ACC San Diego GC Roundtable on Ethics
- Role of the GC
- What role do you play in the business?
- How much of your advice is “business advice” as differentiated from “legal advice”?
- How do you deal with the pressure to get deals done quickly (i.e., not be a bottleneck) but also provide sound advice?
- If part of your role is to be the corporate “ethicist”, do you think that role may dissuade business people from keeping you fully informed?
- Does your role as GC help you to act as a mediator/facilitator between different constituencies in the organization? (part of Hypo I)
- Information and management:
- How do you ensure that you have access to appropriate information to provide advice?
- How do you balance centralization and decentralization of legal work and responsibility to make sure that both independence and effectiveness are maintained?
- How do you manage conflicts for the attorneys you hire? How do you monitor ongoing conflicts issues related to the prior work of your attorneys on staff?
- Independence:
ABA Task Force: Independence requires that corporate counsel “must exercise professional judgment in the interest of the corporate client, independent of the personal interests of the corporation’s officers and employees” or the lawyer’s own personal interests.
“The GC is simultaneously a part of the client-corporation and a lawyer – an advisor and advocate – for that client, while also maintaining a close working relationship with the client’s managers.” - To whom do you report directly? Who controls your compensation and advancement?
- Does your role as part of the business team help you be a more effective legal advisor, or does it complicate that role?
- Do you think it’s appropriate for the lawyer to act as a “gatekeeper”? Is that consistent with you obligation to be an “advocate”?
- Who is the client:
- What is “the best interest of the corporation” and who gets to decide? Board, CEO, shareholders? What if they are divided? What about other “stakeholders”? What about the government? Does the public matter?
Hypothetical I
You are the general counsel of a public company, and you have been working all night on a significant strategic acquisition when your CEO – who is a member of the Board, but not the Chair of the Board – reaches you on your cell phone. She angrily informs you that the Wall Street Journal is publishing an article in the morning paper disclosing your company’s plans on the acquisition. Your CEO says that the information in the article must have – in her judgment – been leaked by one of the board members. She instructs you to immediately engage a private investigation firm to find out which Board member made the leak so that she can “hang that person out to dry.”
Issues for Discussion in Hypothetical I:
Consider the following:
CAL. RULE 3-600(A):
In representing anorganization, a member shall conform his orher representation to the concept that theclient is the organization itself, acting throughits highest authorized officer, employee,body, or constituent overseeing the particularengagement.
CAL. RULE 3-210:
A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal.
Questions:
As the lawyer for the corporation, is it appropriate for you to take instructions from the CEO to investigate the conduct of other individual board members?
Again as the lawyer for the corporation, how do you balance the interests of the corporation (which may be harmed by the discovery of a board member who has leaked information) against the desires of the CEO to “hang that person out to dry” and, potentially, the corporation’s compliance obligations?
What are the obligations of the corporate counsel to monitor the means of the investigation?
What are the obligations of the attorney to inform the board about the investigation?
Case Study I
Conrad Black, chairman of Hollinger International, concocted a scheme to disguise senior management bonuses as non-compete payments flowing from the sale of Hollinger publications. General counsel Mark Kipnis, who is by training a real estate lawyer recently appointed to his position, prepared the related non-compete agreements while Black and other senior managers pocketed the resulting payments without telling the board. Kipnis was not involved in the conception of the scheme and did not obtain direct financial benefit, but was charged with fraud alongside Black and the senior managers. Kipnis was convicted for failing to challenge the fraudulent scheme and for failing, as corporate secretary, to ensure that the full nature of the payments was disclosed to Hollinger’s audit committee and shareholders. After more than 8 years, Kipnis conviction was vacated and remanded for a new trial. The prosecutors declined to try him again.
Issues for Discussion in Case Study I:
Consider the following: Cal Rule 3-600:
(B) If a member acting on behalf of an organization knows that an actual or apparent agent of the organization acts or intends or refuses to act in a manner that is or may be a violation of law reasonably imputable to the organization, or in a manner which is likely to result in substantial injury to the organization, the member shall not violate his or her duty of protecting all confidential information as provided in Business and Professions Code section 6068, subdivision (e). Subject to Business and Professions Code section 6068, subdivision (e), the member may take such actions as appear to the member to be in the best lawful interest of the organization. Such actions may include among others:
(1) Urging reconsideration of the matter while explaining its likely consequences to the organization; or
(2) Referring the matter to the next higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest internal authority that can act on behalf of the organization.
(C) If, despite the member's actions in accordance with paragraph (B), the highest authority that can act on behalf of the organization insists upon action or a refusal to act that is a violation of law and is likely to result in substantial injury to the organization, the member's response is limited to the member's right, and, where appropriate, duty to resign in accordance with rule 3-700.
Cal Rule 3-110:
(A) A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence.
(B) For purposes of this rule, "competence" in any legal service shall mean to apply the 1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such service.
(C) If a member does not have sufficient learning and skill when the legal service is undertaken, the member may nonetheless perform such services competently by 1) associating with or, where appropriate, professionally consulting another lawyer reasonably believed to be competent, or 2) by acquiring sufficient learning and skill before performance is required.
