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Corporate governance attorneys traditionally handle internal investigations and representations before the Securities and Exchange Commission, but the role has expanded in the years since Enron and WorldCom to include acting as independent examiners.

The willingness of the SEC and the Department of Justice to use these examiners to dig deeper once the government’s main investigation has concluded has created a lucrative practice for a select few corporate governance and securities lawyers.

Timothy E. Hoeffner of Saul Ewing said the SEC is beginning to look into subprime lenders, and that could create an even larger need for independent examiners once the government concludes its investigations.

The scandals involving stock-option backdating – a recent phenomenon – could have led to outside monitoring of companies, but Hoeffner said he thinks it was “overhyped.”

Subprime lending, however, has significant implications for the entire economy, so it will receive more scrutiny, he said.

Independent examiners can benefit the SEC as well the company. Richard A. Levan of Levan Friedman is the chairman of the securities regulation committee of the business law section of the Philadelphia Bar Association. He said it would make sense for the SEC to increase its use of independent examiners because the commission has limited resources to police industries such as those in the subprime lending arena.

Levan said it also isn’t necessarily the mandate of the SEC to ensure corporations follow through with post-investigation requirements.

It could be years before the SEC or other government agencies are ready to appoint independent examiners to follow up on any subprime lending investigations, but companies might start independent investigations on their own.

Jay A. Dubow is a securities lawyer at Pepper Hamilton and has served as an independent counsel – generally for the audit committee of a board – for companies looking to do internal investigations on a variety of issues.

“We will see a number of companies that are embroiled in this whole subprime issue . . . engaging outside independent counsel,” Dubow said.

It has already begun, he said, with Bear Stearns hiring Davis Polk & Wardwell to investigate two of its collapsed hedge funds that were related to mortgage lending.

The use of “independent” counsel isn’t as conflict-free as an independent examiner would be because they are protected by attorney-client privilege. But Dubow said the counsel is hired separately from the company’s current counsel or legal department and doesn’t usually anticipate handling any other work for the company in the future.

“They’re not worrying about defending the company,” he said.

The attorneys serving in the role of independent counsel don’t want to “throw any punches” because the SEC or government could be looking at the company in the future.

Hoeffner’s role as an independent examiner came in after the SEC was finished looking into potential accounting fraud at AOL-Time Warner, as it was known during the investigation.

Hoeffner said the SEC has used independent examiners for years in connection with the Foreign Corrupt Practices Act, but has shown a willingness to expand their use as corporate investigations have become more complicated.

The SEC had begun investigating in 2002 whether advertising sales at AOL-Time Warner were recorded in conformance with Generally Accepted Accounting Principles. The commission filed a complaint in 2005 related to certain charges and AOL-Time Warner signed a consent order that called for additional investigation by an independent examiner, Hoeffner’s partner and colleague on the case, Cathleen M. Devlin, said.

The SEC had found an additional 17 hardware or software companies that it thought might have purchased advertising from AOL-Time Warner after the telecom giant bought computer equipment from them, Devlin said. How that revenue was recorded was at issue, she said.

Devlin said government entities are looking for ways to outsource investigations of additional information found during the initial probe in order to complete the process more quickly. AOL-Time Warner entered into a consent order with the SEC that laid out a plan for an independent examiner.

As is often the case, the order called for an accountant to lead the charge with the backing of a lawyer. BDO Siedman accountant Bill Lenhart in New York took charge of the investigation and brought on Hoeffner. Hoeffner had spent 16 years in the New York office of Weil Gotshal & Manges and previously knew Lenhart.

The investigation spanned from August 2005 to August 2006 and resulted in a 500-page report with various recommendations, Devlin said. The firm had a “small army” of attorneys working on the case to review more than 17.5 million documents, she said.

The firm didn’t have subpoena power over the 17 companies, so they had to get the cooperation of several different people at each company in order to fill in the gaps of its research into AOL-Time Warner.

The final recommendations were binding on the company, but they did have a window of time to object to findings in the report. Devlin said AOL-Time Warner only objected to a few tangential issues. The company ultimately had to restate over $500 million in earnings.

Saul Ewing really had no cap on its bills, which were paid by AOL-Time Warner. They were submitted periodically to the company’s outside law firms – Cravath Swaine & Moore, Foley & Lardner and Williams & Connolly – who approved any “reasonable” charges, Devlin and Hoeffner said.

“The business of internal investigations, independent examiners, independent monitors is very high-end work that involves some of the most qualified, sophisticated attorneys in the country,” Hoeffner said, adding that it is a very lucrative practice.

Daniel M. Hawke, director of the Philadelphia regional office for the SEC, said that as the commission refines its approach to what he calls independent consultants, there is an internal debate as to whether companies should get credit toward their penalties for the money they spend on the independent counsel. For now, he said, the SEC might take that cost into account, but there is no credit offered.

There aren’t many, if any, firms in the Philadelphia area that handle this type of work, Hoeffner said.

There are attorneys who might handle proactive internal investigations, such as Dubow, or who act as independent monitors. Examiners, Hoeffner said, act more as arbitrators because of their binding authority, whereas monitors oversee compliance functions once an investigation is complete. Hawke said the SEC frequently authorizes or orders independent compliance consultants to verify that a company is following through with any mandated governance changes.

The examiner is an independent individual appointed by court order and does not represent the SEC or the corporation in question, he said. The charges of an examiner are very clearly laid out in the order, Hoeffner said, which companies generally spend a lot of time negotiating.

The government was criticized for coming down so harshly on corporations after Enron and WorldCom fell, Hoeffner said, and the use of independent examiners has eased the adversarial role between the government and defense counsel.

Investigations by an independent party can help put significant issues behind a company. Bringing in an independent examiner can speak to the credibility of a company’s handling of corporate governance issues, he said.

An independent examiner should be brought in, Hoeffner said, to handle the “tail of what’s left” after the government investigation. Clearing up those remaining issues can also clear up any uncertainty for a corporation’s shareholders, he said.

When AOL-Time Warner had to restate $500 million, Hoeffner said the stock market didn’t react significantly.

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