Caught Between Doing Well and Doing Good - New York Times
November 18, 2005
Legal Beat
Caught Between Doing Well and Doing Good
By JONATHAN D. GLATER
NOT a deal is done unless lawyers have blessed it. Not a regulatory filing is made unless lawyers have reviewed it. And not an executive compensation agreement is signed unless lawyers have approved it.
Lawyers have made themselves indispensable to public companies. Lawyers boast of their ability to learn the ins and outs of any problem and to know a client's interests better than the client does.
But if lawyers are as wise as they profess, how is it that so many of their clients have been in the middle of devastating financial scandals over the last four years?
Slowly, we are learning more about what lawyers have been up to. For example, some prominent law firms have issued opinion letters approving tax shelters later challenged as improper. Some appear to have drawn up the contracts that enabled companies to park hard truths on someone else's balance sheet. And it was not that long ago that some helped set up companies that engaged in a series of revenue-enhancing transactions that made Enron look like a powerhouse, at least for a while.
The typical argument in such cases - and just because it is typical does not mean that it is not powerful or even true - is not surprising: lawyers may not know the net effect of transactions they assist.
"Suppose I am asked to help facilitate a wire transfer of several million dollars from Milan," said Geoffrey Hazard, a law professor at the University of Pennsylvania. "Could that be fraudulent? Sure. Could it be perfectly legitimate? Sure. Any badges indicating it's not? No."
Of course, these arguments suggest lawyers are not as powerful or knowledgeable as they claim when they are selling their services. As one lawyer cynically put it, a lawyer may brag of mastery of a deal in advance; but once prosecutors are interested, suddenly that lawyer's role consisted only of drafting a contract.
Bevis Longstreth, a former member of the Securities and Exchange Commission and a retired law firm partner, put the contrast succinctly. "Our lawyers in this country are instrumental in getting the deal done," he said. "In the course of that, they come to understand a great deal about the transaction. They can say, well, we only had this little part, but most lawyers who think of themselves as very good and who are very good, have tremendous peripheral vision and they are worried about everything under the sun."
When it comes to potential misconduct at a client, he said, "It just doesn't add up that they're not conscious."
Now, this is not to say that every scandal can be laid at the feet of lawyers. Far from it. Lawyers have good reason to protect their reputations by keeping clear of the taint of scandal. Often enough, lawyers guide clients through gray areas - saying a tax shelter is not clearly illegal, for example. The fact that a prosecutor challenges a transaction after the fact does not mean that the lawyer who documented it furthered a fraud.
Still, there are troublesome reasons to think lawyers might have become less effective guardians against corporate malfeasance. Several lawyers cited the annual rankings of law firms by American Lawyer magazine. The rankings, they say, forced them to think about looking successful financially, rather than focusing solely on their intangible reputation as good lawyers.
"The ability to think of yourself as the best without being paid the most became much harder," Mr. Longstreth said. Getting paid more meant keeping clients - which can mean avoiding having to say no.
Regulators have gone after lawyers in a few cases. But regulators have usually focused on the corporate general counsel - someone who clearly stands to gain from looking the other way during fraud.
Building a case against outside lawyers is difficult, several lawyers said. To establish wrongdoing, it would have to be shown that the outside lawyer knowingly furthered a fraud. Another stumbling block is proving motive. Executives whose stock options soar in value as a result of phony earnings have a reason to engage in fakery. Outside lawyers - paid by the hour - do not.
But having no reason to do wrong is not the same as having a reason to do right.
Copyright 2005 The New York Times Company Home Privacy Policy Search Corrections XML Help Contact Us Work for Us Site Map Back to Top
Legal Beat
Caught Between Doing Well and Doing Good
By JONATHAN D. GLATER
NOT a deal is done unless lawyers have blessed it. Not a regulatory filing is made unless lawyers have reviewed it. And not an executive compensation agreement is signed unless lawyers have approved it.
Lawyers have made themselves indispensable to public companies. Lawyers boast of their ability to learn the ins and outs of any problem and to know a client's interests better than the client does.
But if lawyers are as wise as they profess, how is it that so many of their clients have been in the middle of devastating financial scandals over the last four years?
Slowly, we are learning more about what lawyers have been up to. For example, some prominent law firms have issued opinion letters approving tax shelters later challenged as improper. Some appear to have drawn up the contracts that enabled companies to park hard truths on someone else's balance sheet. And it was not that long ago that some helped set up companies that engaged in a series of revenue-enhancing transactions that made Enron look like a powerhouse, at least for a while.
The typical argument in such cases - and just because it is typical does not mean that it is not powerful or even true - is not surprising: lawyers may not know the net effect of transactions they assist.
"Suppose I am asked to help facilitate a wire transfer of several million dollars from Milan," said Geoffrey Hazard, a law professor at the University of Pennsylvania. "Could that be fraudulent? Sure. Could it be perfectly legitimate? Sure. Any badges indicating it's not? No."
Of course, these arguments suggest lawyers are not as powerful or knowledgeable as they claim when they are selling their services. As one lawyer cynically put it, a lawyer may brag of mastery of a deal in advance; but once prosecutors are interested, suddenly that lawyer's role consisted only of drafting a contract.
Bevis Longstreth, a former member of the Securities and Exchange Commission and a retired law firm partner, put the contrast succinctly. "Our lawyers in this country are instrumental in getting the deal done," he said. "In the course of that, they come to understand a great deal about the transaction. They can say, well, we only had this little part, but most lawyers who think of themselves as very good and who are very good, have tremendous peripheral vision and they are worried about everything under the sun."
When it comes to potential misconduct at a client, he said, "It just doesn't add up that they're not conscious."
Now, this is not to say that every scandal can be laid at the feet of lawyers. Far from it. Lawyers have good reason to protect their reputations by keeping clear of the taint of scandal. Often enough, lawyers guide clients through gray areas - saying a tax shelter is not clearly illegal, for example. The fact that a prosecutor challenges a transaction after the fact does not mean that the lawyer who documented it furthered a fraud.
Still, there are troublesome reasons to think lawyers might have become less effective guardians against corporate malfeasance. Several lawyers cited the annual rankings of law firms by American Lawyer magazine. The rankings, they say, forced them to think about looking successful financially, rather than focusing solely on their intangible reputation as good lawyers.
"The ability to think of yourself as the best without being paid the most became much harder," Mr. Longstreth said. Getting paid more meant keeping clients - which can mean avoiding having to say no.
Regulators have gone after lawyers in a few cases. But regulators have usually focused on the corporate general counsel - someone who clearly stands to gain from looking the other way during fraud.
Building a case against outside lawyers is difficult, several lawyers said. To establish wrongdoing, it would have to be shown that the outside lawyer knowingly furthered a fraud. Another stumbling block is proving motive. Executives whose stock options soar in value as a result of phony earnings have a reason to engage in fakery. Outside lawyers - paid by the hour - do not.
But having no reason to do wrong is not the same as having a reason to do right.
Copyright 2005 The New York Times Company Home Privacy Policy Search Corrections XML Help Contact Us Work for Us Site Map Back to Top
posted by Eastlaw @ 5:08 AM
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