Speech by SEC Staff:
Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007
by
Linda Chatman Thomsen1
Director, Division of Enforcement
U.S. Securities and Exchange Commission
Chicago, Illinois
May 4, 2007
'Not often in the story of mankind does a man arrive on earth who is both steel and velvet—who holds in his heart and mind the paradox of terrible storms and peace unspeakable and perfect.' What Carl Sandburg, the prairie poet, said of Abraham Lincoln, the prairie lawyer and politician might just as well apply to the rabbi's son from Chicago who has been called, justifiably, the greatest lawyer of his time. The law is a paradoxical discipline, both absolute and flexible, fixed and evolving. Conservative as precedent, and liberal as compassion, it demands respect for institutions. Yet it relies upon imperfect individuals to give them life.2
So said Gerald Ford in the opening paragraph of his eulogy to Edward Levi, legendary lawyer who, in 1975, left the presidency of his beloved University of Chicago to serve as the 71st Attorney General of the United States. I couldn't resist sharing President Ford's words with you because they reflect so well on two Illinois lawyers and I thought as a guest in your wonderful city it was the polite thing to do. Also, while I know few will ever declare the eloquence of our 38th president to rival that of our 16th president, on this one, I think President Ford did pretty darn well. More to the point of gathering here today it speaks of our profession in a way that should cause all of us to walk a little taller. It is that profession I'd like to talk about today.
Before I go any further I should remind you that my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff. My views are also affected by my view, and while these days I see the world through glasses, I guarantee you they are not rose-colored. Consistent with that, I'll start with the bad news about our profession and talk briefly about behaviors that, rather than causing us to walk taller should have all of us slinking around looking at our shoes.
A few too many recent examples come to mind. The conduct of several inside lawyers in the recent options backdating scandals should make us all pause. In recent months, the Commission has sued the former General Counsels of four publicly traded companies: Apple, McAfee, Monster Worldwide and Comverse Technology for allegedly backdating undisclosed in-the-money options to themselves and to others.3 Sadly, in each of the four cases we alleged that to further the respective scheme, the company's inside counsel altered or fabricated company records to advance or conceal the fraud. According to our allegations, the former General Counsels collectively made millions by exercising their own options and then selling shares. The Comverse and Monster lawyers have settled, each agreeing to monetary sanctions, permanent officer and director bars and suspensions from practicing as attorneys before the Commission.4
In another arena, the Commission has charged inside counsel with insider trading. Ironically, each had substantial compliance responsibilities. In the first case, we charged Randi Collotta, a Morgan Stanley compliance officer — who was also a lawyer — along with 13 others, for her role in one of the largest insider trading cases against Wall Street professionals since the days of Ivan Boesky and Dennis Levine. In the complaint, we allege that Collotta and her husband, Christopher Collotta, also an attorney by the way, provided material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley's investment banking clients to a registered representative at a Florida broker-dealer. The broker-dealer then traded on the information and shared his illicit profits with the Collottas.5
Just two weeks ago, the Commission sued Kevin Heron, the former General Counsel and chief insider trading compliance officer of Amkor Technology. The Commission's complaint alleges that over a two-year period, Heron illegally traded in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions. Heron executed more than fifty illegal trades in Amkor stock and options based on information Heron had learned as a result of his position as general counsel. Heron executed nearly all of these illegal trades while he and other company employees were subject to company blackout periods that prohibited them from trading in Amkor stock.6
Lest we forget one of the events that has had such a profound impact on the securities world, this spring, the Commission sued two former high-ranking Enron in-house lawyers for fraud.7
But all this depressing news about our profession is not what I want to focus on this morning. Instead, I'd like to spend time on the tremendous power of lawyers to do good. Especially in their roles in helping clients work through a crisis or better still working to help clients avoid a crisis all together. And happily, the cases I noted earlier really are not the norm.
Society has long recognized the very effective role lawyers play in preventing terrible conduct and in ensuring fair process. It was, after all, the plotting tyrant Dick the Butcher who said "The first thing we do, let's kill all the lawyers" in Shakespeare's Henry VI (Part 2, Act IV, scene 2). Not, as is so often suggested because lawyers were bad guys but rather because they were effective at fighting tyranny. And if you want a positively chilling acknowledgement of the power of good lawyers to advance the greater good, think about what Adolph Hitler said during his rise to power: "I shall not rest until every German sees that it is a shameful thing to be a lawyer."8 It is not surprising that the law itself recognizes and protects the attorney role, especially in the context of privilege, a concept which dates back to Cicero.9 We've heard a lot lately about the attorney-client privilege, and I'd like to discuss it in more detail in a minute.
