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Even general counsel, typically the paragons of probity, caution and restraint, occasionally take things too far, and “sin.” Some GCs fall prey to the very traits that made them successful — or rather the weaknesses associated with these strengths. It’s a concept that medieval theologians — who believed every virtue had a corresponding sin — endorsed. The idea has lots of precedents: Every yin has a yang, every light a shadow, every head a tail. The concept of sin may seem anachronistic, but with Fortune 100 executives, Wall Street analysts and veteran accountants under scrutiny for excesses in their fields, we thought a review session on in-house lawyers’ failings was in order. Our syllabus: those medieval no-nos, the Seven Deadly Sins. We made a few adjustments, of course, substituting arrogance, obstinacy and duplicity for envy, lust and gluttony, but we kept the other original transgressions. We also noted some stellar in-house behavior [see related article: "The Seven Heavenly Virtues"]. Saints, fortunately, were a lot easier to find than sinners. ARROGANCE In the law, a profession that honors intellectual prowess and accepts overweening confidence, arrogance is the most alluring sin. Sure, self-respect and a thick hide are prerequisites for scaling corporate heights. But hubris can leave in-house lawyers with huge blind spots that ultimately hurt the companies they’re trying to protect. Cautionary tales abound. Dearborn, Mich.-based Ford Motor Co. offers a compelling one. The automaker’s hardball litigation strategy in the 1990s may have improved its bottom line (by scaring off frivolous suits and reducing costly settlements), but ultimately helped tarnish its public image at a critical time. In the early 1990s, then-general counsel John Martin and senior Ford management, according to press reports, decided that the company was spending too much money on settlements, and that going to court would actually be more cost-effective. Martin asked assistant GC James Brown to oversee this new litigation strategy. According to company lawyers, Ford decided that about a quarter of plaintiffs would get no pretrial settlement offers; the rest would receive only minimal sums. “[We] don’t give a shit if [the plaintiffs] take it or not,” Brown told Corporate Counsel‘s sibling publication The National Law Journal in 1996. The strategy paid off — at first. Ford won 80 percent of its cases. According to Brown’s 1996 comments, the size of pretrial settlements shrank, and some plaintiffs were driven off entirely. In 1995 alone, 300 product liability cases were dismissed — most when the plaintiff caved in. “Ford was fighting tooth and nail, challenging every case, settling nothing,” says Gerald Meyers, a University of Michigan Business School professor and former CEO of American Motors Corporation. (A Ford spokesman says that the automaker always evaluates each case individually. Brown left Ford in 1997. His replacement, assistant GC for litigation John Mellen, declined to discuss Ford’s litigation strategy. Neither Brown nor Martin, who are no longer with the company, could be reached for comment.) In the mid-1990s, Ford started to get hit with SUV rollover decisions. In 1995 an Indiana jury returned a $62 million verdict (later reduced to $18 million) in one suit. Also that year, a Houston jury reached a $25 million verdict (later reduced to $5.5 million) in the case of a 21-year-old woman killed in a Ford Bronco II rollover. Plaintiffs’ counsel Tab Turner of Turner & Associates in North Little Rock, Ark., recalls: “Jim Brown just pretty much drew a line in the sand, and it resulted in some pretty nasty verdicts. They got their heads knocked off.” It was a tough time for the company. Litigation mounted over Firestone tires on its SUVs, consumer groups raised concerns about the safety of Ford vehicles, and the automaker’s stock price dropped as Wall Street grew frustrated with the company’s public relations and litigation fumbles. But Ford wised up in the late 1990s. The company spent $3 billion recalling tires on its vehicles, replaced hard-nosed CEO Jacques Nasser with (Ford scion) William Clay Ford Jr., and settled tire-related litigation quickly. Ford’s aggressive legal strategy wasn’t solely to blame for its troubles. But Meyers reminds general counsel: “When lawyers take over the business decisions, their petulance and arrogance can pull a corporation into an untenable position.” OBSTINACY One look at Arthur Andersen LLP’s recent behavior suggests that heedless stubbornness can be a serious failing. Despite evidence that destruction of documents relating to its client, Enron Corp., was widespread within the accounting firm, Andersen held fast to public denials that it knowingly obstructed justice; it also obstinately refused to see that it might end up in court. Although facts are still being gathered, it appears that Andersen’s GC, Andrew Pincus, allowed opportunities for negotiation with federal prosecutors to slip away. Eventually all that remained was a stark choice between the hara-kiri of pleading guilty or the Russian roulette of going to court. Federal prosecutors, outraged at what they saw as Andersen’s thwarting of a