The Privatization of Public Schools May Make Transparency Impossible, Due to the Changing of Corporate Legal Practices
Today, the investigating lawyer essentially acts as a fact-finder with a badge -- the newest (and highest-paid) government agent. Just asking: would a lawyer paid by and investigating a government agency reveal wrongdoing as readily as an independently paid investigator?
The American Lawyer
In 2001 an anonymous letter arrived at the Securities and Exchange Commission. The letter raised questions about accounting practices at Symbol Technologies Inc. and cited two fraudulent transactions. Those transactions, the letter alleged, were "just the tip of the iceberg of how Symbol management continues to manipulate and improperly handle their business accounting."
The SEC notified Symbol, which quickly asked one of its regular outside firms, Clifford Chance, to conduct an internal investigation. But when the firm reported its findings, the government wasn't satisfied. "We told the company they needed to do better," says George Stepaniuk, an assistant regional director for the SEC's Northeast regional office.
Not long after that meeting in the spring of 2002, Symbol's general counsel, Leonard Goldner, with the approval of the audit committee, retained Andrew Levander, then of Swidler Berlin Shereff Friedman (he's now a partner at Dechert). Though Swidler had no longstanding relationship with the company, Goldner and Levander had been partners before Goldner went in-house. And Levander, a former federal prosecutor, had plenty of experience with internal investigations ranging from uncovering lies made by Datascope Corp. to the Food and Drug Administration to unraveling a basketball point shaving scandal at Tulane University.
So he wasn't surprised when he encountered resistance at Symbol. A handful of employees allegedly hid key documents and encouraged others to stonewall his probe -- just as they had with Clifford Chance.
But the two investigations had one crucial difference: Levander ferreted out the alleged obstructionists and asked the company's board of directors to fire them. "I always feel discomfort [about firing people]," says Levander. "But you do what you have to do." (Lawyers from Clifford Chance declined to comment on their investigation. A firm spokesperson noted that Clifford Chance's investigation, which was conducted before Sarbanes-Oxley passed, was limited to responding to the allegations made in the anonymous letter to the SEC. He also noted that, as alleged by the government, former Symbol executives misled and lied to Clifford Chance.)
In the Symbol case, Levander found himself serving several masters. Symbol's board was Levander's client. But the SEC and federal prosecutors from New York's Eastern District, who were running a parallel criminal investigation, were just as interested in his findings. "I was told by the SEC I had better do a better job, or they would be taking testimony from employees for the next two years," Levander says. After two months of negotiating, Symbol agreed to share Levander's finding with the feds.
The move paid off for his client. Since Levander's 18-month investigation concluded last year, six Symbol executives, including general counsel Goldner, Levander's former partner, have pleaded guilty to charges arising from the investigation into accounting fraud. Six other Symbol executives are to stand trial in July on charges they engaged in fraudulent practices that inflated reports of Symbol's revenue by more than $200 million over three years. As a result of the company's effective investigation and cooperation, the U.S. Attorney's Office announced last June that it would not charge Symbol with criminal wrongdoing.
In many ways, the Symbol case typifies the new era of corporate criminal investigations -- and the fundamental shifts that are taking place in the corporate defense practice. While working to uncover wrongdoing, the investigating lawyer used to present a united front on behalf of both the corporation and its employees. The lawyer jousted with the government and sought to limit the flow of information. Today, the investigating lawyer essentially acts as a fact-finder with a badge -- the newest (and highest-paid) government agent. He (or she) conducts hundreds of interviews, scans company computers for damaging e-mails, rummages through the CFO's wastebasket, and then hands potential evidence over to the government.
This work can form the spine of an indictment. For example, last year during a hearing in the case against former WorldCom Inc. CEO Bernard Ebbers, his lawyers asked prosecutors from the Southern District of New York to provide more details about the charges against their client. David Anders, an Assistant U.S. Attorney, referred them to the internal investigation report done by the firm now known as Wilmer Cutler Pickering Hale and Dorr. "[The defense attorneys] don't need to search through all of the discovery," said Anders, "because they have a road map, literally, [of] the charges here through the Wilmer report."
