Taking the Bait

November 3, 2005 | Filed Under General 

Why are there no podcasts by in-house counsel?

Intrepid Corporate Counsel magazine reporter Eriq Gardner posed that question this week in a comprehensive legal podcasting article.

Rather than answer Mr. Gardner’s question in this post, I’ll venture a response tomorrow in a new podcast as the Wired GC goes…

the uncola

Bet-the-Company Litigation: Part 3

November 2, 2005 | Filed Under Tactics, Managing 

Concluding this series, today a look at the demise of the Arthur Andersen accounting firm through the prism of the three ways to avoid bet-the-company litigation outlined on Monday. While Andersen’s conviction over its Enron work occurred in 2002, the signs were present much earlier.

Some of the information on Arthur Andersen is from Barbara Ley Toffler’s excellent book, Final Accounting. Ms. Toffler had a unique viewpoint as the Andersen partner in charge of Ethics & Responsible Business Practices in the early years of its decline. She left after warning signs were being ignored and before the Enron implosion. No word whether senior management conducted an exit interview.

On to the big three:

– Lessons Learned: As early as 1998, Andersen was convening special meetings on the subject of managing internal risks, based upon audit quality problems that were on the increase. The firm was in the throes of shareholder lawsuits over its audit of Waste Management at this time, but Andersen’s settlement with the SEC over that audit was not publicly announced until 2001. That time period proved crucial, since ongoing audits of other clients were going sideways. Some people in Andersen were trying to learn lessons, but this did apparently not capture the attention or leadership of senior management. Strike one.

– Connect the Dots: As with Waste Management, Andersen was involved in litigation over its audits of Sunbeam, the Baptist Foundation, McKesson and that other household name, WorldCom. If management couldn’t learn a lesson from Waste Management, you would think the other bogeys appearing on the compliance radar screen would set off an alarm or two. Apparently not. Strike two.

– The Crown Jewels: If Andersen had one key regulator, it would have been the SEC. In announcing its settlement with Andersen over its Waste Management audit, the SEC stated that the firm failed to stand up to company management and thereby betrayed their ultimate allegiance to Waste Management’s shareholders and the investing public. The settlement also contained customary provisions in which Andersen agreed not to violate securities laws in the future. Then came Sunbeam, WorldCom and, you guessed it, Enron. By the time Enron hits in 2001, the SEC is clearly at wits end with Andersen. Poisoned well with primary regulator means no slack to avoid indictment. Indictment equals strike three. You’re out (of business).

Commentators Tom Kirkendall and Professor Ribstein have put the government’s indictment of Andersen over Enron under the microscope and correctly question whether this was the best public policy since it was a virtual “death sentence” for the firm. Professor Henning noted the Supreme Court decision belatedly overturning Andersen’s 2002 conviction, but reflected the following day that the firm was certainly not blameless in this affair.

From the standpoint of avoiding bet-the-company litigation, you have to look at the final years of Arthur Andersen though a telescope. The signs were there, people inside the firm saw them, and yet they couldn’t break the chain of events that lead to the Enron conviction, perhaps the ultimate in bet-the-company litigation. Taking seriously any one of the three ways outlined above might have lead to a different result.

It certainly couldn’t have hurt.

Bet-the-Company Litigation: China Style

November 1, 2005 | Filed Under Tactics, Managing, In the News 

This is Part 2A of the BTC litigation triptych that ends tomorrow.

The New York Times has a sobering article today regarding the Chinese legal “system.” Mr. David Ji is an executive with Apex Digital, and his company is involved in a dispute with Sichuan Changhong Electric. Changhong is apparently a majority state-owned company based in China’s Sichuan Province. The Times alleges in vivid detail how Changhong used police, prosecutors and judges to try to collect a monies it believed were owed by Apex.

The Times notes that Mr. Ji spent two months in custody at a Changhong-owned apartment that featured all-night interrogation sessions:

So in late December last year, according to a person who compiled a record of the encounter, guards emptied his pockets, removed his shoes and socks, and ripped the buttons off his oxford shirt. He was ushered disheveled and barefoot into the office of Zhao Yong, the chief executive of Sichuan Changhong Electric, Mr. Ji’s onetime business partner and, more recently, his warden.

“Your only way out is to do what Changhong tells you to do,” Mr. Zhao told him. “If I decide today I want you to die, you will be dead tomorrow.”

Mr. Ji soon agreed to cooperate with Changhong. But a year after the Chinese police apprehended him in his hotel room during a business trip, he remains in China as a pawn - Mr. Ji’s colleagues say a hostage - in a commercial dispute…”

Does this fit the definition of bet-the-company litigation? How about BTL: bet-your-life?

We previously examined corporate responsibility issues involved with companies doing business in such countries as China and Russia. That posting noted Yahoo’s recent travails in China.

Since then, Yahoo CEO Terry Semel gave these remarks, reported by CNET:

Asked to comment on the criticism Yahoo received for providing information that helped the Chinese government convict a journalist accused of leaking state secrets, Semel said companies doing business in China and other foreign countries are subject to the laws of that land.

“It’s both a moral issue and a legal issue…Sometimes, on a personal level, I wince,” he said. However, “everyone (living in China) knows the law, and everyone operating (businesses) in those countries knows the law.”

It sounds like Apex’s Mr. Ji has had to do more than wince. And as far as everyone doing business with China knowing the law, I suggest a reading of the Times article. It definitely raises the stakes for bet-the-company litigation.

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