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Corporate Counsel's New Dance
Partner: "Criminal Lawyers Teach the
Limbo Dance"
Maureen
Duffy-Lewis and Daniel B. Garrie*
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Cite as:
M
Duffy-Lewis and D B Garrie, "Corporate Counsel's New Dance
Partner: "Criminal Lawyers Teach the
Limbo Dance"", (2008) 5:1 SCRIPT-ed 168 @:
http://www.law.ed.ac.uk/ahrc/script-ed/vol5-1/garrie.asp
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| DOI: 10.2966/scrip.050108.168 |
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© M Duffy-Lewis and D B Garrie 2008.
This work is licensed under a
Creative Commons Licence.
Please click on the link to read the terms and conditions.
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1. Introduction
In
today’s corporate boardrooms the executives and board members
who long relied on the civil courts to resolve questionable behavior
are now seen as the great unwashed: mere criminals. Even well
meaning Board members, acting in a way they believe is consistent
with the corporate mandate and obligations look over their shoulder
for potential criminal liability. This essay examines another
concern which hovers over these corporate boardroom “criminal”
worries –electronic discovery (“e-Discovery”) --
and offers some suggestions on where companies can turn for stronger
guidance. Further, we examine whether the concerns on American
shores find their way into an international setting.
2. Analysis
For
as long as most can remember, what happened in the American
Boardroom stayed in the Boardroom unless
the US Securities and Exchange Commission (“SEC”)
regulators wanted to chat.1
All things done in the name of corporate activities seem to dance
to the same music until the SEC or their brethren thought a company
was going too low under the limbo bar.2
Even when legal action was taken it was almost always resolved with
mea culpas, more oversight, and a lot of money.3
Even where criminal charges were threatened, though rarely filed,
money, restitution, and fines seemed to assuage all involved.4
Since
the “go go” days of the 1980’s, as portrayed in
Oliver Stone’s movie, Wall Street, many criminal lawyers heard
the distant din of the thunder clouds.5
The corporate scandals of Michael Milken, Ivan Boesky
6
and Charles Keating7
were transcended by the Enron,8
Worldcom,9
Adelphias10
and Brocade11
scandals.12
The hue and cry from individuals financially ruined after years of
hard work appeared on the front page of every newspaper and
television nightly news program.13
The “Perp walk,”14
embattled ex-corporate executives walking into court, seems to be a
staple of the nightly news. To assist America’s corporations
quest to comply, civil firms have opened up entire new areas of
practice focusing on corporate governance, compliance and more
importantly, the white collar criminal practice specialty, tied to
the more traditional business law practice.15
Rarely in the business lawyer’s office would one find a door
that said “Criminal Lawyer.” Criminal law in the
boardroom has come into its own and prosecutors now have a new venue
to explore, laws to prosecute, and shareholders to protect.
In
days gone by, the American public was interested in Wall Streets
goings and comings but they were not overwhelmingly investing their
retirement nest eggs on the Corner of Wall and Broad.16
Enter the American public, who now invest in corporate America to
the tune of trillions.17
It is estimated that nearly 50% of the American public invests in
Corporate America through a number of financial vehicles ranging
from stocks, bonds and mutual funds, either individually or through
their retirement 401K’s.18
Of
course, the Boardroom is not supposed to be run by nefarious
criminal minds but corporations with criminal issues may reap
significant consequences. One need look no further than the recent
alleged criminal activity of Hewlett Packard’s former
chairwoman, Patricia Dunn, who avoided the original felony charges
that stemmed from a scheme to illegally acquire other HP board
member phone records using a method called pretexting.19
Ultimately Dunn resigned at the request of the Hewlett Packard
Board of Directors because of her unauthorized disclosure of
confidential corporate information.20
When CEO’s and Board members make decisions that so deeply
affect a large number of Americans financial well being, no stone
will be left unturned if questions of impropriety are raised.21
As
a result of United States corporate misdealing and misdeeds,
regulatory changes were introduced in an effort to create
transparency and, in theory, reduce corporate malfeasance.22
Among other regulatory reactions, in 2006 the SEC promulgated
revised regulations on executive compensation to make the Boardroom
activity more transparent.23
Everywhere in corporate America, Boards and their legal advisors
are evaluating procedures, disclosures, and overall transparency to
comply with developing legislation and laws.24
The
Boardroom, for so long a bunker, is now under increasing scrutiny
and subject to greater transparency.25
As stated in the beginning of this article, activity by corporate
Boards, CEOs and upper level management responsible for reporting to
the Board is open for deeper scrutiny26
and those who owe a fiduciary obligation to shareholders find
themselves with the potential new label of criminal defendant. It
therefore behooves the American Corporate Boardroom to add another
watchful set of eyes and ears to listen for potential risks and
consequences of Boardroom members’ activities. Board members
will be well served to involve criminal counsel to sort through and
understand what may occur in litigation. For example, a criminal
lawyer’s experience with e-Discovery is starkly different from
their civil counterparts.
