Feds Set Sights on ‘Gatekeepers’ in Fraud Investigations

Joe Palazzolo
Legal Times

Federal law enforcement officials said Wednesday they are targeting lawyers, mortgage brokers, real estate brokers and other “gatekeepers” who perpetrated fraud that contributed to the current economic crisis — a clear warning shot as the federal government is pumping billions of dollars into the financial sector.

“They have the most to lose, they’re the most likely to flip, and they make the best examples,” said Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, during a congressional hearing on fraud enforcement. Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., was even more blunt: “I want to see these people prosecuted,” he said. “Frankly, I want to see them go to jail.” The hearing was meant to underscore the need for more law enforcement resources amid an upsurge in mortgage and corporate fraud investigations.

Leahy and Sen. Charles Grassley, R-Iowa, have introduced a bill that would expand the scope of federal fraud laws and provide funding for more prosecutors and investigators. FBI Deputy Director John Pistole told the committee that mortgage fraud investigations nearly doubled in the last two years to more than 1,600 in 2008. The bureau, he said, has more than 530 corporate fraud investigations open, including 38 directly related to the current financial crisis.

Pistole said he could see that number potentially rising into the hundreds. But federal law enforcers could do much more with additional resources, he said, pointing to the Justice Department’s successes in the wake of the savings-and-loan crisis of the 1980s. At the time, 1,000 agents and forensic investigators and dozens of federal prosecutors were devoted to the effort, which produced more than 600 convictions and $130 million in restitution. Compared to the $160 million lost during the S&L crisis, the current situation is far more dire, with financial institutions globally reducing their assets by more than $1 trillion.  But the Justice Department’s focus on national security has diminished the fraud ranks.

Pistole said 240 agents, supplemented by investigators from other agencies, are working on fraud cases stemming from the economic crisis. Rita Glavin, acting head of the Justice Department’s Criminal Division, said the department was in discussions with Barofsky about how best to handle criminal referrals and prosecutions when his office uncovers wrongdoing. She also said the Justice Department’s fraud section had created a mortgage fraud working group, with a collection of other enforcement agencies. Sen. Sheldon Whitehouse, D-R.I., asked Glavin whether DOJ had any designs for a nationwide mortgage fraud taskforce. Then-Attorney General Michael Mukasey repeatedly rejected the idea, saying individual U.S. Attorneys’ Offices were better equipped to handle the work. Glavin said the department was studying the issue. “No decision has been made with respect to that,” she said.

Tough Times for Corporate Legal Departments

Lexakos asked law department leaders again about their concerns, priorities and resource allocation plans for 2009. This year’s benchmarking survey covers reporting metrics, outsource planning for IP and litigation, budget pressures, e-discovery, privilege waiver management in relation to new Federal Evidence Rule 502, and other compliance priorities.

In 2007 and 2008, Compliance Week, the leading publication and information service on corporate governance, risk and compliance, chose Lexakos as a conduit for gathering and analyzing compliance needs across all industries

On February 3, 2009, Compliance Week featured the results from Lexakos’ most recent strategic planning survey, with over 230 corporations participating. In addition to highlighting Lexakos’ relevance in the compliance arena, this coverage gives Lexakos an exclusive perspective of hundreds of companies’ needs and practices.   Here is an excerpt:

The new study of corporate law departments confirms what most general counsels already know: 2009 is going to be a rough year.

Forty percent of legal departments expect a decrease in their overall operating budget for 2009, compared to only 8 percent last year. At the same time, however, litigation activity is rising—particularly for the financial sector, besieged by investors unhappy with the sub-prime mortgage meltdown and victims of the Bernard Madoff Ponzi scheme.

Wolf “Even though budgets are being tightened, litigation is going up,” says Rick Wolf, CEO of the consulting firm Lexakos, which conducted the survey. “What it suggests to me is that they’re being asked to do more with less.”

David Cohen, co-chair of the e-discovery analysis and technology group at the law firm K&L Gates, has observed similar trends. “Corporate law departments are facing two realities. The first reality is that litigation does not go away in troubling economic times, and the cost of that litigation tends to go up, not down, every year,” he says. “General counsel are left on the horns of a dilemma: how to cut litigation costs in the face of no decrease in litigation, and often increasing e-discovery demands.”

