Opinion

Alison Frankel

How much should corporations admit to SEC, Justice Department?

Alison Frankel
Oct 19, 2012 21:33 UTC

Last April, as a follow-up to revelations that Wal-Mart had allegedly covered up bribes paid by its Mexican subsidiary, the great Corporate Counsel reporter Sue Reisinger ran a very surprising piece. Despite the scandal engulfing Wal-Mart, defense lawyers told Reisinger that the company may have made a strategically smart decision not to disclose the matter to the government. Smart? Really? Would Wal-Mart’s alleged bribery have blown up into a public relations fiasco that cried out for governmental consequences if the company had quietly admitted the facts to the Securities and Exchange Commission or the Justice Department?

I figured Dodd-Frank’s whistle-blower provisions would make corporate self-reporting even more of a no-brainer, since insiders now have not only a moral and legal incentive but also a powerful financial motive to alert the SEC when they suspect wrongdoing. According to BuckleySandler partner Thomas Sporkin, who until last June was chief of the SEC’s Office of Market Intelligence, the commission receives 1.2 whistle-blower tips a day, on average. If I were a corporate official wondering whether to self-report, I’d assume that one of those tips was about my company and run to the feds before they came to me.

But according to several of the most prominent SEC enforcement advisers in Washington, w ho were speaking Thursday at Securities Docket’s Securities Enforcement Forum, corporations should think hard about the decision to confess their sins or handle problems internally. “You have to decide whether the issue merits the government’s involvement,” said William McLucas of Wilmer Cutler Pickering Hale and Dorr in a follow-up phone conversation Friday. Even in an era in which “you have to assume there are no secrets,” McLucas said, problems that fall short of systemic wrongdoing call for judgment, not reflexive confession. “That’s why you have compliance systems and controls,” he said.

William Baker of Latham & Watkins told me Friday that under Dodd-Frank, companies have to be wary that whistle-blowers will go to the SEC, but, like McLucas, said there is a range of problems that can be handled effectively enough in-house that even if the SEC launches an investigation, the agency will be satisfied with the company’s response. If, on the other hand, the wrongdoing involves anything that would affect public disclosures, Baker said, it must be reported. “It’s a very difficult, very nuanced decision for a company,” he said.

It’s also difficult for outside counsel, McLucas said at Thursday’s conference. If outside lawyers recommend that clients throw themselves on the mercy of the government and the government doesn’t show mercy, that’s not a good outcome for the lawyers. Clients, Baker added, also have to think about the higher cost of dealing with a government investigation rather than handling a problem internally. In a panel on the Foreign Corrupt Practices Act, former SEC FCPA enforcement chief Cheryl Scarboro of Simpson Thacher & Bartlett said that while government policy is to reward self-reporting, it’s not always clear what the benefits are. And if companies do report that they’ve made illegal payments to officials in one country, added Joseph Warin of Gibson, Dunn & Crutcher, they often find their practices in other countries under investigation.

Del. judges mean it: Don’t file derivative suit pre-investigation

Alison Frankel
Jul 18, 2012 04:15 UTC

There’s an antitrust conspiracy in Delaware Chancery Court. Chancellor Leo Strine and Vice Chancellor Travis Laster are engaged in a cooperative effort to restrain the trade of shareholder lawyers who file derivative suits without obtaining books and records discovery. I’ve told you about Laster’s decision in the Allergan case, in which he found that shareholders who rushed to sue in California didn’t adequately represent the corporation (the nominal plaintiff in derivative litigation); and about Laster’s follow-up explanation that “diligent plaintiffs should get to litigate,” when he certified the case for appeal. On Monday, Strine echoed Laster when he refused to appoint a lead plaintiff in the derivative litigation over Wal-Mart’s alleged bribes in Mexico.

“More energy was spent by dueling plaintiffs over who gets to be lead counsel and lead plaintiff than was spent writing the complaints,” Strine said, according to my Reuters colleague Tom Hals. The chancellor chastised the two state pension fund giants vying to be named lead plaintiff for basing their complaints on the New York Times scoop on Wal-Mart’s alleged payments rather than on their own investigations, and said everyone should come back to court after the Indiana Electrical Workers Pension Trust Fund, IBEW, and its lawyers at Grant & Eisenhofer have obtained access to Wal-Mart’s books and records through the demand they have served on Wal-Mart’s board.

The California State Retirement System (CalSTRS) and the New York City Employees’ Retirement System had moved for appointments under what was previously considered the leading Delaware case on the standard for lead plaintiffs, Hirt v. U.S. Timberlands ServiceHirt laid out six factors the court should consider in choosing a lead in derivative litigation, including the quality of the complaint and the plaintiff’s economic stake in the outcome. (Remember, there’s no statutory framework for lead plaintiffs in derivative cases, as opposed to federal securities class actions.)

The Bentonville Black SOX? Wal-Mart’s Sarbanes-Oxley problem

Alison Frankel
Apr 23, 2012 20:16 UTC

The follow-up to the New York Times blockbuster scoop on Wal-Mart’s alleged cover-up of $24 million in Mexican bribes has, quite rightly, focused on the company’s potential Foreign Corrupt Practices Act exposure. But that’s not the only law Wal-Mart and its executives should be worrying about.

Good old Sarbanes-Oxley, passed in 2002 in the wake of accounting scandals at Enron, WorldCom, Tyco, Adelphia and other public companies, was intended to prevent exactly the kind of cover-up Wal-Mart allegedly engaged in, according to the Times report. The 10-year-old law imposed gatekeeper duties on corporate lawyers, who are supposed to report material violations of the securities laws up the chain of command, all the way to the audit committee of the board, if necessary. SOX also requires corporations and their auditors to report on the company’s internal controls for financial reporting – and requires that CEOs and CFOs certify the material accuracy of financial reports. According to securities-law experts, if the Times allegations are true, Wal-Mart may have run afoul of all these provisions.

The bribery allegations originated with a Wal-Mart lawyer in Mexico, who told Wal-Mart International’s general counsel, Maritza Munich, about the “irregularities.” She authorized a preliminary investigation by outside counsel in Mexico, then – quite appropriately – reported the findings to Wal-Mart’s then-General Counsel Thomas Mars, among other senior officials. Mars brought in Willkie Farr & Gallagher, which proposed that it conduct a far-reaching internal investigation. So far, so good.

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