Depend on it, Sir, when a man knows he is to be hanged … it concentrates his mind wonderfully. Attributed to Dr. Samuel Johnson 1777
This 18th Century gallows humor by Dr. Samuel Johnson helps explain the interest by corporate counsel in the SEC enforcement and criminal proceedings brought against their peers. The large attendance, spirited discussion and audience participation at the ACC Annual Meeting program, “Corporate Counsel Under Scrutiny: Liability for Corporate Misconduct,” further affirmed that interest.
The panelists, including John K. Villa, Al Gonzalez and Sven Holmes, discussed the types of actions brought by the SEC, why those actions were brought about, how best to protect oneself, and some general observations and useful takeaways. You can also watch the complete archived session, here. Set forth below, you will find some comments that I believe to be of particular value.
General observations:
1. There are not a large number of cases being brought against in-house counsel. When an action is brought by the SEC, it’s usually against the top lawyer. It is not a concerted action by the SEC to go after in-house counsel, but rather it is done with the hope that publicity will cause others to change their conduct.
2. Generally, the actions will fall into three “buckets”: options backdating, misconduct by the CEO, and financial misconduct.
3. The SEC is trying to spread the responsibility to people within the corporation who may deal with the problem.
4. In the civil cases, in-house counsel were charged, even though they received no personal benefit.
5. In criminal cases, in-house counsel were charged because they wore “two hats.”
6. A situation where the government indicates that it may bring a cause of action against the GC, and ultimately decides not to do so, is still bad news. The mere fact that there is a discussion about liability changes the dynamic of the situation for the corporation. No corporation wants its GC in the dock because it suggests serious infirmities and wrongdoing.
7. When the government focuses on the GC, it distorts the proceedings, affecting the corporate defense and privilege, raising possible conflicts, and causing the potential loss of knowledge by the company.
8. A government attack on the GC is a strategic effort to separate the company and its GC. It sends messages of deterrence to the GC community and assurance to the public that they will hold everyone liable.
9. Being investigated by the government could be an “unexpected career-ending development” and result in management’s loss of confidence.
Steps to protect yourself –When and how to best to report potential management/corporate misconduct to the board or the audit committee:
10. Never forget that you are the lawyer for the organization and not management.
11. You should have protocols in place about how to handle difficult situations to avoid ad hoc decision-making and being pressured to do nothing. So, the conversation will go like this: CEO: “I hope you are not going to make a big deal about these numbers.” GC: “I am following the process we established for these types of situations and will bring it to the board’s attention.”
12. Practical point: Before you bring something to the board’s attention that implicates senior management, find out if there is a reasonable explanation.
13. You cannot have different rules for senior management and the rest of the company.
Takeaways
14. When in a situation like this, look to the future and understand what failure to disclose might mean. When considering government filings and certifications, ask yourself — will you be able to make them?
15. Do not assume this is an isolated problem. Frequently receiving information like this it is only the tip of the iceberg.
16. Once you start asking questions, be prepared to follow through. You have seen a “red flag,” and the government will emphasize your failure to act.
17. A common, and perhaps the biggest mistake that you can make, is to allow your advocacy skills to overcome your counselor skills, finding reasons why it’s OK not to act.
18. Remember “hindsight bias” — in the future, you will be judged by what people know two years from now.
19. You should have transparency with the board and the audit committee. Develop a relationship with them before problems arise.
20. Do you have written protocols in place before problems arise? This will help you discuss difficult situations with management more dispassionately.
21. Rely on competent outside counsel. They can help you analyze the situation. (Also, this is a good defense; the government does not bring actions against inside lawyers who have relied on competent outside counsel.)
ACC has a wealth of materials that I encourage you to check out if you have further interest in this topic, here.