Those pressures should lead in-house legal departments to prune back the volume of work they leave to outside law firms by doing more work themselves. But law departments are now under their own pressure to cut back on staff. “The result of all of that, paradoxically, is that lawyers are stretched even more thinly than they have been in the past, making it difficult to bring more work in house,” Cohen says.

As a result, law departments are getting more creative in how they cut costs and managing themselves more efficiently, Wolf says. For example, only 32 percent of law departments last year used a centralized litigation group; that number jumped to 49 percent for 2009. And while only 20 percent of respondents last year said their legal departments had a strategic plan for the year, that number soared to 57 percent this year.

Compliance Week ran a similar feature article on the Lexakos 2008 Strategic Planning Survey titled “Records Management: A Governance Crisis?”

For a copy contact information@lexakos.com.

Kill the Billable Hour? A British Response

As much as the legal sector experiences a change in momentum, such a change seems to be occurring now.

Last week, The Am Law Daily picked up on a piece penned by Cravath, Swaine & Moore‘s Evan Chesler in the latest issue of Forbes magazine, entitled “Time to Kill the Billable Hour.” Cravath’s presiding partner, in presenting an impassioned case for abandoning the practice of charging of clients by the hour, lent his voice to a growing debate.

In the United Kingdom, lawyers and clients have never had the same all-consuming obsession with hourly billing as their American peers. Still, over the last 20 years hourly rates have become the dominant currency here as well, and the tide slowly is turning — some British companies and firms are much further along in making the change.

Last summer, our London-based sibling publication Legal Week broke the story that commercial TV network ITV asked its outside law firms to abandon the billable hour and instead adopt alternative billing arrangements. General counsel Andrew Garard, who joined the company in the fall of 2007 from the London office of Dewey & LeBoeuf, said he wanted ITV to become the first major U.K. company to abandon this form of billing, and he initiated a review of the company’s outside legal providers.

By last November, Garard had finalized a list of approved outside counsel, a panel of nine firms, including Dewey, DLA Piper, Lovells, and Slaughter and May, that had committed to alternative billing methods. “None of the firms will bill us with reference to a measure of time on any matters,” Garard told Legal Week.

For more see law.com.

E-Discovery Trends in 2009 — New developments in e-discovery will affect enterprise general counsel and compliance officers, law firms serving corporate clients, and IT departments

By Christine Taylor, January 9, 2008, 12:10 PM

A few years ago, the Taneja Group coined the term “Information Classification and Management” (ICM) to describe the technology of locating and classifying data throughout the enterprise. ICM covered sub-technology sectors such as e-discovery, compliance, data security control, and data management. However, we saw the term “e-discovery” trump the more comprehensive name as rabid attention turned from ICM to the specifics of civil litigation software tools. We are now seeing the e-discovery term itself take on a fuller usage, more akin to ICM. People do use the term when talking about civil litigation, but are also expanding it to encompass compliance, corporate governance, data classification, and even knowledge management.

In this broad sense we have looked at the trends of the e-discovery market as they impact its largest stakeholders: the enterprise general counsel and compliance officers, law firms serving corporate clients, and IT.

The crux of the matter is that e-discovery and its related areas will be extremely hot for litigation and compliance, especially those related to the financial meltdown. The market increasingly understands the necessity of e-discovery software tools and systems, and will move toward proactive e-discovery adoption. A more reactive approach will remain alive and well as many companies will still avoid implementation until driven to it by a lawsuit or federal investigation. But companies will increasingly understand that the e-discovery solution phenomenon is much more than a litigation aid. It also has major effects on federal compliance and internal governance, and potentially on data management throughout the enterprise.

For more see byteandswitch.com.

Former GC: BigLaw Really Is Better

When Ron Friedmann recently derided general counsel for staying with time-worn practices in their hiring of outside counsel, even in the face of the worst economic crisis since the Depression, he heard from one former GC who said that large companies will not be abandoning their BigLaw outside counsel anytime in the foreseeable future. With her permission, Friedmann shares her surprisingly frank comments.

Sheryl Katz is now an independent legal and technology consultant. She was formerly vice president and general counsel at 101 Communications LLC, now part of 1105 Media. She has also been a partner with Graham & James, counsel to Perkins Coie and an associate at Bryan Cave and WilmerHale. With that experience under her belt, she believes that any movement towards smaller firms is nothing more than a minor trend.