And prosecutors continue to push the boundaries. Last year prosecutors in the Eastern District of New York charged the former CEO of Computer Associates International with, among other things, obstruction of justice for lying to the company's attorneys from Wachtell, Lipton, Rosen & Katz who were investigating the company. In other cases, prosecutors have called internal investigators to testify as government witnesses.
This shift in roles has been in motion since at least the early 1990s, when companies under investigation regularly began waiving the attorney-client privilege in order to avoid prosecution. The practice has accelerated since the Enron Corp. scandal. The effect has pitted company against individual. To avoid prosecution -- and a prolonged drag on share prices -- companies now readily waive the privilege as a way of distancing themselves from any officer or employee under suspicion of wrongdoing. That suits the government, which is often more than willing to trade a corporation's immunity for individual scalps.
Market and regulatory skepticism toward corporate America has fueled the demand for internal investigations. Just 36 days after WorldCom announced it would restate earnings by $3.8 billion in June 2002, President George Bush signed the sweeping Sarbanes-Oxley Act. The legislation assigned more liability for the company's well-being to the board of directors. Now, any whiff of wrongdoing can compel nervous board members to call in their own private prosecutor. This is more than paranoia or window-dressing: In January, 10 former WorldCom board members agreed to pay $18 million out of their own pockets to settle a shareholder suit.
Most internal investigations remain private or at least out of the headlines. But it has become a booming practice area for many law firms. New York Attorney General Eliot Spitzer's investigation of the insurance industry is one of the latest events to set off internal probes. Levander, among others, has been hired to work on one. Anxious corporate boards like to hire former prosecutors like Levander, counting on their reputations with law enforcement agencies. It's a competitive field. Dozens of Am Law 200 firms market internal investigations on their menu of services. That's why it helps to have a star on board like Mary Jo White at Debevoise & Plimpton, Dan Webb at Winston & Strawn, or Robert Fiske Jr. at Davis Polk & Wardwell. All are former U.S. Attorneys.
The first call for help often goes to William McLucas at Wilmer. The former SEC enforcement chief has brought in two of the biggest internal investigations for his firm. In documenting the affaires Enron and WorldCom, Wilmer billed $3.88 million and $12.32 million, respectively.
These investigations can strain regular client-outside counsel relations. They're expensive, and they can expose a company's business practices to inquiry. Because parts of an investigation can end up in the government's hands, lawyers interviewing company employees are required to give what are known as Upjohn warnings, named after a 1981 U.S. Supreme Court case. Counsel must advise individuals that they represent the corporation, not them; that the privilege of the interview belongs to the company; and that the company could decide to waive the privilege in the future. Skadden, Arps, Slate, Meagher & Flom partner David Zornow says that in many cases today it's a "foregone conclusion that the company will turn over materials to the government."
Sometimes those warnings are not so well received. "Internal investigations can be a diplomatic challenge," says Sharon Nelles, a partner at Sullivan & Cromwell. "Investigating employees and officers of your clients can put you in the difficult position of walking into the room, giving them Upjohn warnings, asking hard questions, and proceeding to go through their drawers and walk away with their papers."
Those situations can be made easier when a firm with no ties to the company is conducting the investigation. It can also eliminate conflict-of-interest questions. Some lawyers say the emphasis on independence is a legacy of Vinson & Elkins' inadequate investigation of its longtime client Enron. "I'm not saying that in the past the inquiries were done with a wink and a nod," says Wilmer's McLucas. "I just don't think [that in the past] you have had the market and regulatory skepticism that now means if there are problems, there may be risk for everyone. It has to be a credible process."
The government -- the real prosecutors -- can be very demanding. For instance, in the Symbol case, the government clearly expected an aggressive inquiry and was disappointed by the results Clifford Chance presented. "How and why Swidler was able to find things that Clifford Chance was not able to find out is not something I can comment on," says Stepaniuk of the SEC.
