callaw 2007 roundtable series - shearman & sterling/media/files/newsinsights... · tion....

Cal Law 2007 Roundtable SeriesADVERTISING SECTION

CHRISTINE JEGAN

MODERATOR: Let’s first lay out the land-scape. What’s the current regulatory climatefor inhouse attorneys?

MARTIN: Allow me to start with the usualdisclaimer: the comments I’m going to makehere today are my own and should not beattributed to my company. When you look atthe regulatory climate for inhouse counselsome features are newer and some are not.What's new is the idea of inhouse attorneysas corporate gatekeepers and failure in thatrole providing the basis for regulatory atten-tion. Consequently, what’s also new is the

regularity of private and governmental actionsagainst in-house counsel. But amidst all ofthe new attention given to inhouse counsel,there's an important principle that's not newand it sits at the heart of most of the actionsbrought against inhouse counsel: Theinhouse counsel’s client is the corporation.When inhouse attorneys do not act consis-tent with that obligation, they find themselvesas viable targets of lawsuits or other actions.

ROSE: Every two years, 400-plusCongressional incumbents and close to athird of the Senate return home to run for

Increasingly, general counsels’ advice and actions have resulted in their criminal prosecution.Gathered to discuss this issue were Walter F. Brown, Jr. chair of Orrick, Herrington &Sutcliffe's national white collar defense; Eugene Illovsky, managing partner of Morrison &

Foerster's Walnut Creek office and a member of the firm's securities litigation enforcement andwhite collar defense group; Patrick D. Robbins, a partner at Shearman & Sterling, LLP, who rep-resents companies, officers, and directors in corporate criminal and enforcement matters; MarkC. Holscher, a partner at Kirkland & Ellis, whose practice focuses on white collar criminaldefense and criminal and civil trials; Robert D. Rose, who heads Sheppard Mullin's white collarpractice group from the San Diego office; and Brian Martin, senior vice president and generalcounsel and corporate secretary of KLA-Tencor.

Criminalization Of Noncompliance:How Do GC’s Protect Their Companies and Themselves?

www.callaw.com Cal Law

reelection. Nothing plays as well with theconstituents than having put your name ona crime bill. As one example, the hysteriagenerated by pretexting at H-P has generat-ed a new federal crime for identity theft.Under consideration are new crimes for dis-aster fund fraud and stiffer penalties forwartime profiteering.

HOLSCHER: Inhouse lawyers are facingpotential investigations on garden-varietymail fraud, wire fraud, obstruction of justice.

The Department of Justice and SEC arereflecting a more populous view, which isanti-corporate. Major corporate criminal pros-ecutions now go deeper and wider. The DOJlooks at anybody in the company, includinginhouse counsel, as potential targets. Thisdoesn’t just apply to DOJ Washington. Thereare 93 U.S. Attorney's Offices across thecountry, they act independently, even moreso based upon what's been going on in thelast few months.

BROWN: It used to be that the U.S.Attorney's Office and the SEC conductedinvestigations. But we've seen this creeptowards companies being expected to playthe role of the government. It reached afevered pitch in the last year with the waveof stock options investigations and createda cottage industry of private investigatorsdoing the bidding of the government.

ROBBINS: Five years ago, the Presidentcalled every U.S. Attorney to Washington.The Administration had just formed theCorporate Fraud Task Force and decided toput more resources into prosecuting white

collar crime. Included within the discussionwas the perceived need to co-opt lawyers.The Administration concluded there weretwo ways to do that. One was to invade theprivilege as much as possible; the otherwas to create a deterrent for lawyers byprosecuting lawyers whoparticipate in corporatecrime. But it looks like a bill isgoing to pass in Congressprohibiting prosecutorsfrom asking for privilegewaivers. And although thegovernment has had somesignificant victories, it hashad some setbacks too.There were acquittals insome of the Enron prose-cutions and in other corpo-rate fraud cases broughtaround the country.

