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.

SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program — Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

The Securities and Exchange Commission filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission’s complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the “Program”). The kickbacks were characterized as “after sales service fees” (“ASSFs”), but no bona fide services were performed. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat’s and CNH Global’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission’s Complaint:

During the Oil for Food Program, Fiat’s subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent’s commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for “contract pay-back” due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent’s invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO’s bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO’s role. A line item identified as “pay-back” on IVECO documents corresponded to the amount of the agent’s bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company’s books and records.

For more see SEC.gov.

Desperate IT workers who have been laid off will go rogue in 2009, selling corporate data and using crimeware, reports have predicted

The credit crunch will drive some IT workers to use their skills to steal credit-card data using phishing attacks, and abuse their privileged corporate computer access to sell off valuable financial and intellectual information, forensic experts have warned.

Both PricewaterhouseCoopers (PwC) and security vendor Finjan are forecasting that the recession will fuel a significant rise in insider fraud and cybercrime in 2009.

A PwC forensic expert claimed the financial-services sector is already investigating a rising number of staff frauds, while Finjan cited evidence of a trend in 2008 for unemployed IT staff in Eastern Europe and Asia to use crimeware toolkits to launch phishing attacks and seed malware to steal financial details.

For more see Zdnet.com.

Lack of policy adds to e-discovery cost and complexity — Large percentage of companies lack legal holds

IT and legal teams must work together to establish e-discovery policies. In fact, one-third of companies lack formal policies and procedures for legal holds, according to a recent poll of attorneys and executives conducted by Deloitte. A legal hold is the process by which companies preserve evidence subject to discovery for lawsuits and other legal and regulatory matters. In this increasingly litigious society, it’s likely IT will have to hand over e-mails and backup files.

“Given the relatively low cost of establishing a policy framework and processes to address legal hold issues, it is surprising to see such a large percentage of corporate America lacking in this area,” says Jeff Seymour, a principal with Deloitte Financial Advisory Services analytic and forensic technology practice.

Respondents indicated responding to discovery requests has become significantly more complicated and costly. And less than one-third indicated their companies are very or extremely effective in managing the readiness aspect of the discovery process. Worse, 5% said the guidance provided to IT on litigation hold polices was unclear and 35% said it was only somewhat clear.

For more see NetworkWorld.com.

CIA tape destruction offers cautionary tale for CIOs — Companies face big fines for not producing electronic evidence

December 10, 2007 (IDG News Service) — The recent revelation that the U.S. Central Intelligence Agency destroyed videotapes of interrogations of two terrorist suspects may offer a timely reminder for CIOs at private companies in the U.S. tasked with electronic evidence preservation rules since last December.The e-discovery rules — amendments to U.S. courts’ Federal Rules of Civil Procedure — don’t apply to the CIA. But the agency’s decision to destroy videotapes showing harsh interrogation techniques may teach private companies how not to handle evidence, some e-discovery experts said.

The e-discovery rules require U.S. companies to keep electronic records when they’re faced with a civil lawsuit or the likelihood of a lawsuit. In effect, what this means is that companies should archive e-mail and other electronic records, said Ralph Harvey, CEO of Forensic & Compliance Systems Ltd., an e-mail archiving vendor based in Dublin.

For more see ComputerWorld.com.

Records Management: A Governance Crisis?

By Elizabeth Judd – Compliance Week — December 4, 2007

A new survey says that only 7 percent of senior executives and board directors consider records management a top issue for their company-compared to a whopping 40 percent of law departments on the front lines of litigation and growing demands for speed access to relevant electronic data.

The study, the Chief Legal Officer 2008 Strategic Planning Survey by consulting firm Lexakos, validates a growing suspicion among records management experts that too many executives still don’t understand the rapidly proliferating collection of data their companies are amassing and the attendant legal risks.

“A Post-It note may seem like a nothing, but it may be the core of a legal case,” notes Carol Choksy, president of ARMA International, the trade association for records and information management professionals, and CEO of IRAD Strategic Consulting.

Even the term “records management” is subject to debate. Some refer to “Records” with a capital “R,” classifying only personnel, tax, and environmental documents in that category. Official records like these are fairly easy to manage; regulations often stipulate how long they must be kept, and companies generally treat these documents with care.

More worrisome are the e-mails, random jottings, voicemails, instant messages, and other informal communiqués that employees generate every day. New “e-discovery” rules for how to handle such information in civil litigation, now in place for a year, do shine a spotlight on this area. Unfortunately, they seem to be illuminating the fact that most employees just don’t know how to handle these impromptu records.

“For most communications, there’s a fast-food mentality. You fire off an e-mail, and that’s how people communicate,” says Rick Wolf, founder of Lexakos and former chief compliance officer of the now-defunct Cendant Corp. He notes that an estimated 97 billion business e-mails are generated each day worldwide, nearly five times the volume just five years ago.

This over-accumulation of information-Wolf calls it “corporate plaque” -creates legal risk. Wolf says companies have “poor processes and controls around how people communicate.”

