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Corporate Counsel Under the Microscope

Corporate Counsel Under the Microscope. CLE Presentation to WMACCA June 24, 2010. Why Care about Ethics/UPL issues?. It’s your license!.

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Corporate Counsel Under the Microscope

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  1. Corporate Counsel Under the Microscope CLE Presentation to WMACCAJune 24, 2010

  2. Why Care about Ethics/UPL issues?

  3. It’s your license! “The practice of law is not a business open to all, but a personal right, limited to a few persons of good moral character with special qualifications ascertained and certified after a long course of study, both general and professional, and a thorough examination by a state board appointed for the purpose.  The right to practice law is in the nature of a franchise from the State conferred only for merit.  It cannot be assigned or inherited, but must be earned by hard study and good conduct.  It is attested by a certificate of the Supreme Court, and is protected by registration.  No one can practice law unless he has taken an oath of office and has become an officer of the court, subject to its discipline, liable to punishment for contempt in violating his duties as such, and to suspension or removal. It is not a lawful business except for members of the Bar who have complied with all the conditions required by the statute and the Rules of the Courts.  As these conditions cannot be performed by a corporation, it follows that the practice of law is not a lawful business for a corporation to engage in.” Richmond Ass'n of Credit Men v. Bar Assoc., 167 Va. 327, - S.E.2d - (1937)

  4. Why Care? • Your responsibility for others • Rules 5.1, 5.3

  5. Why Care? • Consequences for your client

  6. Why Care? • It’s no fun being under the microscope!

  7. Under the MicroscopeScenarios • External investigations • Internal investigations • Investor/shareholder claims • Lending institution claims • Insolvency/bankruptcy trustee claims • Sales, mergers, acquisitions, successor entity claims • Conflict among corporate officers or board members • E-Discovery battles

  8. Under the Microscope-Common ethics issues in play • Gatekeeper obligations • SOX & Rule 1.13 reporting • Rule 1.16 withdrawal obligations • Rule 1.2 prohibiting assistance with crime/fraud • Client identity issues • Rule 1.13 • Conflict issues • Rules 1.7, 1.8, 1.9 • Privilege/confidentiality issues • Rule 1.6 vs. evidentiary privileges • Unauthorized Practice of Law

  9. Under the Microscope-Other issues in play • Fiduciary obligations • Contractual obligations

  10. Gatekeeping: It’s not justhypothetical

  11. Gatekeeping: It’s not justhypothetical! • “Major corporate fraud cannot happen over an extended period of time without the complicity of accountants, lawyers and other professionals . . .” • Larry Thompson (then U.S. Dep. A.G., 6/4/03)

  12. Gatekeeping: It’s not justhypothetical! • SEC demonstrates it has overcome reluctance to target lawyers in series of backdating prosecutions • 10/2007: Linda C. Thomsen (then SEC Director of Enforcement) tells reporters at a securities fraud conference: • 30/39 companies that restated financial results because of backdating had GCs • Of those 30, 17 GCs were charged by the government, stepped down, or were fired after internal investigation

  13. Gatekeeping: It’s not justhypothetical! • And it’s not just backdating: • 10/1/09: SEC judgment against assistant GC for allegedly helping company to mislead investors through fraudulent reinsurance transactions • Spring 2007: SEC complaints against in-house counsel from 2 different companies: allege “knew or were reckless in not knowing” • 9/23/04: SEC enforcement sweeps in GC, whose wrongdoing was failure to inquire and failure to report up the chain

  14. Gatekeeping: It’s not justhypothetical! • “One area of particular focus for us is the role of lawyers in internal investigations of their clients or companies. We are concerned that, in some instances, lawyers may have conducted investigations in such a manner as to help hide ongoing fraud, or may have taken actions to actively obstruct such investigations. . .” • Stephen M. Cutler (then Director of SEC Division of Enforcement, 9/20/04)