HOLSCHER: I would saythough, it’s a differentworld. We do juryresearch, and what itshows is jurors want toconvict senior executiveswhether they knew orbecause they should haveknown of criminal conduct.Then you poll potentialjurors on lawyers: theirview is that lawyers aregenerally complicit and dowhat the senior execs wantthem to do. It gets even worse when youstart polling jurors’ views of advice of coun-sel defenses.

ILLOVSKY: The inhouse lawyer has somany roles and wears so many hats, andeach one triggers a different kind of prob-lem and a complication of your job. You're abusiness adviser and a legal adviser;you're a manager of your department;you're the corporate secretary, which longago used to be, "Okay, I'll sign it," now it's"I signed it what did I do?" We see that inbackdating. You're a compliance officer,possibly; you could be a government affairsofficer; you may be a risk manager; youcould be an ethics officer, and now thanks

Brian MartinSenior Vice President and general counsel and Corporate secretaryKLA-Tencor

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“But amidst all of the new attentiongiven to in-house counsel, there's animportant principle that's not newand it sits at the heart of most of theactions brought against in-housecounsel: the in-house counsel’sclient is the corporation.”

— Brian Martin


to the SEC and the government, you're agatekeeper to the marketplace. You’re agovernment agent; you're an issue spotterunder insanely obscure federal criminalstatutes that you had no idea even existed;and you're got to learn how to be agumshoe; and an investigator. So takethat list, take it to your boss or the boardand explain to them why that next raise is

so deserved.

MODERATOR: Given this cli-mate, how does an inhouselawyer go about differentiat-ing between the ethical, theunethical, and illegal? Whatsignals should trigger furtherinquiry?

ROBBINS: Don't listen toany outside lawyer who says,‘That's how it's alwaysdone.’ No one could havepredicted two years agowhat happened with pretex-ting at Hewlett Packard. Youhave to look for what the gov-ernment calls the badges offraud: for concealment;efforts to constrain the circleof people who get to knowabout something; efforts tokeep something from theauditors, efforts to keepsomething from the board orthe audit committee -- thoseare strong red flags. Seekadvice from key constituen-cies. It is very hard for aprosecutor to make a case

on a lawyer who openly speaks with theaudit committee or auditors about anissue, because there's no concealment,there's no deception.

MARTIN: But it's difficult for inhousecounsel to identify the badges of fraud inaccounting, for example, if you're not anaccountant. The gatekeeper role has vastlyexpanded the subject matter that aninhouse counsel needs to master. The keyto this challenge is to harness your internalexpertise. For example, in the accountingarea, you must have very strong relation-

ships with those in your finance depart-ment, treasury, internal audit, controller,the audit committee. You should find some-

one who will have the patience to explainthings. An inhouse counsel simply cannotdefer on technical issues and rest on alack of knowledge.

HOLSCHER: You don’t want to be involvedin email traffic in which the email says,‘How are we going to present this toKPMG?’ ‘How are we going to pitch this tooutside accountants?’ The response is,"We don't pitch anything." There's also areal suspicion of the government whensenior management is involved on bothsides of any transaction. The governmentis particularly interested in trying to figureout if people are looking the other way.

ROSE: A lot of decision-making can be guid-ed by the answer to this simple question:Does this seem right or wrong? Would thispass the New York Times front page test?Is there somebody else I can talk to, whilestill preserving the privilege, that could giveme a second opinion?

ILLOVSKY: But trying to determinewhether something is illegal or unethical isa devilishly complicated task. You have todevelop an internal compliance program sothat employees in all parts of the organiza-tion are making the right decision in con-nection with that same imprecise, impossi-

Robert D. RoseSheppard, Mullin, Richter & Hampton, LLP

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“For a public corporation there

are so many different things that

can prompt an internal investiga-

tion. The issue may be not so

much should we do an internal

investigation, but how much of

an internal investigation do we

need to do and who should do

it.”

