Monday, November 22, 2004
One of the more controversial provisions of the Sarbanes-Oxley Act of 2002 was Section 307, which required the SEC to adopt rules requiring lawyers for corporations to report misconduct within the organization to senior management and the board of directors. An implementing rule, since shelved, would have required lawyers to make a so-called "noisy withdrawal" if the corporate client did not respond appropriately to the report of misconduct. Lawyers objected to this rule on the ground that it would make corporate counsel a "cop on the beat" rather than a representative of the client. Regardless of whether that would in fact be the case, Section 307 emphasizes that corporate counsel has a responsibility to protect the client from misconduct by, at a minimum, reporting wrongdoing and, where necessary, withdrawing from representation.
Although it is always hard to tell whether a law has an effect on individual conduct in a particular instance, a story in the New York Times (Nov. 21) by Partick McGeehan (one of their best business reporters) details the fight between TV Azteca, a Mexican media company whose shares are listed on the New York Stock Exchange and hence subject to SEC regulation, and its former lawyers who withdrew from representation because the company refused to make the proper disclosure of a transaction. The article discusses a draft investigative report prepared by Munger, Tolles & Olson, which was hired by independent directors to investigate the dispute between Akin, Gump and management when the company refused to disclose a transaction between TV Azteca's chairman (Ricardo B. Salinas Pliego) and the company that appears to have provided a personal benefit of $109 million. The company refused to make the disclosure, and Akin Gump resigned as its counsel. According to the investigative report, the company then sought a favorable opinion about not having to disclose the transaction from Clearly, Gottlieb and Hogan & Hartson, both of which counseled disclosing the transaction. The Munger Tolles report alleges that corporate management provided false information about the transaction to the firm in conducting its internal investigation.
The article reports:
Two American directors, James R. Jones and Gene F. Jankowski, did not even wait around for the final report from Munger Tolles. They resigned in early May because they did not believe that they could exercise independence, Mr. Jones said in a brief interview last week. "Gene and I concluded that we needed to leave," said Mr. Jones, a former United States ambassador to Mexico who once ran the American Stock Exchange.
Mr. Jones said that he was interviewed by the commission before he resigned but that he had not been contacted since. Only four years earlier, Mr. Salinas Pliego pointed to Mr. Jones and two other directors as evidence of his enlightened embrace of changing standards of corporate governance.
Attorneys have an ethical obligation to ensure that their clients, especially corporate clients, obey the law and make proper disclosures to the investing public. While some may object to this "gatekeeping" role, it is heartening to see that one company could not "buy" an opinion. If the findings in the Munger Tolles report are accurate, one would hope the SEC would bring an enforcement action against the company to reinforce the signal that improper disclosure and attempts to buy a favorable legal opinion are unacceptable. (ph)