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Steven Woghin is not a household name like Bernard Ebbers, Kenneth Lay and Richard Scrushy, the headline-grabbing CEOs in the government’s hunt for corporate wrongdoers. He was a general counsel — caught in the government’s expanding dragnet. Woghin, the former general counsel of Computer Associates, pleaded guilty to two counts of conspiracy to commit securities fraud and obstruction of justice in September. Since the wave of corporate scandals began in late 2001, in-house counsel have been the targets of increased government scrutiny, facing criminal and civil charges at a record pace. In the past three years, the commission has brought enforcement actions against 30 lawyers, most of them in-house attorneys. Part of the added scrutiny came from the Sarbanes-Oxley Act, which placed new obligations on general counsel, making them answerable as never before as executives of public companies. The increase is largely due to a policy shift at the U.S. Securities and Exchange Commission. In the SEC’s view, as “gatekeepers” of corporate information, in-house lawyers are in a position to stop fraud. That puts them squarely in the commission’s crosshairs, alongside top executives and directors. SCRUTINIZING GATEKEEPERS Last September, the SEC’s director of enforcement, Stephen Cutler gave a speech outlining the commission’s policy of targeting gatekeepers: auditors, lawyers and others who have not orchestrated but allowed or abetted frauds at public companies. “Consistent with Sarbanes-Oxley’s focus on the important role of lawyers as gatekeepers,” he said, “we have stepped up scrutiny of the role of lawyers in corporate frauds we investigate.” Section 307 of Sarbanes-Oxley, the primary provision of the act governing lawyers’ behavior, required in-house lawyers to act as watchdogs and report suspicious activities up the chain of command. “We have seen too many examples of lawyers who twisted themselves into pretzels to accommodate the wishes of company management and failed in their responsibility to insist that the company comply with the law,” Cutler said. “The SEC is very urgently looking for lawyers to make examples of,” said William Sherman, a securities lawyer in Morrison & Foerster’s Palo Alto, Calif., office. In other words, lawyers are fair game for prosecutors, reversing the commission’s long-held policy of avoiding actions against lawyers other than in egregious instances. “The commissioners no longer regard lawyers as a privileged class,” said Thomas Newkirk, a partner in Jenner & Block’s Washington, D.C., office who spent 19 years at the SEC as a senior member of the enforcement division. The commission’s shift occurred in the wake of Enron’s collapse. “This reluctance to charge accounting firms, as well as attorneys,” Cutler said in 2002, at the dawn of the new prosecutorial era, “may have had unintended consequence of holding both groups to a lower standard rather than to the high standard their special roles demand.” COMPUTER ASSOCIATES Computer Associates, a leading software developer based in Islandia, N.Y., ran into problems when it inflated earnings to meet growing expectations from investors and analysts. The company boosted revenue by wrongly booking contracts in fiscal quarters that had already expired, creating what became known as the “35-day month.” The company tapped Wachtell, Lipton, Rosen & Katz and Sullivan & Cromwell to conduct internal investigations and settled civil charges with the commission, paying $225 million to injured shareholders. Woghin, represented by Matthew Fishbein of Debevoise & Plimpton, was among several former executives charged with securities fraud and related actions brought by the U.S. Attorney’s Office in the Eastern District. The government accused him of overseeing the negotiation of contracts improperly recorded in previous quarters, directly contributing to the $1.75 billion revenue overstatement in 1999 and 2000. He faces a maximum sentence of 25 years in prison and a $500,000 fine. Other general counsel played far smaller roles in corporate wrongdoing but still faced punishment. Stanley Silverstein, the former head of the Warnaco Group’s law department, was accused in a civil action of wrongdoing. When making a revision to its past filings in 1999, New York-based Warnaco, which makes undergarments, explained the overstatement of its inventory arose from the adoption of new accounting standards. According to a SEC release, Warnaco’s outside auditor, Pricewaterhouse-Coopers, had instructed company executives not to blame the overstatement on a new accounting methodology during several meetings attended by Silverstein. Because of his attendance at these meetings, Silverstein knew of the misclassification made by Warnaco, and still approved erroneous public filings, the commission charged. In other words, he failed as a gatekeeper to stop the mischaracterization, though he played no role in masterminding or abetting the mischaracterization. In a settlement, Silverstein was censured by the commission and agreed to pay $165,772. Enforcement actions like these arise from “a sense by the SEC that everybody who is involved in corporate governance and disclosures … needs to be held accountable,” said David Becker, the former general counsel of the SEC, who is now at Cleary Gottlieb Steen & Hamilton’s Washington, D.C., office. The gatekeeping duty turns on the SEC’s belief that “people, not companies, commit fraud,” Sherman said. This puts responsibility on in-house counsel who, the SEC believes, are in position to stop fraud even if as lawyers they are advocates rather than independent overseers like outside auditors. LAWYERS’ CONCERNS This new role concerns many lawyers and bar associations. The SEC “views this as an effective way to enforce corporate behavior,” said Evan Stewart of Brown & Raysman Millstein Felder & Steiner — “by changing the role of lawyers.” “The so-called corporate Miranda warning has to be invoked when there is a potential issue,” Stewart said, referring to situations in which in-house lawyers warn executives who may want to discuss difficult, and legally suspicious, actions. Such a warning has the side effect of chilling free communications, many lawyers have said, straining open communications among lawyers and executives rather than encouraging forthright conversations that could help solve potential problems before they balloon.

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