But first, one of the important roles for corporate lawyers is helping companies unscramble the various messes they find themselves in. I'm talking about the internal investigation that companies often undertake when they become aware of potential bad conduct. As one former commissioner said about internal investigations:
"There is a broad common-law basis for the proposition that if a corporation senses there has been wrong-doing, management has an obligation to ascertain the extent of it and to pursue a remedy… Wherever management finds a problem it wants to eradicate effectively and in an objective fashion, it may resort to this new technique of internal investigation."10
The former commissioner? Al Sommer who served on the Commission over thirty years ago from 1973 to 1976 and who made these remarks over two decades ago in 1983. Commissioner Sommer's words are reported in a 1984 law review article by former SEC official and private practitioner Art Mathews, titled "Internal Corporate Investigations." In that article, Mathews details a very interesting history, a history that he noted went back to the 1960s, by the way, of what he described then as the "ever-increasing frequency" of internal investigations.11 Perhaps the most interesting thing about Mathews' research was the unmistakable conclusion that increasingly defense counsel were counseling their clients that conducting a thorough, independent, internal investigation would be in their best interest. First, because such an internal investigation gives the company a valuable opportunity to stay ahead of regulators and to propose realistic remedies that the company can live with in a case of securities law violations. In one example, Mathews noted that by conducting an internal investigation and proactively proposing to pay full restitution, the company likely avoided a receivership that would have placed the company in bankruptcy. A second reason defense counsel may advise internal investigations is that providing such information to the staff can result in significant resource savings for the company by limiting the number of executives and other employees whose testimony must be taken by the staff and reducing the length of the investigation. Most companies are anxious to eliminate the uncertainty of a pending Commission investigation. A third reason Mathews argues that conducting internal investigations is good counsel is that it has the power to restore confidence in the investing public that a company is back on track. And finally, for our part, at the SEC, we credit cooperation and the provision of useful information, which of course can benefit companies significantly. Many times that cooperation and information comes to us via an internal investigation.
The principal of crediting cooperation has been part of our process for years. It was explicitly expressed by the Commission in October 2001 in a report commonly referred to as the Seaboard Report. That report was issued by the Commission in connection with an enforcement matter where the Commission decided not to sue a company, even though it had the law and evidence to do so, because of the steps the company had taken in response to the illegal behavior that had occurred.12 Among the steps was its cooperation. The decision to reward cooperation in the Seaboard matter was consistent with historical precedent, and that precedent continues to today. To cite just two examples, earlier I mentioned our recent action against two former Apple executives. In connection with that matter, the Commission said it would not bring any enforcement action against Apple — based in part on its swift, extensive, and extraordinary cooperation in the Commission's investigation. Apple's cooperation consisted of, among other things, prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.13 Another explicit example can be found in the January 2006 action charging six former officers of Putnam Fiduciary Trust Company (PFTC) with defrauding clients of $4 million. The Commission simultaneously announced that — even though the alleged conduct was "egregious" — the company would not be charged because its cooperation and the remedial steps taken were "extraordinary." PFTC's cooperation consisted of prompt self-reporting, an independent internal investigation, sharing the results of that investigation with the Commission (notwithstanding applicable privileges and protections), terminating and otherwise disciplining responsible wrongdoers, providing full restitution, paying the related attorney and consultant fees incurred by its defrauded clients, and implementing new controls designed to prevent future fraudulent conduct.14 The PFTC action was announced the day before the Commission announced broader penalty guidance, which again reconfirms cooperation, among others, is a factor the Commission considers in determining the propriety of sanctions.15
On the topic of waiver of attorney client privilege and work product protection, a little history is in order. For years, long before Enron or WorldCom or the Thompson memo and certainly before the McNulty memo, we have affirmatively taken steps to protect the attorney client relationship by filing amicus briefs supporting selective waiver. We have consistently advocated legislation that would permit provision of information to us without otherwise waiving the privilege. We have supported rule amendments that would similarly protect information provided to us. Those who practice before us know we work with counsel to find ways to provide information to us that protects the privilege.
Do we discuss waiver issues with counsel? Of course. Do we raise the topic? Sometimes, but more often than not it is the company or individual or their counsel who raise the issue. Why is that? A variety of reasons. First, advice of counsel is often used as a defense. Second, especially for companies with serious issues, they want to do whatever they can to distinguish the company from its employees who have engaged in serious law breaking. I have heard one defense counsel say that, when confronted with a big problem, he, his colleagues and his client, stay up nights trying to think of ways to cooperate.
So what do we do when we initiate these conversations? We have a process, which I will describe, but first two important notes. First, we do not — indeed we cannot — require waiver of the attorney/client privilege. Second, waiver of a privilege or protection is not a pre-requisite to obtaining credit in a Commission investigation. The credit given is based on, among other things, the factual information given, the timeliness of the provision of information and the usefulness of the information. Waivers may be, and often are, a means to that end but are not an end in and of themselves.
