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Corporations cringe at the thought of hiring them, but internal investigation attorneys are becoming a dreaded necessity for a growing number of public companies, where suspected foul play can mean big pay for law firms that do the digging. WorldCom, Enron, Tyco and dozens of other public companies caught in prosecutors’ spotlights have all brought in law firms to root out alleged problems. Often hired by a corporation’s independent board members, investigating lawyers may be summoned at the first inkling of trouble or after the law comes knocking. But as demand is rising for this type of work, so are the complications in doing it. Although the presence of an investigation team — often dubbed “special counsel” — can assuage a government agency targeting a company for malfeasance, concern is rising that, in placating zealous regulators and prosecutors, the attorneys are forced to roll over too easily, sometimes to their client’s detriment. “It makes the advocate’s job more difficult than ever,” said Jonathan Polkes, a former federal prosecutor and now a partner at Cadwalader, Wickersham & Taft of New York doing corporate investigations. In addition, because a special counsel’s task is to uncover wrongdoing within a corporation, it frequently finds itself at odds with general counsel or some of the corporation’s executives. In short, there’s much money to be made in doing the work, but easy money it isn’t. Many of the top firms in the country have offered corporate internal investigation services for years, but recent government probes into corporate wrongdoing and changes in the law have stoked up their practices. For example, Wilmer Cutler Pickering Hale and Dorr helped probe Enron and WorldCom. New York’s Coudert Brothers investigated Global Crossing. Debevoise & Plimpton currently is investigating Ace Ltd., an insurer caught up in New York Attorney General Eliot Spitzer’s insurance bid-rigging investigation. Other big firms with corporate internal investigation teams include: White & Case; Davis Polk & Wardwell; Weil, Gotshal & Manges; and Paul, Weiss, Rifkind, Wharton & Garrison, all of New York. In addition, eight other law firms in the National Law Journal 250 reported new or enlarged corporate investigation practices. “It’s a huge increase for everyone,” said Mary Jo White, former U.S. Attorney for the Southern District of New York and now head of the litigation group at New York-based Debevoise & Plimpton. In the wake of the Sarbanes-Oxley Act, a public company’s independent directors who sit on its audit committee more often are doing the hiring of investigative attorneys, as opposed to a company’s general counsel. The idea is that an investigation at the behest of the independent directors, who are not employed by the company, will be more probing and meaningful. But increasing as well, White said, is pressure on investigating teams when playing ball with prosecutors. “The person who defines full cooperation is really the prosecutor,” White said. “You have to please your audience — to a point,” she said. And where that point lies is a cause for concern. Many attorneys who conduct internal investigations express dismay that prosecutors — Spitzer, in particular — have become too heavy-handed in the way they pursue cases against public companies. Internal investigators say that prosecutors demand that their clients waive the attorney-client privilege at the start of the law firm’s probe. Otherwise, they assert, settlements will stall. Spitzer’s office did not respond to repeated requests for comment. Richard Swanson, co-chairman of the corporate and securities litigation practice at Thelen Reid & Priest, said that internal investigation lawyers often lose their role as advocates for the company and instead become “deputized” to do the government’s own investigation. “The waiver of privilege was often negotiated as part of settlement process. That was at the end. Now it’s part of the ticket to get admitted to the game,” Swanson said. But Andrew Hruska, former attorney for the U.S. Department of Justice and now a Chief Assistant U.S. Attorney in the Eastern District of New York, said that it is not the policy of his office, which has prosecuted accounting cases against Computer Associates International Inc. and Symbol Technologies Inc., to demand waivers at the outset. “We try to be flexible and sensitive to the needs of companies in pursuing our investigation, but we are nonetheless determined to follow the facts and get at the truth,” Hruska said. But Cadwalader’s Polkes said that prosecutors not only look for a waiver up-front. They only reveal at the end of an investigation whether they consider a company’s cooperation sufficient. “Generally, you have to proceed in the good-faith hope that you will be given credit for your cooperation at the end, but there is no guarantee,” he said. Hruska, however, asserted that prosecutors do not have the power in negotiations to force a company to do anything. Hruska helped draft the so-called Thompson memorandum, a Department of Justice memo issued in 2003 by Deputy Attorney General Larry Thompson. It said that, in deciding whether to pursue