Discussion in Rule 3-110:
The duties set forth in rule 3-110 include the duty to supervise the work of subordinate attorney and non-attorney employees or agents.
In an emergency a lawyer may give advice or assistance in a matter in which the lawyer does not have the skill ordinarily required where referral to or consultation with another lawyer would be impractical. Even in an emergency, however, assistance should be limited to that reasonably necessary in the circumstances.
Questions:
Did Kipnis do anything unethical as a lawyer in his situation? Was he competent to do what he was asked to do? Was he assisting with a fraud? What should he have done?
How should an in-house lawyer deal with a situation in which he/she feels she may not be competent to address the specific issue at hand but the lawyer’s managers insist the lawyer handle the matter nonetheless?
What should an in-house lawyer do if s/he suspects that s/he is being asked to participate in a fraud similar to a situation that faced Kipnis where he seems not to have had all the facts?
Case Study II
Google issued over $80 million worth of stock options to employees and consultants in the two years preceding its IPO without registering the offering or providing the required disclosures. General Counsel David Drummond was aware that the registration and disclosure obligations had been triggered, but he consulted outside counsel and believed that Google might be entitled to rely on an exemption from the law. Drummond considered the fact that the violation could be remedied by making a rescission offer to the employees at a later date. Drummond advised the board that it could issue options, but failed to inform the board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption, which was in fact inapplicable. To settle the charges, Google and Drummond agreed to cease and desist from violating the registration and disclosure requirements.
Issues for Discussion in Case Study II:
Consider the following: Cal Rule 3-210: A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal.
Questions:
Did Drummond behave unethically? How? If yes, would Drummond have been exonerated if he had fully informed the board?
When is it ok to advise your client that they can pursue a course of action which is likely, but not definitely, a violation of law?
Does it matter if the remedy is simple as it was in this case through rescission?
What if the penalties are immaterial?
Hypothetical II
You are in-house general counsel of a private company which is wholly-owned by the CEO. The corporation is engaged in litigation when the CEO informs you that he intends to destroy documents relevant to the dispute that were subject to a court discovery order. The CEO directsyou not to produce the documents in response to the order. Further, the CEO requests that you return copies of the documents in your possession to the corporation.
Consider the following:
Cal. Rule 3-600 above.
Also: Consider the decision in FDIC v. O’Melveney.
Also: The Michigan State Bar Ethics Committee issued an advisory opinion on the request of the lawyer. The Committee advised the lawyer to attempt to dissuade the CEO from destroying the documents or, if unsuccessful, to refer the matter to a higher authority within the corporation. Further, the lawyer was advised not to return copies of the documents to the corporation so as to avoid assisting in the unlawful destruction or concealment of evidence. According to the Michigan State Bar, the lawyer may continue representing the corporation since withdrawal is not required when an officer suggests improper conduct.
Questions:
What should the lawyer do?
Is resignation required?
Does the answer change if the CEO is not the sole shareholder? Assume there is an independent board.
Can the lawyer retain the documents?
Does the answer depend upon the involvement of a court in the hypothetical? That is, what if the lawyer discovers that the company is dumping toxic waste or bribing foreign officials?
Hypothetical III
You are in-house counsel to a private company, and you are interviewing a senior company executive as part of an internal investigation. You have some suspicions, but no real evidence, that the officer may have engaged in unlawful conduct which could subject the company to liability and the officer to termination and potential criminal or civil penalties. The company’s employee policies require employees to cooperate with the legal department.
Issues for Discussion in Hypothetical III:
Consider the following: Cal. Rule 3-600(D):
In dealing with an organization's directors, officers, employees, members, shareholders, or other constituents, a member shall explain the identity of the client for whom the member acts, whenever it is or becomes apparent that the organization's interests are or may become adverse to those of the constituent(s) with whom the member is dealing. The member shall not mislead such a constituent into believing that the constituent may communicate confidential information to the member in a way that will not be used in the organization's interest if that is or becomes adverse to the constituent.
Questions:
Assume that the officer does not know you suspect him of unlawful activity. What, if anything, do you advise the officer regarding your role?
Now assume that the officer knows he is suspected and asks you if he should obtain a lawyer before proceeding with the interview? How do you respond?
Now assume that the officer is on the board and a significant shareholder? How do you respond?
Hypothetical IV
You are general counsel of a small public company. You get a call from your outside auditor to discuss the CEO’sexpense reimbursements. It seems the CEO has submitted requests for reimbursement in excess of $20,000 per month, many times without appropriate backup documentation. The auditor tells you that the issue is not material with respect to the financial statements as a whole. Many of the requests are arguably personal – bar tabs, front row seats for the Lakers and expensive purchases of watches and computer equipment characterized as client gifts. You also recall the CEO recently dismissed a member of the accounting staff after a dispute which you seem to remember involved expense reimbursement. You call the Chairman of the Board who says “let me handle it.”
The Chairman calls you back a week later and says he has investigated the situation, is comfortable doing nothing and that the CEO will “clean up his act in the future.” You do nothing. Have you done the right thing?
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