If small firms that would do the same quality work for less were truly available, I would have farmed out more work to them. In some cases former law school classmates, or former attorneys at Wilmer or other firms that I knew, were available in smaller firms to help on matters. Sometimes this resulted in good quality work and lower bills. However, small firms often don’t have the depth of staff, so some matters that are not even necessarily that big can really only be handled by a bigger firm. Also, on a lot of transactions you really need your tax lawyer, corporate lawyer and banking lawyer to be at the same firm.
There are plenty of good lawyers in firms of all sizes and “great” solo practitioners, she acknowledges. “Unfortunately,” she adds, “there is also a lot of mediocrity.” And then there is that CYA factor heard often among GC:

Going to a large firm in a lot of cases is sort of like going to a chain restaurant. You pretty much know that the minimum you are going to get is going to be acceptable. And if the firm messes up, as General Counsel, you are covered. After all, you can always say “It may be a mess but Blank, Blank and Blank is reputed to be a great firm so don’t fault me for hiring them.”

I guess we can call her chain-resturant analogy the food-poisoning theory of law department management. Better the mass-produced burger that is safe and predictable than the risk of a gourmet meal.

By Robert J. Ambrogi on December 29, 2008 at 12:42 PM

GCs Starting to Bring the Work Back Home

Leslie A. Gordon
GC California Magazine
December 18, 2008

Like many in-house lawyers, Shannon Dwyer, general counsel at St. Joseph Health System in the Southern California city of Orange, has been gearing up for the 2010 budgeting cycle. The $4 billion, nonprofit organization, which runs 14 hospitals in three states, has a “responsibility to be a good steward of the assets,” says Dwyer. But in the current economy, she’s finding that using seasoned attorneys at large law firms is quickly becoming “cost-prohibitive.”

As a result, she’s been looking to hire a new lawyer — bringing her legal department to nine attorneys — to help handle even more of St. Joseph’s legal work in house. “It’s a basic cost-benefit analysis,” says Dwyer. “Although there’s some convincing of management to be done whenever you increase [employee staffing] at the corporate level, it’s not difficult to make the business case” that adding in-house lawyers is cheaper in the long run than paying increasingly rising outside attorney fees.

Demonstrating a trend that has significant implications for law firms, a growing number of California companies are under pressure to control costs and handle more work in house, where they can come closer to paying wholesale rather than retail for legal services. According to a 2008 survey of chief legal officers, conducted by consulting firm Altman Weil, GCs like Dwyer are planning to decrease their use of outside firms, which typically constitute the largest expense of any corporate legal department. Correspondingly, chief legal officers plan to increase law department staffing over the next 12 months, according to the survey, which was conducted this past May and June.

Specifically, the survey reports that 49 percent of legal departments plan to hire additional lawyers in the next year, up from the 40 percent who said they planned on new hiring in the last survey. At the same time, 26 percent of law departments will decrease their outside counsel, up significantly from 16 percent in last year’s survey. Only eight percent of CLOs plan to increase their use of outside counsel, down from 18 percent. Not surprisingly, CLOs cited cost control as their top concern over the next three to five years.

Hildebrandt International, another legal consulting firm, conducted a similar survey, which supports the Altman Weil conclusions. Hildebrandt’s 2008 law department survey found that inside legal spending rose by five percent in the United States while spending on outside counsel increased by just two percent. Nearly a third — 29 percent — of the 223 responding companies anticipate a decrease in the number of law firms they will use.

For more see law.com.

Will Tough Economy Push Companies to Outsource Legal Work? Some companies see big savings in ‘offshoring’ legal work – But how’s the quality?

David Hechler
Corporate Counsel
December 22, 2008

Martin Shively directs the worldwide IP operations of Microsoft Corp. But he doesn’t commute to the company’s campus in Redmond, Wash., every day. The associate GC works in a remote office in New Delhi, where he’s been based for 18 months overseeing not call centers, but outsourced patent work. And his operation is saving Microsoft millions on its legal bills.

