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This has not been a good year to be a general counsel. In the first nine months of 2007, a record 10 general counsel were charged with or pleaded to civil or criminal fraud in federal courts, most in the wake of the stock-options backdating scandal. “This is unprecedented,” said David Bayless, former head of the U.S. Securities and Exchange Commission’s San Francisco office and now doing white-collar defense for Covington & Burling. “In the five years I headed the [SEC] office we might have one case. � They have done 10 in one year,” Bayless said. Bayless and others contend that the trend stems from the SEC’s frustration at having to back off a proposed Sarbanes-Oxley Act regulation last year that would have mandated that corporate counsel report suspected wrongdoing to government officials � a practice known as “noisy withdrawal.” That reporting is now voluntary. Some complain the current crackdown is damaging the relationship between general counsel and the executives they serve. When mandatory reporting was proposed, “the legal profession hit the roof and the rule was scrapped,” said Bayless. “I think in response to that, what is happening now is the SEC is trying to deputize general counsels. If a GC is aware of wrongdoing they are going to have to report it or else be a potential target of SEC actions. It is quite scary,” he said. SEC spokesman John Nester countered, “We bring cases that are warranted, when they are warranted.” An unofficial tally showed 53 SEC actions involving general counsel for the six years between July 2001 and July 2007, according to Nester. David W. Porteous, a securities lawyer with Levenfeld Pearlstein in Chicago, has studied SEC actions against lawyers of all stripes. He found that between 1999 and 2001, the SEC brought 49 actions against lawyers generally, the majority linked to insider trading. Between 2002 and 2005, that jumped to 76 against lawyers, but seldom involved general counsel. In this year’s crop of cases, Porteous said, the SEC tended to pursue actions not only against general counsel who allegedly participated in fraudulent schemes, but also against those who filed misleading financial documents. But Porteous chalked up the glut of cases to the backlog of investigations into backdating finally rolling out. “In the early 1990s, they were more tolerant of lawyers’ role, or less was expected of what should have been done. But after Enron and Sarbanes-Oxley, the SEC expected lawyers to grow up. [Lawyers] have an obligation to shareholders, too,” he said. Responding to claims the SEC has been overzealous in pursuing backdating cases, Director of SEC Enforcement Linda Chatman Thomsen said earlier this year that the cases against companies involved “secret slush funds, forgery, grants to fictitious employees, falsified corporate documents, self-dealing, self-enrichment and lying” to auditors. “Are we overreaching? You tell me.” Melinda Haag, a lawyer in Orrick Herrington & Sutcliffe’s San Francisco office who has represented at least three general counsel in SEC trouble, said that there “is little doubt the SEC is focused on GCs as potential wrongdoers. The problem, in my view, is that the SEC’s suspicion about GCs has almost reached a level of paranoia � if they believe someone within the company committed financial fraud, they assume in-house lawyers were involved. It is difficult to convince them otherwise.” Haag did convince the SEC to close its investigation without taking action against former CNet Inc. General Counsel Sharon LeDuy this year. Chief in-house lawyers and general counsel at big-name companies such as Apple Inc., Tenet Healthcare Corp., Monster Worldwide Inc., Mercury Interactive Corp. and KLA-Tencor Corp. have been charged with civil fraud, and in the case of McAfee Inc. attorney Kent Roberts, criminal charges are pending as well. “There are difficulties, to my mind, with the way cases played out recently,” said Susan Hackett, vice president of the Association of Corporate Counsel. “Some cases are cut and dry, the general counsel was complicit and had a hand in the cookie jar.” But in others, the SEC is bringing cases on a strict liability standard, saying company lawyers are responsible, Hackett said. “That is a very weighty standard to live by,” she said. “You don’t have to know there is a problem, but if it happens on your watch, you’re liable.” Robert Rose, head of white-collar practice in the San Diego office of Los Angeles’ Sheppard Mullin Richter & Hampton, echoed the defense bar’s concerns. The tougher SEC enforcement stance against in-house lawyers “is a natural result of not getting what they wished and using the existing tools to accomplish the same purpose,” he said. In options-backdating cases, the government enlists general counsel and outside counsel to do the investigatory work. “This is the alarming part for lawyers. They have been volunteered to be government regulators,” Rose said. “You lose the confidence and the independence to talk to your client.” Bayless added that most in-house counsel will say the best thing about their jobs is the role of trusted advisers. “You have one client. Management will come to you and you can be open and free. If instead, you become the cop on the beat, which has got to change the relationship between in-house counsel and senior management. This is a big deal and it is going to change the nature of the attorney-client relationship,” he said. In January, former Comverse Technology Inc. General Counsel William Sorin became the first corporate lawyer fined by the SEC for options backdating. He agreed to pay $3.1 million to settle a civil conspiracy claim. A month later, the government charged former McAfee General Counsel Kent Roberts in a criminal backdating case. By March, three cases popped up, with Monster Worldwide General Counsel Myron Olesnyckyj settling an SEC civil securities fraud claim, and two Enron Corp. lawyers � General Counsel Jordan Mintz and securities lawyer Rex R. Rogers � being accused of lying to auditors in a civil enforcement case. The SEC leveled three more suits in April against general counsel at Apple Inc., Tenet Healthcare and Amkor Technology Inc., followed by one against Mercury Interactive’s former General Counsel Susan Skaer, with the latest in August against Lisa Berry, formerly with KLA-Tencor. The SEC has made clear that it expects more from lawyers since the Enron debacle. Corporate counsel who find evidence of violations of securities laws must report up the ladder to senior management. When lawyers “fail to live up to their responsibility, the commission will bring enforcement actions,” warned SEC Chairman Christopher Cox in a March speech to the Corporate Counsel Institute. Defense lawyers have complained that the Justice Department has not sufficiently discouraged prosecutors from demanding � as a sign of cooperation � the waiver of attorney-client privilege information and access to results of internal company investigations. A measure to protect corporate attorney-client privilege is working its way through the U.S. Senate. The Attorney-Client Privilege Protection Act of 2007, S. 186, would bar all federal enforcement agencies from demanding or conditioning treatment on disclosure of confidential attorney communications. Hackett said that although criminal prosecutors may not be able to ask, there is no such limit on the SEC or other regulators. “We are seeing an increasing tactic of tag-teaming in parallel investigations,” she said. “The SEC could strong-arm reports out of someone and share them with the Department of Justice, which might not have discovered the information otherwise.” Norman Veasey, former chief justice of Delaware and now an attorney at Weil Gotshal & Manges, recently issued a report to the Senate Judiciary Committee citing instances of alleged prosecutorial abuse in seeking waiver of attorney-client privilege, despite limits imposed in the so-called McNulty Memorandum in 2006. This article originally appeared in the National Law Journal , a publication of ALM. •

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