March 29, 2019

Advising Boards & Management: Ethical Rules & Professional Liability Risks of Corporate Counsel

The White Collar "Cooperation Revolution" Focuses on the Personal Criminal Liability of Executives and Managers. In 1999, then US Attorney-General Eric Holder issued an internal Justice Department memo entitled: "Bringing Criminal Charges Against Corporations." It laid the groundwork for policies that allowed more leeway in bringing criminal charges against large firms.  

By 2002, the Enron and WorldCom failures had occurred, and Arthur Andersen had imploded simply because it had been indicted. (It was ultimately acquitted of criminal misconduct). But innocent partners, employees, shareholders and others suffered severe losses as a result of Andersen's demise.  Congress acted promptly.  In 2002 the Sarbanes-Oxley Act (SOX) became law with the express goal of improving the quality of public company financial reporting.  SOX imposed on senior executives personally enhanced disclosure and certification obligations, eliminated accountants' potential conflicts of interest, and established a new federal regulatory body, the PCAOB, to police the quality of public company audits.  The ABA chartered a task force to consider the impact of SOX. That task force later became the Director's and Officer's Liability Committee of the Business Law Section.

By 2002, the Internal Revenue Service had begun investigating the involvement of major accounting firms, law firms, the investment arms of banks, and securities firms in promoting allegedly abusive tax shelters. The tax shelters under investigation had operated to shield from tax billions of dollars of taxpayer income generated in the years leading up to the crash of 2000.  The IRS referred the matters to the Department of Justice (DOJ).  The DOJ brought or threatened criminal proceedings against both taxpayers and major accounting firms and other participants in the tax shelter industry.  The criminal cases were plowing new legal ground in that they sought for the first time to criminalize conduct that theretofore had been exclusively the province of highly disputed areas of civil tax law.  With only four major accounting firms left, the Andersen experience gave rise to an acute need to balance the interests of law enforcement and erosion of federal revenue against a desire to avoid the severely negative damage to innocent bystanders that followed Andersen's collapse.

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