by T. GormanPosted on Posted in SECActions

In her remarks at the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute held in Chicago earlier this month SEC Enforcement Chief Linda Thomsen revisited the obligations of corporate counsel and cooperation. www.sec.gov/news/speech/2007/spch0504071ct.htm

Ms. Thomson’s comments in part echo those of others such as the Report of the Task Force on the Lawyer’s Role in Corporate Governance issued late last year and those of former SEC Enforcement Chief and District Court Judge Stanley Sporkin in a case about the savings and loan debacle. Lincoln Sav. & Loan Ass’n v. Wall, 743 F. Supp. 901, 920 (D.D.C. 1990). The former chronicles the obligations of lawyers faced with corporate misconduct to give the correct advice which may not be what the client wants to hear. Frequently, as Ms. Thomsen notes that is a difficult task, but one which must be faced and handled correctly despite the strain it may put on the relationship. Judge Sporkin put it more succinctly buy simply asking (essentially) where the lawyers? His comments reference the fact that most transactions do not happen without the lawyers having a key role.

While Ms. Thomson’s call for “courage” on the part of corporate counsel is no doubt correct, her comments about “cooperation” echo a familiar theme while failing to recognize the fallacy of the SEC’s position. There is no doubt that under Seaboard cooperation is not conditioned on the waiver of the attorney client privilege as Ms. Thomson noted in her remarks. There a number of instances where companies have been given “cooperation” credit without waiver. However, avoiding prosecution is another matter. Typically, to avoid prosecution the company is going to have to waive privilege. Indeed, the example of cooperation cited in the Seaboard Release demonstrates this point – the company was not prosecuted in view of cooperation which included privilege waivers. Ms. Thomson reaffirmed this point in her speech last month as noted in our post of April 23, 2007.

Nobody doubts the fact that the SEC respects the proper assertion of the attorney client privilege and the work product doctrine. Over the years the SEC has taken steps to preserve those protections as Ms. Thomsen notes by proposing legislation on limited waiver and advocating “non-waiver” agreements in the courts. The other side to those efforts however is clear: each is predicated on the fact that the SEC is able to obtain privileged material. This fact can hardly be lost on any defense counsel considering cooperation as a possible course of action for a corporate client. Indeed, it is the SEC’s long history of seeking such material coupled with the pressure of a potential prosecution and the harm it can cause the company which precipitates the so-called “voluntary waiver” by the company. What Ms. Thomsen’s remarks and the SEC (and DOJ since the McNulty memo has the same problem) miss is the key point. In her comments Ms. Thomsen says that what the SEC wants is the facts, not the advise given (unless it is a defense in which case it must be produced). This thread runs through out Seaboard and the McNulty memo. That SEC enforcement attorneys and DOJ prosecutors want the fact should hardly be a surprise — Seaboard and McNulty are about making a prosecutorial charging decision which hinges on the facts.What is incongruous about all of this is that in most instances the facts are not privileged. The facts to the situation typically are not covered by the attorney client privilege or the work product doctrine. The former is limited in scope to the seeking/rendering of legal advise. The latter is equally limited being confined to the thoughts and metal impressions of counsel in anticipation of litigation. Production of the facts need not entail a waiver of either the attorney client privilege or the work product doctrine in most instances if these protections are properly asserted. If what the SEC wants is the facts the company should be willing to produce them — without any waivers. If what the SEC wants is the facts, it should be able to obtain them without any waivers. This of course puts a responsibility on both parties: the company must produce all the relevant facts to a matter and not seek to shield them from production with privilege assertions. On the other hand the SEC (and DOJ) should seek nothing but the facts absent the most compelling of circumstances. Where all the facts are produced the company has cooperated and the government has what it needs.

All of this suggests that government cooperation standards should focus on what the SEC and DOJ need — the facts. Companies that want to cooperate should give the government what it needs and receive appropriate cooperation credit. Conversely no cooperation credit should be given for what the government says it does not usually need –privileged material and waivers. To paraphrase a famous rock song: “the government should ask for what it needs, not what it thinks it wants.” You Can’t Always Get What You Want, M. Jagger & K. Richards, Let It Bleed, 1969 (“You can’t always get what you want, but if you try sometimes, you just might find you get what you need.”)