Shively’s Indian experience dates back to 2004, when he took over budget responsibility for Microsoft’s patent group. There was a lot of buzz about outsourcing legal work to India; corporations like General Electric Co. were doing it, and slashing their legal bills. So Shively figured why not Microsoft? He started with the most basic task he could think of — proofreading patent applications. Instead of paying high-priced associates to do this work at a dozen U.S. law firms that drafted Microsoft’s filings, he hired one vendor in New Delhi to do them all. It was, he says, “a safe place to have a failure.” If it flopped “we just wouldn’t tell anyone,” he laughs.

But it didn’t flop. “We went there to save money,” he acknowledges. “We stayed and expanded because we liked the quality of the work.” It wasn’t just OK, it was better.

For more see law.com.

SEC Files Settled Enforcement Actions Against UnitedHealth Group Inc. and Former General Counsel in Stock Options Backdating Case

Litigation Release No. 20836 / December 22, 2008

The Securities and Exchange Commission filed a civil injunctive action against UnitedHealth Group Inc., a Minnetonka, Minnesota health insurance company, alleging that it engaged in a scheme to backdate stock options. Without admitting or denying the allegations, UnitedHealth agreed to settle to charges that it violated the reporting, books and records, and internal controls provisions of the federal securities laws.

In a separate complaint, the Commission charged former UnitedHealth General Counsel David J. Lubben with participating in the stock option backdating scheme. Without admitting or denying the allegations, Lubben consented to, among other things, an antifraud injunction, a $575,000 civil penalty, and a five-year officer and director bar.

The Commission alleges that between 1994 and 2005 UnitedHealth concealed more than $1 billion in stock option compensation by providing senior executives and other employees with “in-the-money” options while secretly backdating the grants to avoid reporting the expenses to investors.

According to the Commission’s complaint, certain UnitedHealth officers used hindsight to pick advantageous grant dates for the company’s nonqualified stock options that on many occasions coincided with, or were close to, dates of historically low annual and quarterly closing prices for UnitedHealth’s common stock. Although pricing the options below current prices required the company to report a compensation expense under well-settled accounting principles, UnitedHealth avoided reporting the charges by creating inaccurate and misleading documents indicating that the options had been granted on the earlier date. The backdated grants resulted in materially misleading disclosures, with the company overstating its net income in fiscal years 1994 through 2005 by as much as $1.526 billion.

For more see SEC.gov.

Which GCs Are Most at Risk in Backdating Cases?

Firm partner’s research shows that general counsel who understood backdating’s accounting implications are getting hit hardest

Corporate Counsel
January 3, 2008

Why is the government taking action against some general counsel who backdated stock options, while letting others off the hook? According to John Villa, the key is whether GCs knew that backdating creates an accounting problem. If they did — and did nothing to fix it — they’re more likely to face a civil suit from the Securities and Exchange Commission or criminal charges from the U.S. Department of Justice.

Villa, a partner at Williams & Connolly, reached his conclusion after looking at the cases of seven general counsel who face criminal or civil charges for backdating. He recently published his findings in ACC Docket, the magazine of the Association of Corporate Counsel. Though Villa’s article does not name all of the seven legal chiefs that he studied, they are Lisa Berry of KLA-Tencor Corp. and Juniper Networks Inc.; Nancy Heinen of Apple Inc.; Myron Olesnyckyj of Monster Worldwide Inc.; Kent Roberts of McAfee Inc.; Kenneth Selterman of Take-Two Interactive Software Inc.; Susan Skaer of Mercury Interactive Corp.; and William Sorin of Comverse Technology Inc.

For more see law.com.

Companies Still Struggling To Find Way on E-Discovery

By Beth Bar
December 20, 2007

One year after revisions to the Federal Rules of Civil Procedure (FRCP) were put in place to address confusion and increased costs associated with electronic discovery, corporations are still struggling to comply with the new guidelines.

“Companies are taking a pro-active approach to electronic discovery,” said Allison L. Brecher, who is litigation counsel and e-discovery coordinator at Marsh & McLennan Companies. “The burdens of compliance, though, remain very difficult.”

Although it may be too early to gauge the ultimate impact of the rules, which went into effect on Dec. 1, 2006, attorneys agree that businesses are spending more money and time on electronic discovery.

The stakes are high. Companies that neglect the new obligations may face sanctions if they cannot produce evidence sought in litigation.