Attorneys
with white collar crime are steeped in dealings involving economic
transactions with millions of potential documents involved in
discovery. And, since many white collar crimes are intent crimes
which often hinge on circumstantial evidence, understanding how to
comb through the mountains of evidence on behalf of the client’s
case is second nature. From the inception of the white collar
attorney’s legal careers, they recognize the importance of
discovery. Their cases so often depend on “[e]videntiary
nuances and related inferences … and often involve numerous
documents, many of which are complex financial records and
sophisticated corporate materials that can only be fully understood
with …..those familiar with the vagaries of the underlying
business transactions.”27
e-Discovery
is becoming the norm in both American criminal and civil trials and
consequently the electronic stored information from the Boardroom is
subject to discovery.28
The amended Rules seek to streamline the e-Discovery process and
resolve ambiguity and uncertainty by requiring parties to address
e-Discovery in the earliest stages of litigation. These Rules create
new disclosure requirements and standards, new meeting and
conference requirements, change or refine the scope of discovery
requests, and grant some flexibility in the form of production.29
But
what should the global corporations of today expect? Companies
listed on the American stock exchanges or doing business in the
United States already know (or should know) they need to meet the
United States e-Discovery requirements. But what do the American
corporations with a presence in Europe need to understand? The
European Union (“EU”) does not have an analogous
government agency to the SEC but that does not prevent the EU from
regulating activities in the boardroom. For example, competition in
the EU is governed by a number of treaties adopted by member states
of the EU over the last 60 years.30
Articles 8131
and 8232
of the Treaty establishing the European Economic Community (“EC
Treaty”) contains anti-competitive provisions analogous to the
Sherman Act in the United States.
England
is one of the first countries within the EU to address electronic
document production. England’s Civil Procedure Rules (“CPR”)
refer to document production as disclosure instead of discovery. In
February of 2005, England amended CPR Part 31 Practice Directions
(“CPRPD”) to account for electronic document production.
Despite using different terminology, both the U.S. and the England
have some similar provisions in their civil procedure rules.
Specifically, each country requires parties to have a document
production planning conference. In the United States it is required
by FRCP 26(f), in England it is required by CPRPD 2A.2 and 2A.3.
Another
central difference between England’s planning conference rule
and the United State’s planning conference rule is the timing
requirements. England has a relaxed disclosure planning schedule
where as the United States has a stringent timeline. Furthermore,
much like the United States, England requires a reasonable search
for electronic documents. The United States and England are two of
the only countries worldwide that have amended their rules of
procedure to account for electronically created information.
There are
a few differences between the United State’s FRCP and
England’s CPR. The main difference between the two approaches
is that the United States FRCP has much more detailed requirements
for discovery than England’s CPR. Another difference is that
absent a prior agreement, in England the losing party pays the
winning party’s legal fees. In the United States the court
might order the losing party to pay the winning party’s legal
fees as a form of sanctions but parties are not automatically
entitled to fee shifting in the United States.
The
International Court of Justice (“ICJ”) has yet to
address the production of electronically created information.33
ICJ proceedings have two procedural components: written and oral.34
The written portion is straight forward, the court may request
production of documents before the hearing begins.35
During the oral proceeding, the Statute of the International Court
of Justice provides the Court ample latitude with respect to
procedure: “the Court shall frame rules for carrying out its
function. In particular, it shall lay down rules of procedure.”36
The ICJ does not have any formal rules on e-Discovery.37
Instead the ICJ grants their judges latitude to rule on e-Discovery
disputes.
3. Conclusion
As
e-Discovery enters center stage and the latest cases on metadata,
spoliation or cost-shifting receive scrutiny, both corporate and
criminal lawyers are swarmed by vendors hawking bigger, better and
faster document review tools.38
Yet, even with this awareness, a growing number of corporate
lawyers and in-house counsel neglect to perform a thorough review of
their computer systems creating a significant risk for themselves
and their clients. Why? Specifically, when these non-technical
corporate attorneys construct policies and practices based only on
assumptions about their IT system, the policies and practices can
explode and create complex discovery problems in future litigation
unnecessarily creating civil and criminal risks for their companies.
Corporate counsel cannot rely on reports of how the system was set
up to run or how IT staff thinks it runs; counsel must learn how the
company’s employees actually use the system39
because reasonableness governs discovery obligations.
