2007 Issue 1 - New York City Bar Association

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L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E employees or pay fees for counsel representing employees. The Thompson Memo suggests that corporations may be at risk for doing so, except when required. It states that prosecutors, “in weighing the extent and value of a corporation’s cooperation,” may consider “a corporation’s promise of support to culpable employees and agents . . . through the advancing of attorneys fees.” 208 Resolution of this issue is easy in some circumstances, such as where contract or corporate law requires corporations to advance counsel fees. Recent Delaware case law suggests that such fees should be advanced even where the liability does not necessarily relate to actions by the employee in his official capacity. 209 Moreover, paying counsel fees may help achieve more accurate results of the investigation or may serve to boost employee morale. The rote incantation that lawyers can sometimes act in ways that delay or impede an investigation wrongfully assumes the worst of the legal profession. Lawyers are guided by ethical principles and can and often do play an important role in ensuring the integrity, accuracy and fairness of the investigation and thus ultimately for corporate governance and the regulators as well. Counsel can aid the investigative process by advising their clients of the importance of cooperating, if they believe their clients’ interests will be thereby well served. They may also bring to the attention of the investigating attorney context and extenuating factors necessary for the investigation to render a balanced, fair and accurate result, freeing investigative counsel to focus on the inculpatory facts—secure in the knowledge that any mitigating facts will not be ignored by individual counsel. In some circumstances, cost and speed factors will counsel against hiring 208. This prosecutional pressure has received some recent criticism. Judge Lewis Kaplan held that government pressure on KPMG to cut off paying the legal fees and other defense costs of former employees criminally charged with promoting illegal tax shelters violated the Fifth Amendment due process rights and the Sixth Amendment right to counsel of those defendants. United States v. Stein, 435 F. Supp. 2d 330, 338-81 (S.D.N.Y. 2006). See also Duggin, 2003 Colum. Bus. L. Rev. at 963: Prosecuting attorneys should not attempt to influence the ability of corporate constituents to retain counsel. An organization’s advancement of legal fees to individuals under investigation or charged with crimes related to their responsibilities as officers, directors or employees of the entity should not be considered as an adverse factor against the organization in charging decisions, plea negotiations, or in determining the government’s position with respect to criminal sentencing proceedings. 209. Homestore, Inc. v. Tafeen, 888 A.2d 204 (Del. 2005) (holding that Homestore executive entitled to advancement of legal fees to defend civil and criminal charges, notwithstanding Homestore’s contention that executive had acted out of personal greed and not in his official capacity). T H E R E C O R D 200
L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E lawyers for the employees, but that decision should not be based on an assumption that counsel will impede an investigation. A related issue is whether a corporation should pay severance to a recently released member of senior management prior to completion of the investigation. Regulators occasionally object to such payments believing that they create a presumption there will not be a finding of wrongdoing, which may prejudice the investigation or give the appearance that the company condones wrongdoing. There are circumstances, however, where payment of severance is contractually obligated. Also, severance payments may help insure that the corporation gains valuable compliance from a potentially culpable person who would otherwise refuse to cooperate, or bring closure to a civil settlement agreement that would be extremely valuable to the corporation. As a practical matter, providing severance payments will in some instances be impractical or even imprudent, in light of Section 1103 of SOX, which empowers the SEC to “petition a Federal district court for a temporary order requiring the issuer to escrow, subject to court supervision,” any “extraordinary payment” to a corporate officer while an SEC investigation is ongoing. 210 The statute does not define “extraordinary payments,” though the SEC has made clear that it interprets the term broadly, and, in the sparse litigation under Section 1103 thus far, courts have generally adopted the SEC’s view. 211 The statutory language has been interpreted broadly enough to encompass any severance payment, even a payment pursuant to a previously existing contractual obligation. Section 1103 requires a minimal showing by the SEC in order for a 45-day freeze to be entered, which is then extendible to 90 days. 212 If the SEC commences an enforcement action against the prospective recipient of the frozen payment prior to the expiration of the freeze, the freeze then stays in place until the conclusion of the SEC’s enforcement action on the merits. 213 Section 1103 has thus added a potent new weapon to the SEC’s arsenal, and the SEC has been alert for opportunities to use it. In some instances, upon being informed of a corporation’s intention to make such a payment, the SEC has requested that the funds be placed in escrow. 214 210. 15 U.S.C. 78u-3(c)(3)(A)(i). 211. See, e.g., SEC v. Gemstar-TV Guide Int’l, Inc., 401 F.3d 1031, 1034 (9th Cir. 2005) (en banc). 212. 15 U.S.C. 78u-3(c)(3)(A)(iv). 213. 15 U.S.C. 78u-3(c)(3)(B)(i). 214. See, e.g., SEC Press Release No. 2003-184, Commission Settles Civil Fraud Action Against Vivendi Universal, S.A., Its Former CEO, Jean-Marie Messier, and Its Former CFO, 2 0 0 7 V O L. 6 2 , N O. 1 201
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THE RECORD OF THE ASSOCIATION OF TH
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Of Note THE NEW YORK CITY BAR PRESE
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O F N O T E cial Department, were p
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2007 Issue 1 - New York City Bar Association

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