government investigation, put their indictment in fast-forward this winter. Their March 14 deadline passed without a guilty plea from Andersen, and at press time, U.S. v. Andersen was in full swing. How did such an established company end up in the dock? The unfortunate Pincus is relatively new to his job, having come to Andersen little over a year ago from the U.S. Department of Commerce, where he was GC. While possible shortcomings in the company’s self-policing and compliance programs can’t be laid at his doorstep, Andersen’s law department must shoulder some responsibility for the company’s predicament. Pincus declined to speak with Corporate Counsel, but Andersen spokesman David Talbot says that company lawyers notified the government about the destruction of Enron-related documents as soon as Andersen confirmed it. “This was a self-reported crime,” says Talbot. Company lawyers cooperated with investigators, turning over thousands of documents to the Securities and Exchange Commission, he adds. But Andersen’s lawyers missed chances to head off the indictment, say many observers. “It’s clear that a number of opportunities were lost, largely through inaction,” says Stephen Meagher, a partner in the San Francisco office of Phillips & Cohen who specializes in representing whistleblowers. Meagher speculates that Pincus and his colleagues either didn’t realize the high likelihood of indictment or couldn’t convince senior management of it. According to Benito Romano, a partner with Willkie Farr & Gallagher in New York and a former federal prosecutor, convincing management that an indictment is imminent is tough. “I can see why the client might have had difficulty seeing the firm was at risk — I can’t think of another accounting firm that was faced with this,” he says. Andersen also failed to pay attention to public perceptions. “It wasn’t only the legal difficulties; it was the public relations aftershocks that undid Andersen,” says Charles Wolfram, professor emeritus of legal ethics at Cornell Law School. “I can’t imagine being a general counsel without being terribly sensitive to public relations.” SLOTH While Pincus reeled from the indictment on March 14, Enron’s former GC, James Derrick Jr., was having an equally bad day. Derrick, who had retired just two weeks earlier, was in Washington, D.C., facing a congressional committee. “You were the company’s lawyer,” the representatives said again and again. “What did you think?” More apt, however, is the question of what Derrick did. According to theologians, sloth is a failure to act vigorously on important issues. There are many GCs whose behavior could, at one time or another, be termed slothful or, to put it kindly, inattentive. At the moment, however, Derrick comes to mind first. For instance, Derrick turned to Enron’s entrenched outside counsel (and also his former firm) Houston’s Vinson & Elkins instead of hiring more disinterested lawyers to investigate a letter sent by Enron Vice President Sherron Watkins to Enron Chief Executive Officer Kenneth Lay in August. The missive warned that the company could “implode in a wave of accounting scandals” and that the Houston-based energy behemoth should find a law firm other than Vinson & Elkins to investigate her concerns. Some legal experts defend Derrick’s decision to ask Vinson & Elkins to look into the charges. “Sometimes it’s very important to get to the bottom of an allegation quickly,” says Willkie Farr’s Romano. But, he adds, “when a company has a long-standing relationship with a principal outside firm, there’s always a question whether they’re able to give thoroughly independent advice.” Susan Koniak, professor of legal ethics at Boston University School of Law, takes a sterner view. “I don’t think they should have hired V&E,” she says. “If they were serious about finding out about Watkins’ allegations, they would have been better off finding a law firm that would not have to criticize its own work.” She also faults the limits that Vinson & Elkins claims Enron put on the inquiry. “When you limit the investigation, you’re not looking for the truth.” Derrick declined, through his lawyer, J. Clifford Gunter III at Houston’s Bracewell & Patterson, to respond to questions for this story. But Gunter says that before retaining Vinson & Elkins, Derrick specifically queried the firm on its ability to supply objective counsel. “They were asked if they could give independent advice, and they said yes,” Gunter says. He also says that Derrick’s job, at the top of a decentralized, 254-lawyer department, required lots of delegation. The former top legal officer concentrated on major company issues, not day-to-day operations, which were overseen by the general counsel of each operating division, says Gunter. They reported directly to the chief operating officers — and only indirectly to Derrick. AGGRESSION Used wisely, anger is one of a lawyer’s best tools. But excessive aggression is an occupational hazard, especially among litigators. Take the case of David Simon, the former chief legal officer at Aetna U.S. Healthcare Inc. An ex-litigator, Simon joined Bluebell, Pa.