 

by T. GormanPosted on Posted in SECActions

Should there be anxiety in the boardroom concerning SEC enforcement?  Consider the following:

  • Traditionally the duties of directors have been a function of state law.  SOX changed that.  As SEC Commissioner Paul S. Atkins noted in a March 25, 2006 speech:  “Sarbanes-Oxley . . . represents. . . an unimaginable incursion of the U.S. federal government into the corporate governance arena.”

  • Gatekeepers such as corporate directors and lawyers continue to be a focus of the enforcement staff.  As Enforcement Chief Linda Thomsen noted a few months ago: “The Securities and Exchange Commission continue to look at so-called gatekeepers, such as lawyers and corporate directors . . “  Thomsen Says Lawyers, Directors Are Under SEC Enforcement’s Gaze, 38 Sec. Reg. & L. Rep. (BNA) No. 36, at 140 (Nov. 20, 2006).
  • Cases against directors have typically been based on intentional or reckless conduct.  Consider for example the complaint filed in SEC v. Collins & Aikman Corp., et al., Civil Action No. 1:07-CV-2419 (LAP)(S.D.N.Y. March 26, 2007).  That action was brought against the company, its CEO David A. Stockman and eight other former directors and officers.  The complaint alleged a financial fraud to inflate the reported income of the company. 
  • Consider also Hollinger International.  There a criminal prosecution of former Hollinger International chairman Conrad Black, who is defending criminal charges from over $60 million taken from the company with board approval is in progress.  The SEC enforcement staff issued a Wells Notice to the Hollinger audit committee noting its intent to recommend an enforcement action against each of the directors.  The crux of the case may have been summarized by former Illinois governor and Hollinger International audit committee member Jim Thompson who testified for the government at Mr. Black’s trial noting that while he only skimmed the disclosure documents for the company he read “every word” of the Wells notice.

  • Traditionally the SEC has brought actions against another gatekeeper group – attorneys – based on intentional conduct.  However in In re Weiss  a negligence standard was used.  Initially an administrative proceeding was brought against attorney Weiss for issuing an opinion stating that the interest on bonds in an offering were tax exempt which the IRS later said was wrong.  The administrative proceeding brought based on claimed violations of Securities Act, Section 17(a) and Exchange Act Section 10(b) was dismissed by the ALJ after a hearing.  On appeal the Commission reversed, finding Mr.Weiss liable under Section 17(a)(2) &(3). www.sec.gov/litigation/adjdec/ed.275/adm.htm. (Feb. 25, 2005).

    • After Weiss  directors must wonder if the standards of liability are shifting.   This is a particularly important question moving forward as the SEC considers what to do with its 140 back dated options cases and its insider trading campaign.  Directors could be key targets in each area.

  • Directors of course are typically involved in the option issuance process.  In discussing the potential liability of directors  SEC Commissioner Roel Campos cautioned in an August 15, 2006 speech:   “As yet, we have charged only officers in option backdating cases.  However, if the facts permit – and I want to emphasize that all of our Enforcement cases are very fact specific – it wouldn’t surprise me to see charges brought against outside directors.  Directors also are involved in trading the stock of their companies.  Many directors sell shares under the safe harbor of Rule 10b-5-1 plans which are suppose to insulate them from insider trading charges.  Directors however may want to recall Enforcement Chief Thomsen’s recent warning that the staff is looking hard at the safe harbor provided directors and officers who sell shares under Rule 10b-5-1 plans for insider trading.  Those remarks are based on an academic study which suggests that directors trading under these plans are doing better than the market – precisely the type of study which triggered the options backdating scandal.  Collectively, these events  represent an unprecedented federal intrusion in the board room, increased scrutiny, potentially shifting standards and huge areas of potential liability.  No wonder there is increasing anxiety in the boardroom.