From the beginning of its probe, Clifford Chance had told the SEC that Symbol was committed to full cooperation. As part of that effort, the company designated its senior vice president of finance, Michael DeGennaro, to act as a liaison between Clifford Chance and Symbol. DeGennaro, a certified public accountant, had formerly been an audit partner with Symbol's primary outside audit firm.
According to the SEC, the accountants helping Clifford Chance with its investigation wanted to review the 10 largest invoices the company sent out in the fourth quarter of 2000. To identify those invoices, the accountants relied on DeGennaro. Their conclusion, which Clifford Chance presented to the SEC at a March 2002 meeting: No evidence of accounting fraud existed for that quarter.
But according to the SEC, that conclusion was skewed because DeGennaro had given the accountants an inaccurate list of invoices. Not long after that March meeting, the SEC made its displeasure clear, and Symbol hired Levander to conduct another investigation. Levander says that both the SEC and the U.S. Attorney's Office immediately asked the company to waive the attorney-client privilege. Levander was able to stall a decision for a couple of months while he got the lay of the land, though he says both offices kept pressing for the waiver. Ultimately, Symbol's board of directors decided to enter into an arrangement with the government in which both sides agreed to share information related to their investigations. To protect itself from third-party litigants, Levander says, Symbol asked the government to sign a confidentiality agreement in which the government would not consider any information it received as a waiver of the attorney-client and work-product privilege. The government would get what it wanted -- access to the findings of the investigation -- while Symbol would theoretically be able to keep those findings privileged.
Levander's inquiry into Symbol's accounting didn't get far in its first few months. A handful of employees were allegedly doctoring documents, delaying access to databases, and holding back information. After conducting dozens of interviews, Levander identified DeGennaro as one of the ringleaders ordering the obstruction. So, in September 2002, Levander asked the board to fire him. (DeGennaro's lawyer, Michael Sommer at McDermott Will & Emery, says his client "worked diligently and professionally" to assist both investigations. Sommer also says that "the notion that [DeGennaro] was secretly undermining those investigations is silly.")
After DeGennaro was dismissed, Levander's investigation began to make progress. As promised, Symbol cooperated fully and gave the government practically everything but the keys to company headquarters in Holtsville, N.Y. Throughout Levander's investigation, Symbol shared the substance of hundreds of interviews with current and former employees and customers, made witnesses available, and handed over more than a half-million pages of company documents and hundreds of thousands of restored e-mail and voicemail messages.
Could the SEC and the U.S. Attorney's Office have achieved the same results without Levander's investigation? Maybe. But it likely would have taken government investigators several additional months, if not years, to obtain the same information. Still, like many lawyers who do these investigations, Levander would rather not be looked at as a government agent. For one thing, that title wouldn't go over well with most clients. He does acknowledge, though, that this is far from normal defense work. "I like to think I do it in a fair way," he says. "But clearly [it's] a different role."
While the emphasis -- and consequences -- have changed, corporations have been investigating themselves and reporting the results to the government for decades. After the Watergate scandal exposed companies making illegal campaign contributions, the SEC began an inquiry into corporate slush funds. That inquiry later expanded to a broader investigation of payments made to bribe foreign and domestic officials.
Limited government resources became an issue. Stanley Sporkin (a former federal judge and now a partner at Weil, Gotshal & Manges), who ran the probe as head of SEC enforcement, says that about 65 companies were initially charged with securities violations. More might have been charged, but Sporkin's staff wasn't big enough to investigate and sue every company under suspicion.
So Sporkin started a voluntary disclosure program. It allowed companies to avoid penalty by conducting their own investigations. The SEC didn't promise anything in return, but if it deemed an investigation's quality to be satisfactory, the company could make a disclosure and avoid charges.
The idea was risky. If the investigations turned out to be whitewashes, Sporkin would have looked like a fool. One of the first companies to come forward was Gulf Oil Corp. Sporkin remembers explaining his predicament to the company's lawyers, including John McCloy of Milbank, Tweed, Hadley & McCloy.