On to our process. It is, to coin a phrase from another current discussion in the securities world, principles based. First and foremost, we respect the legitimate assertions of the attorney client privilege and the attorney work product protection. Second, we think about alternatives for obtaining the information we seek. Third, we distinguish between facts and core attorney-client communications and opinion work product. It is the former we are interested in. We also recognize the difference between work associated with an internal investigation and work done at the time of the events at issue. It is the factual information from the former we are most interested in. As to the latter, we often get it but not at our request but rather as a result of someone advancing an advice of counsel defense or argument. Fourth, recognizing the importance of this issue, if we initiate these conversations, we do so at the Assistant Director level or higher. Finally, we are candid about the existing state of the law and let people know that while we will do our best to protect the confidentiality of information provided to us, the state of the law may not support maintaining confidentiality after information has been shared with us.
Our approach is based on the fact that we respect the role of good lawyers. We want to encourage parties to consult counsel both regarding potential violations of the securities laws and regarding how best to rectify bad behavior, and therefore, we must be — and we are — judicious in requesting waivers. We are ever mindful that the request alone may have a chilling effect.
But, and this is an important but, we can not talk about the attorney-client privilege without talking about and embracing the reason for that protection. Underlying the privilege is the assumption that attorneys will advise and advance compliance with the law. Society expects lawyers to be more than hired guns, to do more than keep people happy. We expect that they can and will make uncomfortable decisions and that they can and will deliver unwanted advice and bad news. Underlying all evidentiary privileges — which let me remind you, are disfavored at law, for the simple reason that they interfere with fact-finding — is the idea that there is an offsetting benefit that justifies the cost to the truth-seeking process. That somehow — by protecting these relationships with priests, or doctors, or lawyers — we, as a society, end up encouraging better conduct, not worse.
On this point, in November of 2006 the New York City Bar Association issued its Report of the Task Force on the Lawyer's Role in Corporate Governance. While I don't necessarily agree with everything in the report, I do find it an extremely thoughtful analysis. In March of 2005, the then-president of the New York City Bar appointed a task force to "examine the role of counsel, both in-house and outside, with respect to counseling about corporate conduct."16 The task force, which included four current or former public company general counsel, sixteen law firm lawyers, including litigators and transactional lawyers, two plaintiffs class action attorneys, two law professors, three government lawyers, one federal judge, one general counsel to an auditing firm, and one non-attorney who has served on audit committees, was charged with examining "all aspects of the role of individual lawyers and law firms by examining recent failures to perform that role effectively as alleged by government agencies, Congress and the courts."17
In the introduction to the report, the task force said it had "addressed itself generally to the question of how lawyers, whether in-house or outside counsel, can be more effective in helping the public companies they advise avoid problematic conduct that, as Enron, WorldCom and other recent scandals have dramatically emphasized, can injure many thousands of investors and employees. Lawyers are often in a position to influence or facilitate the conduct of their corporate clients. Thus, the question of what role lawyers can and should play to minimize wrongdoing by their public company clients is an important one."18
The report reasks the question Judge Sporkin asked in connection with the savings and loans crisis: Where were the lawyers? (I should note that is not the precise way the opinion reads but it is a fair, and perhaps understated, paraphrase.) Within this report there is one truly remarkable section. Roman numeral section II, subsection capital E., page 95 is the shortest lettered subsection in the report. It runs barely one page. But to my mind it may be the most important, and the title says it all: Professional courage: the indispensable element.
The report finds that when lawyers are faced with unlawful corporate conduct "[f]irm advice to clients, including directly to the Board if necessary, should be sufficient to address and redress nearly every instance of actual or potential wrongdoing." And therein lies the need for professional courage. The task force found that "[t]he essential need is for lawyers to give that advice clearly… and not waver when the advice is unwelcome, no matter how important the client or how powerful the officer or director resisting the advice."19
Given the economic and financial pressures to maintain relationships with major corporate clients and powerful officers and directors, and the fact that the answers to legal questions are rarely beyond dispute, the report acknowledged that "it may take genuine professional courage to provide unwelcome advice and stick to it."20
These acts of courage can be dramatic—resigning for example. But more often, there will be less dramatic, but just as important, opportunities for lawyers to effect good. Encouraging a client to step back from a line rather than help the client squeeze as close to it as possible. Once you've figured out whether a particular course of conduct can be taken, encouraging everyone to think about whether it should be taken. When going through the process of looking back over events, whether in an internal investigation or otherwise, not only figuring out whether the conduct is legally defensible but also asking, the quieter questions, is it in the business's long term interest? Is it behavior we want to encourage? Is it something we should be proud of?
As I'm sure you can tell, I love the fact that the New York City Bar's report talks about courage. There it is, right there, a discussion of a virtue. I was reminded of what Aristotle said about courage—it is the first virtue, because it makes all other virtue possible. So, here's to the courage in all of us.
Endnotes
http://www.sec.gov/news/speech/2007/spch050407lct.htm
