CORPORATE CRIME REPORTER
John
Coffee Says McNulty Memo Went a Bridge Too Far in Tying Hands of Prosecutors
in Corporate Crime Investigations
21 Corporate Crime Reporter 1, December 26, 2006
Columbia Law School Professor John Coffee says the Justice Department’s
McNulty
memo went “a bridge too far” in requiring prosecutors to get
approval from Justice Department headquarters before seeking waiver of attorney
client privilege in corporate crime investigations.
“Typically, when a corporation is caught up in a scandal, the board of
directors, if it is behaving competently at all, will ask an independent law
firm to come in, conduct a study, and advise it of what went on because they
can’t rely solely on management – because management is self-interested
and quite possibly implicated,” Coffee said in an interview last week
with Corporate Crime Reporter. “When those reports are done by
management and given to the corporation, they are privileged. Plea bargains,
for as long as I’ve known them, usually involve the company giving up
someone else. When a corporation gets a deferred prosecution agreement, it would
be appropriate to have the corporation prepare that same internal self-study
and give it to the government. If you are going to have leniency, you have to
help the government identify who was responsible and help them take that action.”
“Under the McNulty memo, the government doesn’t say it can’t
ask for that study,” Coffee said. “But it requires that it has to
be approved by the Assistant Attorney General running the Criminal Division.
And that is higher up than the typical young prosecutor will be comfortable
going.”
Will this lead to more criminal prosecutions?
“It could make the deferred prosecution agreement less attractive to the
government,” Coffee said. “You might like that. I would like to
see however that the government get the benefit of this type of detailed study
that independent counsel has conducted. We want to know what happened. And those
reports are a valuable source of information. As I understand the McNulty memo,
it basically restricts the government’s access to those studies.”
Coffee was also critical of the work of the Committee
on Capital Markets Regulation – aka the Paulson Committee. Coffee
served as a member of the committee’s enforcement task force.
But Coffee said that he didn’t share much common ground with the committee on curtailing Sarbanes-Oxley and was critical of the committee’s work on regulation and law enforcement generally.
“I was a consultant to that committee, but only on the topic of securities
regulation,” Coffee said. “I don’t share much common ground
with that committee on whether or not we should cut back on Sarbanes-Oxley.
I believe Sarbanes-Oxley was the needed answer to problems and I don’t
believe it can be ascribed as the cause of any flight of foreign issuers from
the U.S. capital markets.”
Coffee said he disagreed with the Paulson Committee’s proposal to preclude
private litigation any time the SEC brought an action against a corporation
that was settled for damages paid out of Sarbanes Oxley’s fair funds provision.
“I don’t believe that proposal works,” Coffee said. “It
effectively makes the SEC into a kind of board of pardons for companies by allowing
the SEC to be the only institution that levies any penalties or gets any recovery.
That would quickly cause corporations to come running to the SEC with a settlement
well before the SEC knew enough to understand what the full financial harm or
damage was.”
Coffee said the proposal “compromises the SEC – putting it in effect
in a position of selling indulgences to public corporations.”
“The SEC in the past has never had to worry about what is an adequate
compensatory recovery when it settled with the company,” Coffee said.
“It saw its role as to gain some deterrence and also to notify the private
bar that here was a company that misbehaved and they could now sue it.”
And Coffee said that the Committee never even considered his idea that Congress
repeal the 1994 Supreme Court decision in Central Bank of Denver, which
in effect eliminated aiding and abetting liability for gatekeepers in securities
litigation.
“The Supreme Court said in that case that there is no liability for aiding
and abetting under SEC Rule 10b-5, which is the principal anti-fraud rule of
the federal securities laws,” Coffee said. “That means that the
only time you can sue an auditor, or an investment banker, or any of the other
agents who represent and help structure the transaction is when they have literally
made a statement to the world. And lawyers don’t generally do that. They
draft statements for the client, but they generally don’t make their own
statements. Before 1994, when the Central Bank of Denver decision came
down, the law firm could be sued for aiding and abetting the client’s
violation – at least if you showed the requisite level of intent. That
is appropriate. It is also appropriate that investment bankers and auditors
should have liability when they assist the company in making a false statement.
But today, they only have liability when they make their own statement –
which the auditor does make when it certifies the company’s annual financial
statements. But it doesn’t make any similar statement when it approves
the company’s quarterly financial statement.”
Much of the interview with Coffee focused on his new book – Gatekeepers:
The Professions and Corporate Governance (Oxford University Press, 2006).
Coffee argues that the directors are essentially prisoners of the gatekeepers
and that while much attention has been focused on the board of directors, little
has been focused on the gatekeepers – the attorneys, auditors, securities
analysts and credit rating agencies.
With this book, he seeks to rectify the imbalance.
If his proposals take hold, the gatekeepers will likely not be happy.
For corporate lawyers, for example, Coffee would have the SEC require that every publically held company have a designated “disclosure counsel” who would be responsible for preparing the company’s annual report and quarterly reports that are filed with the SEC.
The disclosure counsel would have to certify that he helped prepare those documents and that he conducted a review that he considers adequate under the circumstances. And based on that review, he was not aware of any material omission or misstatement.
(For a complete transcript of the Interview with John Coffee, see 21 Corporate Crime Reporter 1, January 1, 2007, print edition only)
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