Randall Paulikens, partner with Friedman’s FLVS practice, contributed an article to Law 360, sharing the importance of having counsel when legal issues in the workplace arise.
Law360, New York (June 3, 2016, 11:37 AM ET) --
In the midst of an increased emphasis in Washington (including from the U.S. Department of Justice and the U.S. Securities and Exchange Commission) on prosecuting individuals for corporate crimes and fraud, there's confusion and a line that needs to be drawn regarding corporate counsels and the advice they provide to their organization. If you're a board member or otherwise senior-level professional at a firm, you can't hide behind advice given by your firm's general counsel. After all, that is the firm's counsel, not yours individually. That's a big deal when it comes to issues from insider trading to fraud, where the SEC has made naming and shaming one of its favorite toolbox tricks.
What does this mean to you?
If you are relying on your corporate counsel’s advice during an investigation, you are probably in a lot of trouble. You are very late in realizing that the corporate counsel’s office is loyal to the company, not to you. This is not to suggest that corporate counsel is mean or unethical, but that they have a job to do. You need to know what their job is, what it is not and where you fit in.
Countless corporate frauds have made headlines and, all too often, a major complaint is that C-suite individuals rarely do the time for doing the crime. Sometimes, people’s life savings and their jobs have been eliminated due to the conduct of the very few at the top of an organization. Occasionally, the government needs to bail out organizations that have harmed its stakeholders by engaging in wrongful conduct. Corporations and business organizations may be considered separate and distinct legal entities from their officers, employees and shareholders — but are they really?
Your best action is to have retained your own counsel prior to specific decisions being made. While not every decision may require counsel, sometimes you may need to listen to someone who has your best interests at heart. The fact that you consulted an attorney will also be used against you, citing the fact that you should have known better. But, if the facts presented to your independent counsel were found to be sound legal advice — untainted by differing loyalties — they certainly should help your case in the court of public opinion and a court of law.
Corporations and other business organizations do not act on their own, they do not have any free will and they cannot speak. In fact, organizations themselves cannot do anything. Rather, a corporation is run solely by its officers, employees and board of directors. Put in a comical sense, a corporation is like a ventriloquist dummy. The dummy usually gets the laughs while the ventriloquist does everything to make the dummy perform. Who is really offending the audience and saying the politically incorrect lines anyway?
What does this have to do with a CEO or other C-suite professionals? Everything. Changing perceptions of past events and learning new information years after the fact can be used to criticize the actions of the participants, sometimes decades later. This is occurs all the time. Your actions will be viewed with the certainty of hindsight and the ability to reorganize and refine the information that may or may not have been truly available when the decision was made. The 24-hour media does not take the time to analyze the nuances and many other factors that are involved in a case. How often does the media frenzy call for prosecution, and often none results, or the accused is found not guilty? Granted, this assumes that the legal system examined the relevant facts and deliberated appropriately (as opposed to an eight-minute segment on the news). Still, reputations have been ruined and significant amounts of resources have been consumed.
As long as everyone is working within the law and within the appropriate ethical guidelines, this should not be an issue. If no one does anything wrong, then there is usually nothing to worry about. But what if the decision the “organization” deems as appropriate is deemed wrong by the public or the courts? The question starts at the beginning — long before the investigation started, and long before anything went wrong. It started when the approval and the decision to do the action was being debated and ultimately made.
This is where the question of when to rely on corporate counsel and when to retain your own becomes the most important. Remember, ordinarily making a mistake in good faith is not grounds for a criminal investigation. Making a decision using the best information available to you at the time is also not considered a crime — even when that decision turns out to be wrong. This is in a court of law, not in the court of public opinion. Information that comes to light months or years later is often used to criticize you. However, the advice you receive while making that decision can and will be scrutinized — perhaps mercilessly.
This level of scrutiny happens all of the time to C-suite individuals. If the launch of a product or an acquisition is successful, then you are blamed for the success. If a product or acquisition is unsuccessful, then you are credited with that failure. For very large companies, executives’ success or failures can have a significant impact on the economy as a whole. It was not too long ago that the largest banks, financial institutions and automobile manufacturers were too big to fail.
Assume a decision is being contemplated that has real questions of compliance within the law — moral or legal. You are in the C-suite and you are weighing the pros and cons of a potential decision. Your corporate counsel is in the room, you speak freely, and you receive counsel’s guidance if you are actually breaking the law. The team makes a decision. The decision goes bad. Charges are made, customers are mad, vendors are owed money, and the public is outraged.
At this point, corporate counsel and frankly the corporate officers themselves have a fiduciary duty to the entity and its owners to put the entity’s best interests ahead of their own. While the entity’s officers may have similar, if not nearly identical interests at certain points of the proceedings, at some point their interests diverge.
Using insider trading as an example, there are fairly clear black and white rules that govern conduct — yet there are many examples of insider trading where the parties’ conduct showed that they bent the rules or bypassed them. (Is it illegal to aggressively use your connections? Ask Martha Stewart.) The investigation will occur if your actions caused you to profit while others lost, or if you profit much more than the general investor. Keep in mind the ventriloquist dummy. As a C-suite executive, you are privy to a significant amount of sensitive information and discussions about trends, competition and other information that simply is not publicly available. It does not take much imagination to think that when a significant amount of your personal net worth is at stake, you may take steps to act on such inklings before the window closes. The same is true for alerting your friends. If you lose the same or more money than the public, then you have no worries as no one will raise questions.
Using this information can be extended to utilizing “curiosity” discussions about potential acquisitions to buy up a target stock again before the window closes. You may know from dealing with your co-workers their “tells” of what they are thinking. This is a gray area. Corporate counsel may say one thing, your conscience another, your wallet a third. Perhaps your own attorney should be your Jiminy Cricket — before you act. Yes, this will cost money but it may wind up costing a fraction of the costs of a criminal investigation and trial.
There are other matters, such as providing information, complying with subpoenas, fully answering interrogatories, and other inquiries that also may necessitate relying upon your own counsel. Being charged with obstruction of justice is not a great resume builder. Being convicted of a corporate crime is even worse. Usually, corporate counsel responds to these requests, but can corporate counsel truly consider your risks? Are your conversations with corporate counsel truly privileged?
If you choose to rely on “not illegal,” you should have consulted with your own counsel prior to giving your approval since interpretations of laws can change and public shamming in today’s world is permanent. If corporate counsel needs to protect the company, then you must look at their advice as jaded even if counsel does not seek to harm you.
How do you prevent this? The obvious answer is don’t do anything wrong. When you think you are getting close, call your own attorney. This is when you should rely on your own counsel as compared to relying on the counsel of your organization.