"I said, 'My neck is on the line if this doesn't work,'" recalls Sporkin.
But according to Sporkin, the Gulf Oil report prepared by McCloy was "one of the greatest reports you could ever find." It detailed exactly how and who at the company orchestrated the illegal activities. Many other reports did the same. In total, Sporkin says, the voluntary program resulted in more than 650 companies conducting investigations and admitting wrongdoing.
Other government bodies later adopted the same idea. The U.S. Department of Defense started a program in the 1980s that encouraged defense contractors to report fraud. In the early 1990s the U.S. Department of Justice antitrust division revised a corporate leniency program that gave incentives to companies to disclose violations and cooperate with the government.
But it was not always in the company's interest to divulge the contents of their internal investigations. And it certainly wasn't always expected that a company would share them with the government. Robert Bennett at Skadden Arps has been probing troubled clients for more than 30 years. But until the mid-to-late 1990s, his investigations were usually for the company's eyes only. They weren't often seen or judged by prosecutors or regulators. "When you were doing an internal investigation, you fought hard not to disclose it [to the government]," says Bennett.
Today lawyers operate under the premise that their internal investigation findings will be turned over to the government. Prosecutors in the Southern District of New York have helped lead this change. In the 1990s one new factor they considered when weighing the adequacy of a company's cooperation was its willingness to waive the corporation's attorney-client privilege. By 1999, the Department of Justice adopted that principle in the Holder memo, named after then-deputy attorney general Eric Holder Jr. The so-called Thompson memo (named after former deputy attorney general Larry Thompson), written in 2003, reinforced those ideas.
The memos have rankled the defense bar. While the Thompson memo states clearly that prosecutors should not require a waiver when deciding whether to prosecute a company, defense lawyers complain that it has become a requirement in reality.
Defense lawyers also point to the federal sentencing guidelines and the SEC's model guidelines for cooperation as tools that prosecutors and regulators have used to obtain privileged materials. If privileged materials are routinely passed to the government, they argue, the flow of information at companies could slow down. That could impede the effectiveness of any investigation, which would prevent shareholders from learning critical information about the company. "You want company officers and directors to talk to their outside and inside lawyers," explains Mary Jo White, former U.S. Attorney for the Southern District of New York. "If what becomes the rule of the road -- that everything you say will be turned over to the government -- that will chill communications."
Prosecutors and regulators don't see cause for concern. David Kelley, U.S. Attorney for the Southern District of New York, professes to strongly believe in the sanctity of the attorney-client privilege, and says the private bar's worries about it being waived are overblown. Kelley maintains that his office rarely asks a company to waive its attorney-client privilege. His prosecutors are like Joe Friday, he says: just interested in the facts. And the disclosure of those facts ultimately helps shareholders. "Companies are saying that the government has to stay out of these things," he says. "Our goal is good corporate governance. We wouldn't be there if we didn't need to be there."
To "be there," though, the government needs help. In a speech last September, SEC enforcement director Cutler acknowledged his agency's resource deficit. "While we've been the beneficiaries of significant budget increases in the last three years," he said, "we're still quite small when you consider the breadth of our 'beat'-- more than 12,000 public companies, 7,200 broker-dealers, 8,200 investment advisers and 35,000 mutual funds."
So prosecutors and regulators increasingly rely on the defense bar. Last year, for example, the SEC's investigation of possible accounting improprieties at Royal Ahold N.V. would have been a lot tougher, if not impossible, without the help of Wilmer. Royal Ahold voluntarily expanded its own internal probe from the United States to 17 operating companies in 10 countries and arranged for staff to be interviewed by the SEC in the United States and abroad. Wilmer devoted more than 50 lawyers to the task. Morvillo, Abramowitz, Grand, Iason & Silberberg also worked on the investigation in the United States. In October the SEC announced that it would not seek civil penalties from the company, partly because of Ahold's extensive internal investigation and cooperation.
