Michael J. Halloran, Senior Partner of the corporate securities group at Pillsbury Winthrop LLP, and former General Counsel and Executive Vice President of Bank of America, served as the Chair for the Corporate Governance program. In addition to introducing the distinguished panel speakers, Mr. Halloran served as the moderator for the program discussions, which covered a wide variety of emerging and current corporate governance issues, from SEC corporation finance disclosure developments to accounting and compliance issues to securities enforcement and litigation trends. In addition to moderating the talks, Mr. Halloran also posed many hypothetical scenarios to the panelists to facilitate further discussion. His "real world," practice-oriented questions proved to be highly illuminating for the audience, many of whom are faced with similar problems in their roles as General Counsel and in-house securities counsel.
David Anderson, a Partner at Pillsbury Winthrop and former prosecutor in the Securities Fraud Unit of the San Francisco Attorney's Office, presented the topic of special investigations, now an integral part of corporate audit committee responsibilities. According to Mr. Anderson, the SEC encourages the vigorous discharge of investigatory duties by the audit committee, and Section 301 of Sarbanes-Oxley conceives of the audit committee's central role in pursuing "some information," whether a letter from a whistleblower, or a suggestion of impropriety in the company's books and records.
Anderson noted that there are two models of enforcement, whether from the SEC or the U.S. Attorney. One is the "Arthur Andersen" model, which is to come down upon the organization and destroy it. The second is a model that looks to the corporation, and in particular the audit committee, to engage in self-policing. This second model leads to the increasing use of special investigations under the supervision of the audit committee to follow up on "some information" to determine: whether there is a problem; what the size and scope of the problem is; who the responsible party is; and how the situation can be fixed.
When dealing with special investigations, a key area of concern for general counsel is whether to bring in outside law firms to assist the audit committee, or whether the investigation can be handled in-house. In most cases, the advice of outside counsel working directly for the audit committee, completely independent from any prior dealings with the company, is invaluable. Similarly, the advice of an independent forensic auditor with no prior involvement in the company's financials is crucial.
When deciding whether to bring in outside counsel, the litmus test is: have you discovered something that you internally have determined is probably evidence of material wrongdoing? If this test is satisfied, you will most likely be forced to engage the audit committee, its own outside counsel, and forensic auditors.
Mr. Anderson observed, "As general counsel, when you retain outside counsel, you move from a world where you have a great deal of control directing a company's legal affairs, to a role of the world's least effective traffic cop — a traffic cop with no ability to write tickets." There are so many different parties with different views: the company's primary auditors; independent forensic auditors; the usual outside legal team that helps prepare the SEC filings; the independent legal counsel reporting to the audit committee; the audit committee itself; internal management; and all the external constituents, such as the Department of Justice, SEC, and the plaintiffs' lawyers in a class action or derivative suit.
Another major concern during an investigation is whether the attorney-client privilege is waived. Anderson advises that you'll have to waive the privilege to the SEC if you want favorable treatment for the company. As a condition to getting the primary auditors comfortable with the findings of the review, you will have to make significant disclosure of the findings of the audit committee to the primary auditors, which will also operate as a privilege waiver, even if you've maintained that the disclosure to the SEC somehow didn't waive the privilege. Anderson succinctly sums up the situation by stating, "You have no privilege, so get used to it."
Turning next to the question of process, Anderson covered the different types of investigation as well as different ways of approaching external constituencies. The routine investigation approach, taken for the past 10 years, was identifying and sequestering the problem from the rest of the company. Now, Anderson feels that the investigation's emphasis has to be on finding one problem and looking for others. The new shift in approach moves from a very focused investigation to a very wide spread and a much more prosecutorial investigation, one which is not popular with management.
Anderson concluded by noting that corporate America is in the midst of a new era. "We're clearly in the era of special investigations." When potential investigations appear, his advice to in-house counsel is to recommend that the audit committee hire outside counsel, and depending on the issues, that they hire a forensic accounting firm. These professional advisors can handle investigations effectively and efficiently, and protect the company regardless of the issues you have.