  15. Gatekeeping: It’s not justhypothetical! • Courts agree that your fiduciary duties make you a gatekeeper • Bankruptcy trustees, creditors, investors are casting a net wider than just the primary bad actors • Stakes include civil & criminal penalties, your license, damages to others; also could include your earnings

  16. Gatekeeping: It’s not justhypothetical! • Examples: • Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) • U.S. v. Black • 2007 U.S Dist. LEXIS 8797 (2/7/2007) • 526 F. Supp.2d 870 (12/10/2007) (N.D. Ill.) • Pereira v. Cogan, 294 B.R. 449 (S.D.N.Y. 2003)

  17. Gatekeeping: It’s not justhypothetical! • Aside from potential wrongdoing, negligence, consider bankruptcy’s reach to your pocket for compensation paid to you pre-petition: • Fraudulent conveyance • 2 years before filing • Transfer with actual intent to hinder, delay, defraud • Debtor’s intent – not yours • Bankruptcy Code (11 USC) Section 548 • Defense must show • Value given • Objective good faith • Inquiry notice + failure to conduct diligent investigation = fatal to good faith defense • In re: Bayou Group, LLC, 396 B.R. 810 (S.D.N.Y. 2008)

  18. Gatekeeping: It’s not justhypothetical!

  19. Gatekeeping: It’s not justhypothetical! • You likely are an attractive witness

  20. Gatekeeping: It’s not justhypothetical! • Examples: • New York AG Andrew Cuomo placing spotlight on lawyers and waiving privilege • DOJ policies on waiver of privilege as part of evaluation of “cooperation” • Thompson, McNulty, and now Filip memos

  21. Gatekeeper obligations • Must I? May I? • Report? • Withdraw?

  22. SOX “evidence of a material violation” “shall report” to CLO or CLO + CEO absent an “appropriate response,” the attorney “shall report” to the Board, audit committee, or other independent board committee See Exhibit 1 of written materials for Sox overview Rule 1.13 “knows” of violation of law likely to result in substantial injury to the organization “shall proceed as is reasonably necessary in the best interests of the organization” reporting up the chain options “may resign” in accordance with Rule 1.16 Gatekeeper obligations

  23. Gatekeeper obligations • Rule 1.6 reporting • “Shall not” reveal (1.6(a)) • Privilege + confidentiality (broader concept) • “May” reveal (1.6(b)) • Compliance with law, court order • Establish claim or defense • Client’s fraud on third party related to subject matter or representation • Protect client (death, disability, incapacity, incompetence) • Lawyer assistance program • Outside agency • “Shall promptly reveal” (1.6(c)) • Intention to commit crime (with warning to client) • Fraud on a tribunal (with warning to client) • Attorney misconduct (with client consent)

  24. Gatekeeper obligations • Be mindful that while confidentiality is a broad concept, privilege is more limited • Crime-fraud exceptions • Government may offer incentive to corporation to waive privilege (recent reversal of that policy) • Bankruptcy trustee becomes the privilege holder

  25. Shall withdraw (1.16(a)) Violation of Rules or law Lawyer’s physical or mental impairment Discharge See also Rule 1.2(d) Cannot assist client in criminal, fraudulent conduct May withdraw (1.16(b)) If no material adverse effect; OR Listed reasons Use of service that is illegal or unjust Perpetrate crime or fraud Client fails to fulfill obligation (with warning) Unreasonable financial burden Other good cause Gatekeeper obligations

  26. Gatekeeper obligations • Inquiry • If you don’t ask, you might be liable for not inquiring (fiduciary duties) • If you do ask, you might • Discover information leading you to engage reporting vs. withdrawal issues • Defeat any claim that you received salary “in good” faith (bankr. trustee claims)

  27. Clients, Conflicts, & Privilege • It’s not just hypothetical! • Fiber Materials Inc. v. Subilia, 974 A.2d 914 (Maine 2009) • Company’s ex-president under investigation for bribery • Memo between ex-president and company’s outside law firm found on a company laptop computer used by ex-president • Memo addresses company’s indemnification obligation to then-president