-based health maintenance organization U.S. Healthcare in 1990 as general counsel. When Hartford’s Aetna Inc. bought the HMO in the mid-1990s, the combined company adopted the uncompromising litigation strategy Simon had devised. One case in particular, Goodrich v. Aetna, dealt a stinging blow to the health care company’s reputation which, in turn, contributed to its poor financial performance and declining stock price. The suit involved the late David Goodrich, a well-respected California attorney. Aetna U.S. Healthcare refused to cover some treatments for his stomach cancer, arguing they were experimental. Goodrich’s widow brought suit in 1996. Plaintiffs’ counsel Michael Bidart, a partner at Claremont, Calif.’s Shernoff Bidart & Darras, says that Simon never offered more than $1.2 million to settle. A jury decided Goodrich’s pain was worth $120 million. After the verdict, both Aetna CEO Richard Huber and Simon were quoted publicly attributing the decision to the jury’s emotionalism. The huge punitive damage award was the result of a “skillful ambulance-chasing lawyer, a politically motivated judge, and a weeping widow,” said Huber. While hardly a crime, the comments hurt the company’s reputation. (The case was settled for an undisclosed amount in 2001.) “Simon was Aetna’s chief lawyer, and that’s an attitude that’s set in the GC’s office and filters out to the field,” says William Sweeney, past president of the Connecticut Trial Lawyers Association, which represented consumers opposed to the Aetna-U.S. Healthcare merger. This combative image was reinforced less than a week after the Goodrich verdict, when a federal jury found Aetna U.S. Healthcare had violated antitrust and racketeering laws, and awarded $1.85 million to Brokerage Concepts Insurance. Managed care consultant BCI claimed that the HMO used illegal tactics to muscle it out of a health care consulting contract with a Pennsylvania company. First filed in 1995, the suit was initially reversed on appeal but upheld at retrial. BCI President Arnold Katz said in a press release that the entire matter could have been “settled six years ago with a simple letter of apology.” It wasn’t just insensitive comments by company executives and big jury verdicts that gave Aetna a bad rap. The HMO was cited by regulators in Texas and Florida for physician contracts that violated state law. And in May 1999, E. Ratcliffe Anderson Jr., CEO of the American Medical Association, singled out Aetna in testimony before a House committee considering HMO legislation. “The AMA believes that Aetna seeks to both maximize profits and dominate markets,” he said. “In pursuing this strategy, Aetna has developed a reputation among physicians for heavy-handed contracting practices [and] has also been openly criticized for unfair … conduct.” By the close of the 1990s, and under pressure from more suits, Aetna decided to take a more conciliatory tack. Consumer backlash against HMOs and heavy debt had taken a toll on the company. By 2000 its earnings had dropped to the lowest level in 20 years; its share price had plunged 60 percent since August 1997. To his credit, Simon negotiated a landmark settlement of a complex suit by the state of Texas against HMOs in April 2000. But it was too late. In May 2000, Simon left the company. (Aetna declined to comment for this story and would not discuss the reasons for Simon’s departure. Simon could not be reached for comment.) In the spring of 2000, L. Edward Shaw Jr., Simon’s replacement, promised a mellower approach. According to plaintiffs’ attorney Bidart, there’s been a “public change of philosophy” at Aetna. “The company has undertaken a considerable effort to try to change the public perception of its take-no-prisoners attitude,” he says. GREED Many former dot-com GCs are now chastising themselves — if not for greed, then at least for poor judgment. Hundreds left stable old-economy jobs to chase early millions, only to find themselves unemployed. Although ambition is typically a virtue, left unchecked, it can lead a hungry executive into trouble. That may be what happened to Justin Macedonia. He graduated from Harvard Law School and went to work at Pillsbury Madison. Like many others, he then threw off his law firm traces. In 1999 Macedonia became senior vice president and general counsel at New York-headquartered Internet service provider StarMedia Network Inc. A sizzlingly hot property in the late 1990s, it was hailed as the ISP solution for Latin America. Macedonia seemed to have it made. In 2000, he earned a salary of $223,750 and a bonus of $115,000 — plus options valued at $2.5 million. (In 2000 he realized $1.1 million by exercising a chunk of these options.) His employment contract guaranteed automatic salary increases of 10 percent a year and at least a $75,000 bonus, according to the company’s SEC filings. Macedonia also got a $1.3 million personal line of credit that came with the promise that half the debt would be forgiven if he were fired. Then the bottom fell out of the dot-com market in 2000. Hundreds of associates who had ventured out of law firms and rushed headfirst into Webland were filling out unemployment forms or hoping to return to their jobs at large, stable firms. Many regretted not doing better due diligence on their dot-com employers before joining up. StarMedia also saw its fortunes turn. The CEO stepped