— Robert D. Rose



ble judgment as well. As we all know, theidea of good ethics has found its way intolaw and regulation such that under the sen-tencing guidelines now, it is expresslynoted that one of the reasons for having agood compliance program is to create onorganizational culture that promotes ethicaldecision-making.

ROBBINS: The most positive thing a GC cando is to create a direct line to the auditcommittee. The companies that get highmarks from the SEC for compliance havethe GC reporting directly to the audit com-

mittee, and not where the GC talks to theaudit committee a few times a year. Ifthat's the model, it's not going to work.

HOLSCHER: But I’d add the caveat that togo to the board on an issue is a majorevent and a major potential blow up at sig-nificant cost to you and your department ifyou are wrong.

BROWN: One of the few areas of compli-ance where you can get outside guidance isthe Foreign Corrupt Practices Act. For anycompany that has operations beyond theUnited States, there is a procedure at theDepartment of Justice Fraud Section whereyou can actually present a set of facts andthey will give you a nonbinding opinion.

MODERATOR: Let’s talk for a momentabout email.

HOLSCHER: We've all been involved in caseswhere there were people inhouse, eitherlawyers or non-lawyers, who felt they reallyneeded to shake up people to have them payattention to the problem and say, “Look, this

could be criminal.” If you have one takeawayfrom this discussion, don’t send that email totry to get attention to an issue that is unclearat the time. If you are going to raise an issue,do it in a nuanced, lawful way and don’t exag-gerate the problem. “I’m looking at thisissue, I have some questions, we should talkabout it."

ROSE: Here's the simplestpiece of advice I can offer:Knock off the use of emailfor anything and everythingthat people should say toeach other in person or overthe phone. It is simply tooeasy for a prosecutor toovercome a presumption ofinnocence by merely re-arranging emails.

HOLSCHER: Any time you'recarbon copied on an email,the prosecutors assume youhave read it, you agree with it,and unless you send some-thing in response, that is therecord. I call it conviction bycc or carbon copy. Everyoneat this table has sat downwith the U.S. Attorney andsaid, "Do you know that myclient receives 850 emailsevery three days and that hedidn’t read these emails?"The prosecutors respond,"Tell that to the jury."Make it known in your company that youdon't review carbon copies. Or if you get acc of something you don't like, you needto make sure you have sent back to some-one, "I don't have time to look at thistoday, I'm happy to talk to you, I don'tagree with your characterization, comesee me." In the Merrill Lynch/Enron bargecase, the head of investment banking ofMerrill Lynch was convicted at trial on oneemail. There were two other senior exec-utives who were convicted on the basis oftwo emails and fifteen minutes of conver-sations in their career. I've counseledfriends to set up their own private emailfor private discussions. Everyone mixestheir personal and professional emails,and there's always something that the

Mark C. HolscherKirkland & Ellis LLP

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“Any time you're carbon copied onan email, the prosecutors assumeyou have read it, you agree with it,and unless you send something inresponse, that is the record. I callit conviction by cc or carbon copy.”

— Mark C. Holscher

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government finds quite interesting that'sirrelevant that gets them excited.

MARTIN: Here’s a practical training tip:Start collecting from the press examples ofstupid emails and create a stupid email filefor training purposes. But there's a morefundamental point here. Many of your con-stituents believe that they are your clientsand that they have an attorney/client rela-

tionship when they walkinto your office and say,‘Hey I think we have aproblem.’ You need todisabuse them of thisidea.

MODERATOR: How doesan inhouse attorneydemonstrate to the gov-ernment that he or shehas engaged in sufficientdue diligence?

BROWN: There's ten-sion between acting inan alarmist fashion andcalling your outsidecounsel every time aproblem comes up anddoing the opposite andnot being proactiveenough. The relatedquestion, though, is howmuch are you going to beable to rely upon outsidecounsel, and to whatextent is the governmentgoing to try to argue thatat some point it becamepart of the problemrather then the solution?