Corporate
executives need more than just the “run of the mill”
governance, compliance and regulatory attorneys; they need attorneys
with criminal defense experience and e-Discovery experience.
Companies that do not seek out these attorneys’s advice for
the corporate boardroom expose shareholders to unnecessary risks.
In summary, corporate lawyers, both in American and abroad, need
learn to collaborate with their criminal attorney brethren to help
position companies to design e-Discovery (and other) policies and
practices that are defensible. While it remains to be seen how much
of the American model will become international, it can certainly be
argued to understand and follow the United States trends will keep
the international companies one step ahead.
*
Honorable Maureen Duffy-Lewis is a Judge of the
Los Angeles Superior Court, State of California, United States of
America. Daniel B Garrie, Esq. is a Principal at CRA International,
lives in New York and can be reached at [email protected].
Contributions by: Christopher A Bojar, Esq.; Ronald J Lewis, Esq.
and Michael J Robak, Esq.
1
Even then, the SEC’s enforcement mechanism was seen as lax.
See for example, T A Puz, “NOTE: Private Actions for
Violations of Securities Exchange Rules: Liability for
Nonenforcement and Noncompliance”, (1988), 88 Columbia Law
Review, 610. (The legislative history to the 1975 amendments is
replete with congressional concern over SEC passivity in the realm
of exchange rulemaking and enforcement, suggesting that the express
remedies provided by the 1975 amendments were intended to
supplement, rather than to supplant, the availability of private
actions. In an expansive study prior to the 1975 amendments, a
Senate Committee noted that “the major regulatory problems in
the securities industry have not by and large been the result of the
SEC’s lack of authority but rather “tame watchdog”
that exercises its direct supervisory powers over exchanges only
sparingly, preferring instead to cooperate with and defer to
exchanges in the area of rulemaking. Hence Congress observed that
“[s]ixteen different years of amendments make clear Congress’
readiness to assure the [SEC] the power to protect investors, but no
amount of legislative tinkering can build within the SEC the
commitment and vitality to make full use of the tools Congress
provides.”) And it was not until the early 1980’s
amendments to the regulations that more enforcement authority was
provided. See for example, J D Cox and R S Thomas, “SEC
Enforcement Heuristics: An Empirical Inquiry”, (2004), 53
Duke Law Journal, 737. (By amending the securities laws in 1984,
1990, and 2002, Congress expanded significantly the SEC’s
enforcement arsenal).
4
D M Weiss, “Reexamining the SEC’s use of Obey-The-Law
Injunctions”, (2006), 7 UC Davis Business Law
Journal. 239 (“During 2005, the Securities and Exchange
Commission [“SEC” or the “Commission”] filed
947 enforcement actions and obtained a record amount of more than $3
billion in penalties and disgorgement. 1 As in
any given year, the vast majority of these cases were not litigated
but filed as settlements. 2 In addition to money
penalties and disgorgement, most SEC settlements levy “obey-the-law”
injunctions – injunctions [or consent decrees] against future
violations of securities laws in which a perpetrator agrees to “sin
no more” or risk contempt of court—as a remedy. The
injunction has been a “cornerstone” of the SEC’s
enforcement program since the Commission’s founding in
1934.”).
6
J K Strader, “White Collar Crime and Punishment: Reflections
on Michael, Martha, and Milberg Weiss”, (2007), 15 George
Mason Law Review 45, 60-61: “The government ultimately
focused on a novel securities fraud theory, in Milken’s case
in connection with a ‘stock parking’ arrangement. Stock
parking occurs when one party nominally sells stock to a second
party, with the understanding that the second party will sell the
sock back to the original owner at a later time…The
government theorized that Nilken and Boesky had entered into a stock
parking arrangement in order to conceal the Boesky’s stake in
a company’s stock. This arrangement allowed Boesky to avoid
publicity disclosing his stake in the filings with the SEC.”
7
S P Green, “Looting, Law, and Lawlessness”, (2007),
81 Tulane Law Review 1129, 1139-1140: “…executives
are said to have looted corporate bank accounts, while government
officials are accused of looting national treasuries or the social
security trust fund. A particular notorious example is the
so-called looting of savings and loan institutions perpetrated
during the 1980s by figures such as Charles Keating.”
8
D Millon, “Who “Caused” the Enron Debacle?”,
(2003), 60 Washington and Lee Law Review 309, 310: “At
the heart of the Enron scandal was a group of exceptionally
ambitious executives seeking to create a new kind of energy company.
