Tyco and Compliance
June 20, 2005 | Filed Under Compliance, Governance, In the News
On Friday former Tyco CEO Kozlowski and CFO Swartz were found guilty on 22 criminal counts by a New York jury. After a six-month long trial ended in a mistrial last year, prosecutors simplified their case, and post-trial reports have the jurors focusing on the credibility of the pair’s testimony. One major issue was an inability to explain why certain “compensation” that didn’t appear to have had board approval was not reported on W-2 forms. Former GC Mark Belnick was acquitted of charges last year.
Attorneys for Kozlowski and Swartz say they plan to appeal. Professor Ribstein and Tom Kirkendall offer more detail and observations on the big picture of white-collar prosecutions.
From a compliance perspective, this verdict serves as a reminder that company officers should adhere to a higher standard of conduct than that required by their corporate compliance program. Training I am familiar with focuses on what not to do, and also the importance of avoiding an appearance of impropriety. This is a concept lawyers recognize from their basic legal ethics coursework. Auditors frequently examine the “tone at the top” when assessing the adequacy of internal controls.
Kozlowski and Swartz may have their convictions overturned on appeal. What is clear is that they acted in a manner that invited scrutiny. Had they insisted that all compensation be explicitly authorized in written form by the proper board committee, they would probably have never been charged. The jurors drew their own conclusions about the explanations (such as oral approval from deceased director).
During compliance training, a common response when someone asks if conduct X is potentially a problem is: “Think about your parents, spouse or child reading about it in the newspaper.”
I can think of two people who might have had some faint recollection of that concept last Saturday morning.
Thumbs Down?
June 17, 2005 | Filed Under In the News, General
What is the Plan B for BlackBerry?
The New York Times reports that Research in Motion, maker of the addictive BlackBerry wireless PDA, is seeking to enforce the terms of a settlement of patent infringement litigation brought by NTP. One reason for RIM’s concern is NTP’s lingering threat to obtain an injunction to shut down the BlackBerry network. While RIM and some industry observers think that’s a long shot; it can’t be the sort of story a critical technology provider likes to see in the press.
The Times notes the key issue for RIM–a settlement “term sheet:”
The focus of the current fight between the companies is a document, about half a page long, that they signed late in the afternoon of Saturday, March 12, after three days of mediation.
Ah, every publicist’s dream and every lawyer’s nightmare: a half page piece of paper that purports to document a $450 million settlement. The RIM version of this court action is here. In response to RIM’s enforcement action, NTP is now claiming the settlement document is “vague” and “ambiguously worded,” according to the Wall Street Journal.
RIM’s CEO told Reuters yesterday that they have a “work-around” to the NTP patents.
Corporate counsel get criticized for over-lawyering and endlessly documenting. But sometimes it’s because issues are complicated and the general intent–to pay money to settle claims–has to cover all contingencies. That’s precisely when a highly competent and creative lawyer is worth every penny–maybe even worth a percentage.
Speaking generally now, it can be tempting to take the quick-and-dirty approach to documentation after protracted settlement discussions or contract negotiations. There are flights to catch and a backlog of other pressing business to attend to. Any “term sheet” or the eerily-titled “letter of intent” relies on one thing: the mutual trust of the parties. There are cases where they are enforced (like the Texaco v. Pennzoil case), and others (maybe this one) where they aren’t.
Fashioning a business solution into a legally predictable outcome is a key skill for the corporate lawyer. Since my grocery list can sometimes run to a second page, I would hope if I could view a settlement agreement in a single screenshot of a BlackBerry, I would think it’s time for another draft.
Getting the Chair
June 16, 2005 | Filed Under In the News
Today’s morning papers bring news of an indictment of corporate executives. Unfortunately, that isn’t as notable as it used to be.
But the report regarding the fallout due to allegations of inflated revenues at Bristol-Myers Squibb was notable, due to one of the terms of a settlement reached by the company to avoid indictment. As reported by the New York Times:
The $300 million will compensate shareholders financially harmed by the manipulation as part of a “deferred prosecution” agreement. In addition, Bristol-Myers agreed to establish an endowed chair in business ethics at the Seton Hall University Law School in Newark.
Huh?
Will the Enron prosecutors demand that a Jeffrey Skilling chair in commercial transactions be established at a law school in Houston?
This arrangement is tame by comparison.
Tomorrow, back to the regular Monday - Wednesday - Friday posting schedule.
The GC and CYA
June 15, 2005 | Filed Under Managing, General
Is your slip showing?
A few months ago, Ed Poll discussed this phenomenon in his LawBiz Blog, reporting from a legal marketing meeting where general counsel discussed the hows and whys of selecting outside lawyers. This issue was also raised earlier in the IP Litigation Blog with similar conclusions.
After running through a list of criteria, Mr. Poll states:
Reputation is very important to general counsel because they are always reviewed and criticized by someone - everyone - in their organization.
He then goes further: general counsel just don’t look at the lawyer, the firm is important, too. This is supposedly because:
… it is true that clients — Corporate America — do look at the law firms. They have to in order to CYA because, as noted above, their every move is scrutinized by everyone else in their corporate organization. It’s a lot easier to say a mistake was the result of an action by a major law firm than it is to say it was the result of a sole practitioner or small firm. This prejudice of large organizations (clients) regarding the size of their law firm is a fact of life.
This CYA explanation doesn’t wash in my experience. It reminds me of the shopworn “nobody ever got fired for buying IBM.” Or their firm (Cravath)?
I choose outside counsel by targeting a specific lawyer or group at a firm. The firm’s “reputation” will enter into the calculus; size is less important–only so many lawyers can work a deal or case effectively. If a solo fits the bill (and some do for me), size is clearly irrelevant.
What I want is great service (good communication and results) at a reasonable cost. Those are the key things I am “covering.” If something goes wrong, I shoulder any blame, not the law firm. If an organization is scrutinizing a GC’s “every move,” it has too many people with too little to do.
Perhaps the CYA phenomenon is more common than I think. But a company that makes it a primary selection rationale really doesn’t have a general counsel.
A scrivener who initials invoices and golfs a lot is probably closer to the mark.
The Law Firm GC
June 13, 2005 | Filed Under Managing
U.K. publication Legal Director notes a recent Altman Weil survey on law firm general counsel. A few findings are of interest. Most law firm general counsel are already partners of the law firm (92%). A majority (74%) are not on the law firm’s governing board. As law firms continue to grow by “merger”, will firms see a benefit from hiring a general counsel from the outside? Will they also find merit in having the general counsel on the firm’s governing board, even in a non-voting role?
A Legal Intelligencer article on law.com casts additional light on the same survey, noting a major reason that some firms have designated general counsel: risk management concerns. These concerns often start out with a legal malpractice and conflict-of-interest focus. While reasonable, it does narrow the field as to the lawyers being considered for the position. Longer-term, will firms want general counsel with broader experience than litigation?
But in a sign that law firms are different, the article quotes a law firm general counsel on some of the unique factors they face:
“You want people to come to you sooner rather than later with potential problems,” … “And you don’t want to create an impediment such as the possibility that you might rat the lawyer out to the compensation committee.”
Sounds like fun.
Hildebrandt offers a seminar later this year; PLI has one on tape. There’s even an upcoming symposium issue in the Kansas Law Review on the subject. An ACC subcommittee on law firm general counsel may be just around the corner.
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