The short-term burdens of complying are reflected in several recent surveys.  Some of the findings:

• Almost 55 percent of the 140 in-house counsel surveyed by the e-discovery consultant Lexakos said their companies needed to spend more time developing e-discovery and litigation readiness plans.
• Fifty two percent agreed that they had to improve their litigation hold procedures, which require companies to preserve all data that may relate to a legal action involving the company. And almost half expressed the need to develop a process to segregate privileged communications and thus avoid high document review costs.
• Of the 76 people surveyed by Lexis Nexis at the Association of Corporate Counsel’s annual meeting, 44 percent said that their companies had not been prepared for the new rules. Although 61 percent said they were now very or somewhat confident that they were fully compliant, 30 percent still said that they were not very confident and 5 percent not at all confident.
• Twenty seven percent of respondents to a litigation trends survey released earlier this year by Fulbright & Jaworski said that the rules have made handling of e-discovery issues in federal litigation more difficult. Eighteen percent said they have made the process at least somewhat easier. The remainder detected no change.

The amendments includes revisions and additions to Rules 16, 26, 33, 34, 37 and 45, as well as Form 35. Among the matters addressed were the definition of discoverable material, the procedure for asserting privilege or work product after production and the early attention to electronic discovery issues.

The new protocols have made e-discovery compliance a prime litigation issue. H. Christopher Boehning of Paul, Weiss, Rifkind, Wharton & Garrison said that cases are increasingly being dismissed or companies heavily sanctioned based on the loss of electronic evidence.

“Cases are being derailed as a result of discovery issues,” Mr. Boehning said. “You want cases to be decided based on the merits, not on an e-discovery sideshow.”

So far, Mr. Boehning said, the rules have not improved the situation.

“Everybody is still trying to find their way,” he said.

Under the revised rules, parties have no initial duty to produce electronic data that is reasonably identified as inaccessible. A judge, however, can still order the evidence to be produced if she or he deems that there is good cause.

The rules also allow for a subpoena to be served to “permit inspection, copying, testing, or sampling” of electronically stored information.

This occurred in the recent Southern District case, Bridgeport Music v. UMG Recordings, 05 Civ. 6430. In this copyright infringement dispute, defendants UMG Recordings, Napster, Apple Computer and Yahoo! deposed attorney Stewart L. Levy, a nonparty, during discovery and subsequently issued a subpoena seeking production of certain licencing agreements for “new media.”

Bridgeport Music and Southfield Music argued that production of these documents would be unduly burdensome. But Magistrate Judge James C. Francis IV disagreed. In a decision that will be published in the Law Journal on Dec. 27, he ruled that the burden of production was “not so great as to justify quashing the subpoena, even if it is imposed upon a nonparty such as Mr. Levy.”

Costs for complying with the new discovery rules can run into hundreds of thousands of dollars.

High Cost of Preservation

Courtney Ingraffia Barton, an attorney who is vice president of industry relations for LexisNexis Applied Discovery, and Deborah House, Association of Corporate Counsel’s vice president and deputy general counsel, said that one of the biggest challenges companies are facing is securing the resources to implement a system that addresses electronic discovery issues.

David J. Lender, a partner at Weil, Gotshal & Manges, acknowledged that creating an electronic document preservation system is costly, but said that companies save money in the long run because they save on litigation expenses by having a system already in place.

And Adam I. Cohen, co-chair of the New York State Bar Association’s e-discovery committee, said that a documented process for handling information is beneficial in litigation.

“If mistakes are made you can defend your good faith by showing that you have devoted resources and developed methods” for dealing with this type of data, Mr. Cohen said.

Ms. Brecher of Marsh & McLennan, said her company was using a “team-based” approach.

“We are partnering with the IT department, and educating each other,” Ms. Brecher said.

She said that sometimes this education takes the form of training sessions and may involve bringing an information technology colleague to an e-discovery seminar.

Patrick Oot, director of electronic discovery and senior counsel in Verizon’s legal department, said that his company has developed a litigation manual that identifies the company’s policies with regards to electronic document preservation. It also identifies the specific actions that information technology and in-house legal counsel must take.

He said that having some type of efficient and uniform process for dealing with data requests is “invaluable.”

However, Robert D. Owen, a partner at Fulbright who is co-head of the firm’s e-discovery and information management practice group, said that rather than instituting e-discovery policies, many companies have decided to play “the e-discovery lottery.”

“They have decided to take the chance that they won’t be hit,” Mr. Owen said. “It’s a gamble.”