At its peak, Enron reported annual revenues of $100 billion and
employed over 20,000 employees. Fortune ranked the company
as high as seventh on its ‘Fortune 500’ list. We now
know, however, that the edifice was an intricate house of cards
build on a foundation of sham transactions and accounting
manipulations. When the frauds surfaced during the fall of 2001,
the structure quickly collapsed, leaving investors, employees, and
customers with billions of dollars in loses.”
9
K T Cowart, “The Sarbanes-Oxley Act: How A Current Model in
the Law of Unintended Consequences May Affect Securities
Litigation”, (2004), 42 Duquesne Law Review 293, 301:
“In June 2002, Worldcom announced $3.8 billion in inflated
profits; an announcement which led NASDAQ to force a halt on trading
of the company’s stock. Former Worldcom executives, Scott
Sullivan and Buford Yates, Jr, were indicted on charges of
securities fraud for allegedly hiding billions in expenses from
investors and auditors. Worldcom’s accounting irregularities
were ultimately found to be approximately $9 billion. In July of
2002, Worldcom filed for Chapter 11 bankruptcy protection,
surpassing Enron as the largest filing in United States history.”
10
Id at 302: “Adelphia was a leading cable provider where
Chairman and Chief Executive Officer (‘CEO’) John Rigas,
who founded Adelphia, sat on the company’s nine member Board
of Directors with five other Rigas family members, including his
three sons. The Rigas family used their personal money tree,
borrowing $2.3 million through various family owned partnerships.
Unfortunately, all such transactions occurred off the balance sheets
so that shareholders had to means of knowing about the massive
borrowing taking place within the company.”
11
D I Walker, “Updating Backdating: Economic Analysis and
Observations on the Stock Option Scandal”, (2007), 87 Boston
University Law Review 561, 575: “The potential tax and
accounts consequences of revealed option backdating are illustrated
by the SEC’s complaint filed again executives of Brocade
Communication Systems. The complaint alleges, inter alia, that
Brocade granted options on two million shares of its stock on
October 30, 2001, when in fact the grants were not approved until
January of 2002. Brocade’s average stock price for January
2002 was $36.56. The price on October 30, 2001 was $24.20.
Backdating these options on October reduced the strike price by
about one-third.”
21
Impact of globalization discussion is worthwhile to note as HP is a
global company.
23
J S Martin, “The House of Mouse and Beyond: Assessing the
SEC’s Efforts to Regulate Executive Compensation”,
(2007), 32 Delaware Journal of Corporate Law 481, 487: “The
Revised Regulations deal not only with compensation issues, but also
with related-party transactions, director independence and corporate
governance.”
24
See: “Proxy Voting Guidelines”; Ethos, Swiss
Foundation for Sustainable Development, March 2001; download in
English, French or German at www.ethosfund.ch.
27
M S Chan, “Paper Piles to Computer Files: A federal Approach
to Electronic Records Retention and Management”, (2004), 44
Santa Clara Law Review 805, 809.
29
See B Burdett, “Hiding the Inaccessible Truth:
Amending the Federal Rules to Accommodate Electronic Discovery”,
(2006), 25 The Review of Litigation, 115.
30
Treaty establishing the European Coal and Steel Community 1951
(“Treaty of Paris”), Treaty establishing the European
Atomic Energy Community 1957 (“First Treaty of Rome”),
Treaty establishing the European Economic Community 1957 (“EC
Treaty”), Merger Treaty 1965, Budgetary Treaties 1970 and
1975, Single European Act 1986 (“SEA”), Treaty of
European Union 1992 (“TEU”), Treaty of Amsterdam 1997
(“ToA”) and Treaty of Nice 2000 (“ToN”)
available at:
http://europa.eu.int/eur-lex/lex/en/treaties/index.htm.
38
Before the rules were changed, an article describing the corporate
counsel response to the anticipated new e-Discovery issues appeared
in the magazine “In House Counsel.” The GC, in 2005,
related that for many corporate counsel they cannot find enough ways
to prevent disaster. Presciently, Marathon Oil’s General
Counsel suggested “…it could be five years before the
e-Discovery frenzy calms down and the court offer clear directions
on what companies must produce. Until then [Marathon GC]
Kerrigan adds, e-Discovery ‘is like planning for Armageddon.
No one knows how much is enough.’” (emphasis
ours), In House Attorneys Become IT Gatekeepers, October, 2005
available at
http://www.law.com/jsp/ihc/PubArticleIHC.jsp?id=1128342926735.
39
M Browning, “E-Discovery Looks Like Risky Business”, Law
Technology News, October 17, 2007 (“A significant
challenge facing the profession is the need to attain sufficient
competence to deal with the many deep complexities surrounding
EDD.”)
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