  28. Clients, Conflicts, & Privilege • It’s not just hypothetical! • United States v. Nicholas, 606 F.Supp.2d 1109 (C.D. Cal., 2009) • Representation of • company in internal investigation of stock option granting practices + • CFO in defending SH lawsuits re: stock options • Counsel gives “Upjohn warning” in interview of CFO as part of internal investigation • Court rejects sufficiency of warning to clear the conflict • Reversed & remanded: United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009)

  29. Clients, Conflicts, & Privilege • Who is your client? • Rule 1.13 • “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.”

  30. Clients, Conflicts, & Privilege • Affiliates • Wholly owned, solvent – hypothetical possibility for conflict • But see Bowles v. National Association of Homebuilders, 224 F.R.D. 246 (D.D.C. 2004) (no privilege between parent and sub when sub opposes licensing agreement proposed by parent and both were separately represented) • Less than wholly owned • More potential for conflict • Majority cannot oppress the minority • Consents must come from the disinterested (Rule 1.13(e)) • Privilege may/may not extend between them • Communication for information only? Then look to degree of affiliation • Communication to advance common interest? Degree of affiliation less important • See U.S. v. American Telephone & Telegraph Co., 86 F.R.D. 603 (D.D.C. 1980)

  31. Clients, Conflicts, & Privilege • Affiliates • Insolvency • Duty runs to creditors (vs. equity owners), increasing risk of conflict • Client and privilege holder may become trustee in bankruptcy

  32. Clients, Conflicts, & Privilege • Affiliates • Privilege points • The entity is the privilege holder • Privilege “changes hands” when management or ownership of any entity changes. Commdity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) • E.g., subsidiary sale = prior parent and current owner entitled to entire file from the period of dual representation of sub and prior parent. Polycast Technology Corp. v. Uniroyal, Inc., 125 F.R.D. 47, 50 (S.D.N.Y. 1989) • E.g., bankruptcy – legal department advised both parent and sub such that there was no basis to assert privilege or confidences between them, entitling sub’s receiver to all files. Transmark, USA, Inc. v. Dep’t of Ins., 631 So.2d 1112, 1115 (Fla. D.C.A. 1994)

  33. Clients, Conflicts, & Privilege • Affiliates Togetherness vs. Separateness? Which message is the legal department sending and why?

  34. Clients, Conflicts, & Privilege • Corporate dispute • Who has authority to act? • Are they acting within their authority? • Are they acting consistent with best interests of the company (equity owners, non-oppressive behavior to minority owners, fair to creditors)? • Look to articles and bylaws of the company – be a stickler on the process • May need court intervention to resolve • Separate counsel for all “factions”

  35. Clients, Conflicts, & Privilege • Shareholder derivative suit • Rule 1.13 (comments 10-11) • Suit is brought “on behalf of” organization and may name the organization among other defendants • Dispute typically is over management • Can counsel for the organization defend? • Depends on existence of a conflict between duty to organization and relationship with board/management

  36. Clients, Conflicts, & Privilege • Individuals • Are you my lawyer? • Restatement Section 14 • Client = • person who manifests intent for lawyer to provide legal services + • Lawyer who knows that the person reasonably relies on the lawyer fails to disclaim intent to do so

  37. Clients, Conflicts, & Privilege • Individuals • Is what I tell you privileged? • “Bevill”* factors • Employee approached counsel for legal advice • Employee made clear that counsel was in personal, not representative, capacity • Counsel communicated with employee in individual capacity • Conversations were confidential • Substance did not concern matters within company’s affairs *In re Bevill, Bresler & Schulman Asset Management Corp.,805 F.2d 120, 125 (3d Cir. 1986)