Internal investigators don't just gather evidence for the government. Sometimes they have to testify, too. "A lot of us are uneasy about that prospect," says Kirby Behre, a white-collar criminal defense lawyer at Paul, Hastings, Janofsky & Walker.
And with good reason. Consider the attack on David Boies during the closing remarks of Mark Swartz's criminal trial. The former chief financial officer of Tyco International Ltd., Swartz was accused of abusing the company's loan program and stealing from the company through payments not approved by the board of directors. Tyco's board hired Boies to conduct an internal investigation into the company's accounting.
Swartz's lawyer, Charles Stillman of Stillman & Friedman, attempted to portray Boies as beholden to the company and the district attorney's office in Manhattan. In his closing argument, Stillman reminded the jury that Boies' firm, Boies, Schiller & Flexner, had collected $30 million in legal fees from Tyco over a 19-month period (for work in the investigation and for representing Tyco in civil litigation against Swartz and the former CEO, Dennis Kozlowski).
Boies had testified that his firm had regularly consulted with prosecutors about the case, and Stillman implored the jury to question the reliability of Boies' statements. "Ask yourselves in light of that testimony whether Mr. Boies has a bias," said Stillman before the prosecution objected. "I would suggest it's almost as if the district attorney called one of its prosecutors sitting at their table to the stand to refute Mark Swartz's testimony." (Boies did not return two messages to his office.)
Robert Jossen also learned what it's like to take the stand. When the former general counsel of Rite Aid Corp., Franklin Brown, was on trial for allegedly conspiring to manipulate earnings at Rite Aid, Jossen was called as a witness for the prosecution. Jossen, then at Swidler Berlin and now a partner at Dechert, had been hired by Rite Aid's audit committee in November 1999 to look into the company's financial statements. During the course of his investigation, he interviewed Brown and wrote a memo about the conversation. The memo was entered into evidence at trial.
Much of Jossen's testimony focused on what Brown had told him during that interview. But on cross-examination, Brown's lawyer, Reid Weingarten of Steptoe & Johnson, also spent time on the processes of Jossen's internal investigation, seemingly aiming to question its reliability. Jossen testified that he had not written down verbatim what Brown said in the interview, and that no court reporter or tape recorder had been used. He also stated that he and a colleague had collaborated to write the memo of the interview and that they did not share the contents with Brown.
Weingarten also asked Jossen to confirm that he was hired by the audit committee. At one point Weingarten asked Jossen if during his investigation he ever had concerns about being "viewed as new management's hatchet man." Jossen replied, "Absolutely not."
"No defense lawyer likes to do that," says Jossen about testifying as a prosecution witness. "It was not a pleasant experience. It was probably the least enjoyable experience I have had. But to some extent, when you sign on to do one of these, if the company decides it wants to cooperate with the government, that comes with the territory."
Where does the current status of investigations leave corporate officers? In need of their own counsel. Circling the wagons doesn't work anymore. In "Den of Thieves," an account of the insider trading scandals during the late 1980s, author James Stewart (an alumnus of The American Lawyer) reported that famed lawyer Edward Bennett Williams made an impassioned plea to James Dahl, one of Michael Milken's colleagues. Williams, who was already representing Milken in the government's investigation, wanted to be Dahl's lawyer, too. He told Dahl, "We'll beat these sons of bitches, but we have to remain on the inside of the tent pissing out."
That type of coordination on the defense side is now hard to find, and individuals bear a heavy burden in the current era of internal investigations. If an employee speaks to the company's lawyers, he or she risks having any statements turned over to the government. Employees who refuse to speak risk being fired and branded criminal. As the practice of internal investigations has matured, this dynamic has caused some concern in the defense bar. "If something bad happens, okay," says Charles Stillman. "But I think they should analyze their case. They should stand up [to the government]."
But sometimes it's just more effective to toss out the weakest -- or the most culpable -- and hope that their meat will satisfy the hunger of the proverbial wolves.
The Business Practice Law Center