down in August 2001, after the company’s stock plunged and Latin American competitors made inroads on its markets. Last November the ISP announced that it would restate earnings for the past 18 months and investigate accounting practices at its Mexican subsidiaries. The press release also noted that the CFO had resigned and that Macedonia had been terminated. Michael Hartman, who joined StarMedia in July 2000 as assistant GC, took Macedonia’s spot. What went wrong? Neither Macedonia nor his lawyer would comment because the ex-GC is involved in arbitration against the company. According to a StarMedia 8K statement filed in November 2001, the ISP “intends to vigorously defend against” Macedonia’s claim that StarMedia owes him money. It has also pursued “counterclaims” against him. PRIDE Microsoft Corp. tends to believe that what’s good for it is also good for America. Empires are built on this kind of immense, single-minded corporate confidence — but so are epic antitrust battles. Over the last five years, the software leader has defended itself against these anticompetitive charges in prolonged, costly and image-damaging litigation — and lost many crucial rounds. Some of the blame must fall on GC William Neukom (who is retiring this month). The founder and architect of Microsoft’s law department and its top lawyer since 1985, Neukom was an integral part of the Redmond, Wash., company’s management team. That’s certainly no sin. But he may have failed a critical test for any GC — gauging how your client’s reputation, legal tactics and business practices are being perceived by competitors, media and the court. When the federal government first filed antitrust charges against Microsoft in 1998, the company adopted a strategy of denying every allegation and refusing to settle. Microsoft Chairman Bill Gates’ arrogant videotaped deposition before U.S. District Judge Thomas Penfield Jackson was also widely excoriated. The high-handed approach backfired. The court ruled that the company was a monopolist, guilty of violating antitrust laws. After a federal appeals court narrowed the finding, Microsoft began to settle and now, four years later, an end to its troubles is finally in sight. Neukom was unavailable to speak with Corporate Counsel, but Microsoft spokesman James Desler disputes the widespread perception that the company was reluctant to settle. “We tried before trial and during trial,” he says. “Ultimately the state attorneys general would not let us.” Desler also defends Neukom by noting that when Gates’ deposition was videotaped, there was an order in place prohibiting it from being played in court. It was only the judge’s last-minute reversal that permitted parts of the tapes to be seen. Desler does concede: “There may have been a legal error in not anticipating that order would be reversed.” DUPLICITY Three years ago Wal-Mart Stores Inc. was slammed with the largest sanction for discovery abuse ever levied. A district court judge said the company had a policy of hiding evidence from plaintiffs and judges and withholding key documents. The Texas judge who hit Wal-Mart with $18 million for discovery abuse sanctions said that the company, under the watch of longtime GC Robert Rhoads, had a corporate policy of “deliberately thwarting, obfuscating, and obstructing the legitimate ends of the discovery process in litigation.” The sanction was dissolved when the case settled in 2001. The court nonetheless mandated a public courtroom apology from the retailer, which was given by Wal-Mart’s second-highest-ranking lawyer, Ron Williams. But as of last fall the Bentonville, Ark.-based chain was again cited for withholding similar evidence. The 1999 sanctions ruling was prompted by a case involving a woman who was abducted from a Wal-Mart parking lot in 1996 and raped. She sued, claiming that the company should have known that the lot was unsafe and tightened its security. Her lawyers asked Wal-Mart to hand over any relevant crime studies. But it wasn’t until one of her attorneys, Alto Watson III, an associate at the Law Offices of Gilbert T. Adams in Beaumont, Texas, read about another suit against Wal-Mart that he learned about a “survey” of store security the retailer conducted. It showed that the company had tracked crimes in 1,347 stores and found that 80 percent of them occurred in store parking lots. And a pilot study of improved security measures showed that crime would drop significantly if those procedures were implemented. Watson also turned up a number of other cases in which Wal-Mart had denied the existence of those studies. “They told an absolute lie in discovery — and told the exact same lie all over the country,” says Watson. He says plaintiffs generally lost cases in which the studies were withheld. Watson filed a class action suit, charging the company with “nationwide fraud and conspiracy” in premises security cases. Rhoads declined to answer questions for this story. But the company has since hired a lawyer to coordinate discovery efforts and doubled the size of its legal staff. Cornell’s Wolfram deems Wal-Mart’s actions “very significant moral failings.” He adds: “You just don’t ignore procedural requirements.”

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