  38. Clients, Conflicts, & Privilege • Rule 1.7 • Conflict = • Direct adversity to current client OR • Significant risk that representation of your client will be “materially limited” by your responsibilities to a third person or by a personal interest of the lawyer • What are you worried about? • Rule 1.9 • Conflict = representation materially adverse to past client in a substantially related matter

  39. Clients, Conflicts, & Privilege • Rule 1.10: Imputation • “While lawyers are associated in a firm . . .” • “Firm” = • Legal department of a corporation or other organization

  40. UPL: This isn’t just hypothetical • From the headlines: • April 20, 2010 ABA Journal: “Former Gucci GC Questions the Fuss over His Inactive Status”

  41. UPL: This isn’t just hypothetical • See Selected Authorities Addressing Impact of Licensure Status of In-house Counsel to Privilege Assertions • Exhibit 2 of written materials

  42. UPL: This isn’t just hypothetical • Pop quiz: What are the elements of the attorney-client privilege?

  43. UPL: This isn’t just hypothetical • Elements of the Attorney-Client Privilege: • Communications • Between attorney and client • For the purpose of obtaining legal advice • Federal Rule of Evidence 501 • Upjohn Co. v. United States, 449 U.S. 383, 389 (1981)

  44. UPL: This isn’t just hypothetical • Focus = Attorney • In-house counsel OK if • licensed in the appropriate jurisdiction • E.g., United States v. United Shoe Mach. Corp., 89 F. Supp. 357, 358-59 (D. Mass. 1950); Phillips v. Dallas Carriers Corp., 133 F.R.D. 475, 480 (M.D.N.C. 1990) • acting in the role of legal advisor when the communications were made • E.g., Evans v. United Servs. Auto. Ass'n, 142 N.C. App. 18, 32, 541 S.E.2d 782, 791, cert. denied, 353 N.C. 371, 547 S.E.2d 809 (2001) • In-house attorney acting on management side of business presumed non-legal communications • Carolina Electric Membership Corp. v. Carolina Power & Light Co., 110 F.R.D. 511, 517 (M.D.N.C. 1986)

  45. UPL: This isn’t just hypothetical • The potential double-edged sword: Is the communication not privileged or was your GC committing UPL? • How will your adversary flesh this out?

  46. UPL: This isn’t just hypothetical • Office location • Co. web site, SEC disclosures, discovery responses • Title, job description • Co. web site, discovery responses • Past employee’s title, job description • State bar • verify licensure status with bar directly or via web site; understand status (e.g., inactive status) • Who is client? • Ascertain whether communications were for company business or were personal to ex-employee • Compare actual employer of in-house lawyer to actual employer of former employee -- any differences? • Compare against status with bar and coverage for affiliates

  47. UPL: This isn’t just hypothetical • 8/10/09: “Wis. Gov’s Unlicensed Chief Counsel Resigns After GOP Objects” • http://www.abajournal.com/news/wisc._govs_unlicensed_chief_counsel_resigns_after_gop_objects/ • 5/1/09: “Oops. Hospital GC Not Licensed in Home State Is Suspended from $260K Job” • http://www.abajournal.com/news/oops._hospital_gc_not_licensed_in_home_state_is_suspended_from_260k_job/

  48. UPL: This isn’t just hypothetical • 10/23/08: Hipwell v. Kentucky Bar Ass'n (Ky., No. 2008-SC-000267-KB) • GC suspended for “practicing law” without a license • April 2007: Hipwell “outed” by story in Corporate Counsel magazine • Listed 7 other general counsel at Fortune 250 companies who were not licensed in the jurisdiction in which they were working

  49. UPL: This isn’t just hypothetical • Be diligent in use of national non-lawyer services • Real estate • Tax arena • Insurance adjustments • Collections • Contested areas • Do not assist UPL • UPL issues can invite unwanted scrutiny

  50. Multi-Jurisdictional Challenges:UPL • You must not engage in the unauthorized practice of law or assist another to do so • Rule 5.5

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