HOLSCHER: In terms of sufficient due dili-gence, what I've often seen in these investi-gations is that the company doesn’t get clo-sure on an issue. Think about how a recordis left when somebody, for whatever reason,thinks there’s something going on that'swrong.

MODERATOR: When should general coun-sel or inhouse attorneys initiate an investi-gation? Who should the GC involve?

ROSE: For a public corporation there are somany different things that prompt an internalinvestigation. The issue may be not so much"should we do an internal investigation?" as"how much of an internal investigation do weneed to do and who should do it?" The keyis to identify what is the problem. Get your

hands around what's being alleged. You canalmost bet that, if you get into an investiga-tion and it goes on for any length of time,there's going to be a surprise---either some-thing that you didn't know when it began orsomething that wasn't alleged.

ROBBINS: The problem now is that publiccompanies have become reflexive inlaunching massive internal investigationsinvolving outside counsel. The investiga-tions cost millions of dollars and areextremely disruptive of morale. There'sroom for reason in choosing the level andintensity of the review, whether it's con-ducted by inside or outside counsel. If theinvestigation is going to be conducted byinside counsel, you do need to understandthe Upjohn warning, the way to questionpeople appropriately, and how to properlyobtain and preserve evidence.

BROWN: Your auditors may very well haveviews about how an investigation shouldhave been conducted. The questionbecomes when do you involve them in thedesign of the investigation. Auditors willtypically tell you, ‘We'll wait till it's finishedand then we'll give you our thoughts aboutit.’ Increasingly I've tried to involve theauditors at an early stage so there are nosurprises at the end.

“If you find yourself in the crosshairsof the government, and you have acompliance program that is nothingmore than something on a shelf, youare in much worse shape than if youhad no compliance program at all.”

— Walter F. Brown, Jr.


Walter F. Brown, Jr.Orrick, Herrington & Sutcliffe LLP

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HOLSCHER: I can't tell you how manytimes we are doing an internal investigationand someone refuses to be interviewed. Ilook at the employee handbook and thecompany didn’t have the employee sign thehandbook. Or the handbook doesn't havethe basic statement that you have an obli-gation to cooperate and make yourselfavailable for any internal investigation.

MARTIN: Moreover, the casebooks are fullof instances where inhouse counsel failedto provide someone whom they're inter-

viewing with what we call the corporateMiranda. This warning assures that theemployee understands the lawyer’s role inthe investigation and that the employee isnot the lawyer’s client. The Association ofCorporate Counsel has an info pack onconducting internal investigations, which isan outstanding resource.

HOLSCHER: If it's a senior executive who ispotentially implicated, there are a lot of rea-sons why in that situation you bring in an out-side lawyer. You also need to make sure thatif it's a significant investigation there's a viewthat the law firm is conducting the investiga-tion independently. If the firm knows the per-son being investigated, and if it’s a law firmthat does significant corporate work, you needto be careful. Just keep in mind the govern-ment is skeptical. I have tearfully declinedrepresentation from clients because my firmhas been lead outside counsel.

ROSE: You could look at the ThompsonMemorandum, the Principles of FederalProsecution, the Seaboard decision forlists of things to cover in your investigation.

MARTIN: To me oftentimes truly independ-ent is synonymous with massively expen-sive. How do I balance the need to investi-gate issues with management of thecosts?

ROSE: With a specific plan--what to go after, who to talkto, who'll do the talking, howit will be reported, and thenwhat will be the report backprocess—costs can be con-trolled. I always recommendthat there be stages alongthe way where they'll be aprogress or status report.

ROBBINS: A huge portion ofthe cost of an internal inves-tigation is collecting and pro-cessing electronic data.Lawyers are expensive too,but the trend is to hire anaudit firm that is not the reg-ular auditor, have it gather allthe data and restore backuptapes to create a huge data-base. That costs millions ofdollars. If you simply pre-serve as much of the dataas possible, but filter andprocess only what you ration-ally identify as key, you cansave money. You can go tothe SEC and explain, ‘Here'sthe huge universe we pre-served, here's how we approached the pro-cessing and review. We can always go backand process more if you want us to.’Typically they don't ask you to do that.

