Responding To SOX: A Class Action Litigator's Perspective

Wednesday, December 1, 2004 - 01:00

Editor: Your panel is entitled "Corporate Compliance Programs: A Practical Approach Based On Recent Amendments To The Sentencing Guidelines." From a litigator's perspective, how important is it that a company have state of the art legal and financial compliance systems in place? Could you give some examples?

Greenbaum: Companies that are large enough to have a substantial inside counsel staff will be expected to have sophisticated systems in place. I am thinking here of a combination of codes of conduct, employee training programs, and systems for assuring compliance with legal requirements and responding to regulatory inquiries as well as having corporate counsel strategically placed throughout the company who can advise management about how to avoid legal pitfalls.

Having such systems in place will go a long way toward convincing regulators and law enforcement officials that the corporation is a good citizen and is serious about complying with the law even though it may discover it has a bad apple in its ranks who may have engaged in wrongdoing. Today, the initial contact with a regulator inquiring into possible corporate wrongdoing will include a request for e-mails and other electronic data. The first impression that the regulator has of a company may be based on the company's ability to gather such information quickly and responsively. If it does not have systems in place to do this, the regulator's attitude about the company may be colored by the impression that it is unresponsive and foot dragging. It's highly likely that the more responsive a company is, the better its relationships will be with regulators.

Editor: Have corporations encountered problems because top management and the board were not viewed as serious about promoting compliance or cooperating in a effort to uncover wrongdoing?

Greenbaum: Anyone who follows the daily newspapers knows that it is not desirable for a company or its chief legal officer to be perceived as less than fully cooperative in an inquiry about possible wrongdoing or unknowledgeable about facts that should have been learned by management. Reactions of this kind are viewed by regulators as a sign that senior management is not proactively encouraging compliance throughout the organization. A failure to manifest a desire to cooperate may raise the frustration level of the regulators with respect to a company and cause them to focus on that company rather than on other companies that may have similar problems. If you do not have systems in place that enable you to know what actually is going on, you may make misstatements that will lead regulators to jump to conclusions about the company's culpability and the tone at the top.

Editor: You and other colleagues at your firm have recently authored a book titled "E-Discovery: A Guide For Corporate Counsel," how important is e-discovery?

Greenbaum: I have been defending companies in court for many years. My task has become much more difficult as a result of the proliferation of e-mails. They have replaced the group around the water cooler as the medium for informal communication. For some reason, people lose their inhibitions when they send e-mails and give very little thought to the fact that a jocular remark can later prove to be damaging. Almost daily, one reads in the newspapers about a new scandal that has been uncovered as a result of e-mail review.

The most sophisticated companies recognize electronic discovery has become a fact of life and that they need to have systems already in place to respond quickly and appropriately to regulatory requests for electronic data. These systems are created by a team of people within a company with a variety of skill sets, including those with IT, investigatory (FBI, Secret Service, IRS) and legal experience. The goal of the team is to create and maintain a system that will enable a company to gather requested information quickly and comprehensively. In developing their systems, companies draw upon the expertise of law firms like ours with experience in the area and of consultants with technical qualifications.

Editor: I understand that there is a lack of standards to guide courts in handling requests for electronic discovery. What steps are being taken to obtain uniform and reasonable rules?

Greenbaum: I am currently the ABA Section of Litigation Liaison to the Judicial Conference's Advisory Committee on Civil Rules. That Committee is in a public comment period on proposed rule changes affecting e-discovery. The comment period will be open until the middle of February. The role of the ABA's Litigation Section is to provide the perspective of litigators who work with clients in dealing with the issues raised by e-discovery and to make sure that our experience is properly reflected in the new rules.

Editor: Given today's legal environment, what questions should an individual ask before becoming a director and what qualifications should such an individual possess?

Greenbaum: He or she will want to be satisfied that there are effective internal controls in the financial area, that a state of the art legal compliance system is in place, that there is a strong general counsel with an adequate staff and other tools who recognizes his or her responsibilities to the independent directors and to the corporation and that there is comprehensive D & O insurance coverage in place.

A person who becomes a director needs to recognize that to protect himself or herself, he or she must be prepared to devote considerable time to the job and have the intellectual capacity and background to understand the complexities of a modern corporation and to ask the right questions. There is also a role for outside counsel. For the past twenty years people who are contemplating becoming a director have come to me, sometimes at the suggestion of the corporation's general counsel or CEO, to get independent advice about the risks of serving as a director.

Editor: You mentioned the importance of having a strong general counsel with an adequate staff, what would you consider an "adequate" staff?

Greenbaum: The question of whether additional staffing is needed in the legal department to assure that compliance issues are properly addressed will vary by company. My experience is that many companies have lawyers assigned to different business units to help them in their day-to-day activities so that the necessary staffing may already be in place in these corporations. A good place to start in considering whether there is adequate coverage by in-house counsel is to look at where the breakdowns took place in the companies involved in scandals, because people are now asking "Where were the lawyers?" It should be made clear to all in-house lawyers that they have an ethical obligation to report compliance issues up the ladder. Companies should carefully consider their need for additional legal staffing in the light of the new challenges.

Editor: Does your firm play a role in training corporate counsel?

Greenbaum: We have wide-ranging seminars for corporate counsel, both clients and nonclients, covering significant legal issues in a variety of areas. For example, we have been giving a series of programs for corporate counsel on electronic discovery and the proposals for changes in the relevant court rules.

Editor: Where an apparent compliance failure or disclosure issue that might give rise to litigation comes to light, how important is it to act immediately to contain the damage?

Greenbaum: We think that companies should react quickly and appropriately. However, one size doesn't fit all. It is always desirable when making a decision as to the appropriate reaction to reach out for advice to law firms and other consultants that have handled other crisis response situations.

In most cases getting the facts quickly is essential to reacting appropriately. I mentioned the need to have a system in place that will enable a company to quickly get a handle on the content of e-mails flying back and forth. However, e-mail traffic is only one element.

It is important that the relevant facts be gathered as rapidly as possible through a credible investigation, both as a basis for company statements and for decision making. If the investigation team is headed by a firm or lawyer with credibility with the public, courts and prosecutors, so much the better. Having a lawyer on the team with class action experience is helpful because if you uncover an ambiguous document, a lawyer with that kind of experience will have a good feel about how plaintiffs' counsel will view that document and attempt to exploit it and what the appropriate company response should be.

In some situations, the company may wish to have the investigation conducted by a law firm that has had no previous relationships with the company. You would be surprised to see how quickly a firm like ours that is accustomed to doing investigations can react when called upon - even where it has not had advance notice.

[Editors's Note] Mr. Greenbaum will moderate one of the panels at the January 27 Seminar "What Corporate Law Departments Need To Know: Corporate Governance And Compliance Today And Tomorrow." sponsored by the New Jersey Corporate Counsel Association in conjunction with Sills Cummis Epstein & Gross P.C. and Deloitte & Touche LLP. The purpose of this interview is to get his views on some of the issues to be discussed by his panel and to focus on the challenges facing corporate counsel in the post-Sarbanes-Oxley environment as they relate to his practice area (class action litigation).