|  | | 2005 News and Press Releases | | |
HEADLINE NEWS:
SEC's Use Of Private Counsel Is 'Pandemic'
Pamela A. MacLean
The National Law Journal. December 27, 2005
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EXCERPT: For at least 30 years, the U.S. Securities and Exchange Commission has relied on private lawyers for some corporate misconduct investigations and for protection of the assets of firms already in hot water, but now this unusual version of outsourcing has become pervasive. If the SEC's increased reliance on private counsel to investigate potential malfeasance were likened to the spread of a virus, it has gone from "an occasional outbreak of flu to a pandemic," said Joseph Grundfest, a Stanford Law School professor and an SEC commissioner in the 1980s. In 2001, the SEC began offering favorable treatment to troubled companies that hire independent counsel to do internal corporate investigations and report back to the SEC. But with that has come a host of new legal challenges. Do companies that waive attorney-client privilege and turn over the results of internal investigations to the SEC also waive the privilege for third parties, such as plaintiffs' lawyers representing shareholders? And have the outside counsel become, in effect, agents of the government so that cooperating employees need to be given Miranda warnings? Diverging opinions are emerging in state and federal courts around the country. "It is incongruent for the U.S. government to participate in withholding the reports," said Elizabeth Cabraser. She recently persuaded a California state appellate court to order the release of an internal corporate report that pharmaceutical distributor McKesson HBOC Inc. gave to the government as part of a cooperation agreement. California does not recognize partial waivers of privilege, the court held. Cabraser said that attempts to curry favor with regulators by doing internal reports, then being allowed to withhold the information from investors, creates a double standard. "The SEC was not empowered to get investors' money back," said Cabraser of San Francisco-based Lieff Cabraser Heimann & Bernstein. That requires civil actions, she said. The SEC practice of relying on outside counsel began in the 1970s while retired Judge Stanley Sporkin served as the SEC's director of enforcement. The agency needed a way to leverage the agency's capabilities. "We found that our budgets were so limited we couldn't do all the mop-up work in these cases and we decided to enlist the private sector," said Sporkin, now with New York-based Weil, Gotshal & Manges' Washington office. "It worked out extremely well." In its most benign form, the SEC seeks court appointment of independent distribution consultants under the Fair Funds Act to get money back into the hands of injured investors. |
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