In the spotlight

The US federal securities watchdog certainly has teeth, as it has proved during George W Bush's presidency. It also has a growing appetite for pursuing general counsel, as a spate of investigations over the summer has shown. Sophie Evans reports

September 29, 2004 at 08:03 PM

6 minute read

By a:1:{i:0;s:1:" ";}

Not so long ago, it was virtually unheard of for a general counsel to be pursued by the authorities for alleged involvement in a company's misdemeanours. But in a changed corporate climate in the US, in-house lawyers are no longer safe from investigations by the Securities and Exchange Commission (SEC). With greater visibility in a company's executive structure, comes greater risk for general counsel.

A handful of legal advisers at major companies have found themselves at the heart of the SEC's recent spate of investigations. Following in the wake of former Tyco general counsel Mark Belnick's acquittal of all fraud charges in a case brought by the New York District Attorney, three more corporate counsel have hit the headlines as the SEC continues its push to stamp out corporate wrongdoing.

Under President George W Bush, the agency has imposed a record-breaking $1.8bn (£1bn) in penalties in four years. This figure is more than the SEC levied in the preceding 16 years, dating back to the time when it received the power from Congress to set meaningful penalties.

Computer Associates

Last week, the SEC announced it was bringing securities fraud charges against Computer Associates International (CA), and three of the company's former top executives, including general counsel Stephen Woghin. Computer Associates is the world's fourth largest business software maker, operating in more than 100 countries, and the three executives stand accused of a multi-billion dollar accounting scandal.

The allegations are that from 1998 to 2000, CA routinely kept its books open to record revenue from contracts executed after the quarter ended, in order to meet Wall Street quarterly earnings estimates. The SEC claims that CA prematurely recognised $2.2bn (£1.2bn) in revenue in the financial year 2000-01, and more than $1.1bn (£600,000) in the following financial year.

The commission also alleges that the three executives, including Woghin, obstructed the SEC's investigation into the company's accounting practices.

The company has already agreed to stump up $225m (£125m) to injured shareholders as well as instituting reforms to its corporate governance and financial accounting controls. Woghin's replacement at CA, Kenneth Handal, will no doubt be heavily involved in the shake-up of its governance.

The SEC accused Woghin of serious misconduct. It alleges that he "allowed CA's legal department to approve contracts obtained by the sales force while knowing, or recklessly disregarding the fact that, those contracts contained false and misleading signature dates and that CA would recognise revenue from those contracts in the incorrect fiscal quarter".

Ex-CEO Sanjay Kumar and the company's former head of worldwide sales, Stephen Richards, have both pleaded not guilty to charges of obstruction of justice, conspiracy to obstruct justice and making false statements to law enforcement officers.

But Woghin has admitted to charges of conspiracy to commit securities fraud and obstruction of justice. His employment at CA was terminated in April.

Three other former senior accounting and financial reporting executives have already pleaded guilty to conspiracy to commit securities fraud charges.

While civil penalties remain pending, Woghin has agreed to a partial judgment permanently barring him from serving as an officer or director of a public company.

In reporting the charges, Mark Schonfeld, director of the SEC's northeast regional office, said: "Like a team that plays on after the final whistle has blown, Computer Associates kept scoring until it had all the points it needed to make every quarter look like a win.

"With these charges we have demonstrated our commitment to hold the highest levels of management responsible for fraud on the company's shareholders."

Qwest

The SEC has also recently pursued Drake Tempest, the former general counsel of Qwest Communications, in an attempt to force him to testify against his former employer. On 28 July, the SEC filed a request asking a federal court judge in Denver to force Tempest to testify in relation to Qwest: Drake failed to appear at an SEC hearing in June this year after being subpoenaed by the regulator.

Again, Qwest is a huge company, ranking in the top 70 of the Federal Government's prime contractors. Its annual turnover is more than $10bn (£5.5bn), and it provides telecommunications and web-hosting facilities to many Government departments.

The SEC alleges that Qwest overstated $2.5bn (£1.4bn) of sales, and wants Tempest, who left Qwest in 2003 to join Los Angeles law firm O'Melveny & Myers, to testify in its civil case against 10 senior Qwest officials about their role in the affair.

However, Tempest's lawyers have advised him to delay his appearance before the SEC until a US Department of Justice criminal investigation into the affair is concluded.

The first criminal case concluded last week, with former executive Thomas Hall pleading guilty to a single count of falsifying documents. But there are several more cases in the pipeline.

Google

The third corporate counsel to hit the headlines in recent weeks could not be in a more high profile job. In August this year, Google's top in-house lawyer, David Drummond, found himself the potential target of SEC charges.

The allegations against Drummond, a former partner at tech specialist Wilson Sonsini Goodrich & Rosati, relate to his previous role as chief financial officer of SmartForce, an educational software company.

The allegations came to light in the run up to Google's IPO. They were contained in a filing Google made with the SEC in July as part of the preparations for its float. In it, the internet search engine giant said that SEC staff would be recommending to the regulator that it launch a civil injunction against Drummond "alleging violation of federal securities laws, including the anti-fraud provisions". Google expressed its "utmost confidence" in Drummond.

In the context of the SEC's drive to bring corporate wrongdoers to account, few senior lawyers in the US are surprised that some corporate counsel are being caught in its net.

One senior partner at a top US firm observed: "This is all part of the Sarbanes-Oxley fall-out where the authorities have been aggressively targeting both in-house and outside counsel in order that they fulfil their broader obligations."

US corporate counsel undoubtedly have a higher corporate profile in the US than they do in any other jurisdiction.

This profile brings with it considerable financial rewards – but it also puts senior US in-house lawyers in the thick of things when the SEC smells a rat.