.” That SEC philosophy leads to tension for general counsel, who both serve on an executive team and have responsibilities as company watchdogs under the rules of the Sarbanes-Oxley Act of 2002, said Frederick Gonzalez, general counsel of network security device maker SonicWALL Inc. of Sunnyvale, Calif. “There’s a fundamental tension between all the constituencies that look to the general counsel for ethical leadership, moral leadership and compliance leadership,” Gonzalez said. Sarbanes-Oxley added layers of responsibility for lawyers, but a well-known speech made by former SEC enforcement director Stephen M. Cutler two years ago at the University of California at Los Angeles School of Law raised awareness throughout the legal community, said Susan Hackett, senior vice president and general counsel of the Washington-based Association of Corporate Counsel. In that speech Cutler said that the agency had stepped up its scrutiny of the role of lawyers and other gatekeepers in corporate fraud cases since 2002. An SEC spokesman said that the agency brought more than two dozen enforcement actions against attorneys, including gatekeeper and stock market manipulation cases, in the fiscal year that ended on Sept. 30, 2005. Holding corporate gatekeepers, including general counsel, responsible for the company’s misleading or incomplete disclosures is still a priority, said David Bergers, district administrator of the SEC’s Boston office. “The commission will continue to focus on misleading disclosures in the biotechnology industry and other industries to ensure investors receive accurate info,” Bergers said. Most lawyers who face SEC sanctions had their hand in the cookie jar, according to a March 2005 study by the corporate counsel association, but the overall scrutiny of lawyers is much tighter and the number of cases is on the upswing, Hackett said. “General counsel are seen as a fiduciary leader,” Hackett said. “Therefore, they are now responsible [for what the company does].” Extra insurance Relying on the advice of outside lawyers has proven an effective way to avoid at least criminal liability for a lawyer who is not actually involved in the wrongdoing, Hackett said. Some lawyers are investing in extra insurance protection in case the government comes knocking. Layering an employed-lawyer insurance policy on top of directors and officers (D&O) liability insurance is one strategy, said Jennifer Camacho, vice president of intellectual property and chief patent counsel at Cambridge, Mass.-based Codon Devices Inc. Camacho, who said employed-lawyer insurance runs about $3,000 to $4,000 per year, said she negotiated for the insurance during her employment offer. “The D&O insurance isn’t sufficient for in-house counsel,” said Camacho. “It wasn’t five years ago and it certainly isn’t now.” Yet, ultimately, staying out of trouble can be as simple, and as difficult, as accepting that the general counsel’s role is often to play the heavy among highly optimistic business leaders. Insisting on disclosure of potential problems with the company’s product can be challenging among a crowd that relies on sheer force of will to overcome obstacles to build new companies, said RoseAnn Rotandaro of Armor Legal Counsel in Palo Alto, Calif., who was formerly general counsel at two high-tech companies. “It’s hard to be a general counsel in an emerging growth company,” Rotandaro said. “At times you have to really kind of help people understand why you’re always the bad-news person. You have to be strong and stubborn and not be afraid to be in people’s faces.”

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