HOLSCHER: I’ve gone to the SEC and saidthese are the search terms we're using tolook at documents. With a grand jury sub-poena, it nicely says ‘Any and all recordsincluding but not limited to the following.’You can go back and say, ‘Here's whatwe're searching for, here's the searchterms we're using, here's the employees, ifthere's anything else you want to adjust, letus know.’ In most cases the U.S. Attorney'soffice and the SEC do not want these mas-sive searches.

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Patrick D. RobbinsShearman & Sterling LLP

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“Don't listen to any outside lawyerwho says, ‘That's how it's alwaysdone.’ No one could have predicted two years ago what happened with pretextingat Hewlett Packard.”

— Patrick D. Robbins

Cal Law 2007 Roundtable SeriesADVERTISING SECTION Criminalization Of Noncompliance:

How Do GC’s Protect Their Companies and Themselves?

ROBBINS: One comment about documentpreservation. The Supreme Court ruled 9-0in Arthur Andersen that destroying docu-ments pursuant to a valid document reten-tion program is not a crime. That's the goodnews. The bad news is Congress passed a

completely differentobstruction statute afterArthur Andersen but beforethe Supreme Court opinion,which is incredibly broadand still not tested. It saysif you destroy documentsand had in mind the possi-bility of an investigation thatmay not have started yet,you can be criminally prose-cuted. What that says to meis that it’s very important tohave not just a valid docu-ment retention program butone that's actually followed.

MODERATOR: How doesthe inhouse attorney goabout training upper man-agement so the companydoesn’t get in trouble inthe first place?

MARTIN: While trainingis important, perhapsmore important is thatinhouse counsel needsfirst to assure that theyare affiliated with compa-nies that possess a cul-ture of compliance. The

most effective way to avoid the ethicaldilemmas we fear is to go to work with acompany that will not place you in thosesituations. You need to talk to board

members, to the management team to geta sense about the culture.

HOLSCHER: Try to get the CEO, COO, oreven someone on the board to be theauthor of the memo that goes out asking

that the training be done. When it comesfrom the CEO, the message is sent that it'sa priority to make sure that we are in com-pliance.

BROWN: If the goal of this seminar todaywas to help you stay out of trouble, this isone of the most important areas for you allto think about. In the early '90s it becamevogue for companies to start enacting com-pliance programs in response to the corpo-rate sentencing guidelines. A lot of compa-nies put something in writing, set it on ashelf, and left it there. If you find yourself inthe crosshairs of the government, and youhave a compliance program that is nothingmore than something on a shelf, you are inmuch worse shape than if you had no com-pliance program at all.

ROBBINS: And the practical impact is yourcompany will pay a lower fine to the gov-ernment whether it's the SEC or DOJ,because you have a program that works.

Eugene IllovskyMorrison & Foerster LLP

“The inhouse lawyer has so many

roles and wears so many hats, and

each one triggers a different kind of

problem and a complication of your

job.”— Eugene Illovsky

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Caw 2007 Roundtable Series PANELISTS Cal Law

PATRICK D. ROBBINS is a partner with Shearman & Sterling LLP. He represents companies, officers and directors in corporate crim-inal and enforcement matters. From 1995 to 2004, Patrick was a federal prosecutor in San Francisco. While at the U.S. Attorney'sOffice, he served as Chief of the Securities Fraud Section and as a supervisor in the Enron Task Force. [email protected]

SHEARMAN & STERLING LLP is a global law firm with approximately 1,000 lawyers locatedin 19 offices around the world. The firm is a leader in mergers and acquisitions, capitalmarkets, project development and finance, complex business litigation and internationalarbitration, asset management and tax. www.shearman.com

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