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Published: 2008-03-26

The Post Sarbanes-Oxley World



Jordan Eth, a Partner at Morrison Foerster, presented a discussion on securities enforcement and litigation, and focused particular attention on the top pitfalls for corporate clients in the area of Sarbanes-Oxley compliance that deals with requests for documents from the SEC.

Mr. Eth stressed that any request for information from the SEC, even an "informal one," is adversarial right from the start. A general counsel is strongly advised to tell their executives that when they receive a call from the SEC, their first question should be "Are you from Enforcement?" If the callers are indeed from Enforcement, the advised response is, "We have a policy that we first have to talk to a lawyer."

Another pitfall is that corporate clients may not fully understand what "voluntary" or "informal" means. They may erroneously believe that if the SEC asks for something, you must give it to them. While you may want cooperate, you don't necessarily have to. If you do cooperate, you may be waiving a privilege, implicating someone, or creating evidence that two years from now is going to get someone in trouble. "So," Jordan advises, "you have to think about what you have to do, versus what you want to do." The SEC will ask everything, and you should approach it as an adversarial issue.

Mr. Eth next addressed a hypothetical in which a corporate client receives an investigation inquiry from a state securities agency. A key issue is whether one can convince the state authorities to coordinate their investigation with the federal SEC. According to Mr. Eth, there are no restrictions on sharing information between state and federal authorities, "although it would be different once you are in criminal territory."

When faced with the prospect of multiple investigations from multiple entities, Mr. Eth advises that general counsel should try to keep the number of fronts to a minimum and be able to know personally what is going on in as many of them as possible. "If there are multiple agencies involved, you want to know where they are getting their information."

On the issue of joint defense agreements with co-counsel under these circumstances, Mr. Eth's general preference is not to put joint defense agreements into writing until a criminal proceeding is near. Joint defense agreements pose a number of potential problems, as they are like any other policy that can be easily violated through issues such as conflict problems.

To illustrate, Mr. Eth asked the audience to consider the conflicts that arise if you represent a company, and an officer, who happens to be your contact at the company, becomes implicated. If you have a joint defense agreement with the officer, what does that do for the company? In this circumstance, you may miss an early opportunity to plead to the government about how they should be lenient with you because you have been cooperating.

Additionally, when outside directors are implicated by an informal investigation, you would want to have "shadow counsel," who are at the very least in the background looking at whether separate representation will be necessary, because of these very conflict problems.

Speaking finally on trends concerning class action litigation and derivative lawsuits, Mr. Eth noted that the average settlement amounts are climbing. This is primarily because plaintiffs are trying to make every case into a mini-Enron, by developing a derivative case, an ERISA case, etc. Mr. Eth continued, "We're also seeing that it is getting tougher to get these cases dismissed."

Insurance can help cover costs of investigations in this area, however a multi-front war, will drain the policy. Another issue is that if the officer who signed the insurance application lied, the insurance company will try to rescind. If your policy does not have a serverability provision, that policy is history. If the policy is severable, it is important whether it is full or partial, and whether you can still buy it. You can buy insurance after you have been sued, but at much greater expense.