criminal charges against a company, prosecutors should consider its cooperation with the government. Despite concerns of government overreaching by corporate-investigation lawyers, demonstrating cooperation to the prosecution and at the same time zealously advocating for the corporation are not mutually exclusive, Hruska said. “Clever and sophisticated counsel for companies can and do find ways to advise their clients and still produce information to the government, and not necessarily waive privilege,” he said. Appeasing the government and remaining a company’s advocate means that not all lawyers are cut out for the job of corporate investigator. Samuel Seymour, head of the criminal defense and investigations group at New York’s Sullivan & Cromwell, tells his clients that by conducting a complete and objective investigation, he is being the strongest advocate possible for the firm, even if the process is painful for a company. Still, it can feel counterintuitive, he said. “When big companies have problems, normal litigation instincts are not only not perfect, they’re 180 degrees off,” he said. His group has conducted internal investigations for Computer Associates, Riggs National Corp. and other public companies in trouble for alleged financial wrongdoing. The firm just added two former federal prosecutors in Manhattan to its corporate investigations practice: Karen Seymour, lead federal prosecutor in the Martha Stewart case and Samuel Seymour’s wife; and Steven Peikin, lead trial counsel in the obstruction case against former Credit Suisse First Boston investment banker Frank Quattrone. Challenges for internal investigation lawyers are not limited to their relationships with prosecutors. The advocacy issue is further muddied when different factions of a company begin to lawyer up. Not only will independent directors bring in investigating attorneys, but inside board members individually may hire their own attorneys. The company’s general counsel most likely has a long-running relationship with an outside firm, which may be involved as well. Often, these lawyers are at cross-purposes. In the Enron case, for example, after the Securities and Exchange Commission announced in 2001 that it was opening an investigation into the energy giant, the company announced that it would use Vinson & Elkins of Houston, outside counsel for Enron that routinely performed work for the company, to conduct an internal investigation. The firm found that Enron had generally adhered to accounting laws. But a subsequent internal investigation conducted by the firm then known as Wilmer Cutler & Pickering as special counsel found “a tragic consequence of related-party transactions and accounting errors,” and “self-enrichment,” according to the investigation report. Attorneys involved with a troubled company are most likely to butt heads when the investigation is expected to reveal that general counsel, and the outside counsel it hires, were not fulfilling their duties to the company. In theory, all attorneys involved — general counsel, outside counsel and special counsel — are on the same team because their loyalties are to preserve the value of the publicly held company. And although their differing roles may not equate to a conflict of interest in the legal sense, conflict can arise “in the practical sense,” said Thelen Reid’s Swanson. “If the new independent counsel takes a fresh look, the general counsel is concerned that their own judgments are going to be questioned,” he said. In Tyco’s case, the judgment of its former general counsel, Mark Belnick, was called into question after special counsel Boies, Schiller & Flexner conducted an internal investigation. David Boies later testified at Belnick’s trial for grand larceny and securities fraud, but Belnick was eventually acquitted of those charges. When an audit committee, without consulting with general counsel, independently chooses special counsel, the general counsel’s position is to “wall itself” off from the investigation, said Anastasia Kelly, a former internal investigator and now general counsel for MCI Inc. who was hired as part of MCI’s restructuring. That wall not only can make special counsel’s job more difficult, but it can also lead to enormous expense for the company and a vast duplication of efforts. It is not uncommon for troubled companies to conduct two simultaneous investigations, where general counsel, or a firm hired by general counsel, is looking for information, and special counsel is doing its own probe. Repeated investigations at Tyco reportedly cost that company as much as $100 million, and internal investigations in WorldCom prior to Kelly’s appointment reportedly cost the company $40 million. Frequently, employees may be questioned repeatedly by several different teams of lawyers all working for different factions within the corporation. The process can exact a toll on corporations already drained by bad news. But even with all the complications, the rewards, and not the just monetary ones, can be big for attorneys willing to deal with the challenges. “It’s a fabulous way to dive quickly into some very high-level stuff,” Kelly said.

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