That shouldn’t be so, he argues. With e-mail messages turning out to be a smoking gun in everything from Microsoft’s antitrust trial to the collapse of Arthur Andersen five years ago, “Records management is becoming difficult to trump as a priority,” he says. “And to a company, no one’s comfortable that they’re nailing this thing.”

A Crisis of Global Proportion: Slipshod Control Over Work-related Files of Employees

A recent survey conducted says that one out of two employees store work-related files in multiple locations.  Do you know any employee who stores all their work-related files in one place?  While common sense suggests this percentage is much higher, the point is that most organizations are losing the information management battle–if fighting it at all.  The proliferation of business email, estimated  at 97 billion a day in 2007, when combined with poor records and information management, is a bona fide global crisis.  It is not easy to achieve, but the organizations that dig in and start enforcing compliance with records management policy will realize material savings to the bottom line and quickly gain competitive advantage. 

For more on the referenced survey follow this link.

Data digging can be legal headache

Thursday, November 8, 2007

By MARTHA McKAY
STAFF WRITER for The Record

Here’s a fact to consider: As much as 70 percent of all electronic documents your business generates will never be printed on paper.

So what, you say? Isn’t the paperless office a good thing?

Well, it depends.

If your business gets sued, it’s no longer a matter of leafing through boxes for letters, files or other papers that lawyers typically request during the initial discovery phase of a lawsuit. These days, a suit against a company, or any other organization, is likely to trigger a new kind of cyber-scrambling.

Instead of searching through boxes, you’ve got to search hard drives, servers and backup tapes. Your IT guy might have to wade through two years’ worth of stored e-mail for messages related to the suit. And you may end up paying a small fortune for a legal team (because it will take a team to do the work) to review all the electronic documents that turn up despite trying to refine a search using words related to the specific case.

It’s not hard to imagine that this could become a really big headache for any size business.

“Companies are starting to drown in their own e-mails and electronic files,” said Patrick J. Burke, assistant general counsel for Guidance Software Inc., computer forensic specialists based in Pasadena, Calif.

In December, a set of federal guidelines came out that gave lawyers and courts a better framework for how to deal with electronic discovery issues. The new rules force participants in a lawsuit to think early on in the process about the quantity of electronic documents that need to be produced, who is going to pay for them, and how the process will be done.

As for awareness in the business community about impact of the new rules, most lawyers believe the news is filtering out.

“Businesses with in-house counsel are either aware of it or are beginning to be aware of it,” said David Kohane, a litigator with Cole, Schotz, Meisel, Forman & Leonard in Hackensack. “Companies involved in litigation are definitely aware of it.”

What they might not be aware of, however, is cost.

The sheer volume of e-mail sent by businesses these days means the amount of information you’re likely to have to sift through is big. Really big. Think about how many times an attached document might be circulated around an organization in an e-mail and you’ll start to get the idea. Or consider what might happen if a lawyer asks for a document dating back 10 years or more that’s stored on a musty backup tape in a format no one uses anymore (remember WordStar?).

Your business may end up with people sitting for 10 to 12 hours a day reviewing the mass of electronically stored documents before they are handed over to the legal adversary requesting them.

As Jeffrey J. Greenbaum, a veteran business litigator with Newark law firm Sills Cummis & Gross, put it, this could cost your business “oodles of money.”

Greenbaum told of one case he handled in which his client was forced to drop the lawsuit because the cost of electronic discovery was simply too high.

Not surprisingly, there are a slew of technology companies that offer methods of combing through backup tapes and sniffing around desktop hard drives to retrieve the relevant data. Many of them are also in the business of offering storage and archiving services.

AXS-One, a digital archiving and records management company based in Rutherford that offers businesses e-discovery services, says it is starting to see companies come to them before they get hit with a lawsuit. And they predict more changes to come.

“Over time, IT management will start to need to have a very good handle on what’s involved in litigation and [a company’s] general counsel and outside counsel will become much more savvy about IT,” said Marie-Charlotte Patterson, a vice president of market strategy at AXS-One.

Rick Wolf, a former top lawyer for Cendant Corp., has been through the e-discovery wringer.

As senior vice president and head of global compliance, he coordinated that company’s effort in 1998 to secure e-mail backup tapes in connection with a grand jury subpoena.

Today, along with tighter regulations governing what records must be retained by companies, the cost of storing all that electronic data has dropped, said Wolf, who now runs his own consultancy, Lexakos in West Orange.

“[Storage] is almost a commodity,” said Wolf. “It’s affordable to store the information, but it’s very difficult to preserve what you need and destroy what you don’t.”

That is the big problem. If you continue to allow your employees to communicate using e-mail, instant messaging, mobile text message services and more, then your business needs to think about getting a good records retention policy in place that both in-house lawyers and IT people can agree on.

It’s easier said than done, the experts say.

“Everybody knows what they need to do,” said Wolf, “but it’s very difficult to execute.”