and the in-house lawyer
A question of ethics and objectivity
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WINTER 2014 ISSUE
The classic notion of the whistleblower is the little guy - lone, principled and conflicted, fighting a David and Goliath battle against a stony and faceless corporation. Are they heroes? Or are they unscrupulous and out for what they can get?
The term whistleblower is said to have been coined in the 1970s by US activist Ralph Nader to avoid the negative connotations of terms such as ‘informer’ and ‘snitch’, instead invoking the referee in a sports match, blowing the whistle to stop the game when there is unfair play.
No matter how concerned and engaged the general counsel, bad actors are potentially everywhere. So provision of mechanisms and protections for whistleblowers in all industries are an accepted fact of doing business in the 21st century, right? Wrong. Even in 2014, many companies have neither formal whistleblowing policies nor unambiguous reporting lines for serious corporate misconduct issues. The in-house lawyer as the custodian of legal propriety walks an increasingly wobbly tightrope in representing the company’s business interests whilst upholding what is right and fair.
We examine the dilemmas facing in-house lawyers, speaking to those who have dealt with whistleblowers and those who took the plunge and became whistleblowers themselves.
Where do your loyalties lie?
So are GCs continuing to struggle with the burden of being perceived as a business blocker by the board? John Flood, professor of international law and business at the UCD Sutherland School of Law, Dublin says central to the GC ethics debate is the issue of job evolution: the role of a GC is a lot more complex than it once was. Previous GC bread-and butter issues - employment, immigration, M&A - are now increasingly overlaid with a multitude of other pressures and demands. ‘It’s increasingly about being more business minded and dealing with compliance,’ he says. ‘The in-house legal department has historically been seen as an overhead, a cost. Now there is a burden to become value creators.’
But at the heart of the GC job is negotiating a course of action when things go wrong. Call it risk management, or making sure the right processes or lines of action are followed when trouble looms, but much more is required than merely calibrating a situation ‘high’ or ‘low’ risk.
Perhaps one of the biggest questions of all for a GC is who is the client? Is it the company or CEO, the board, employees - or shareholders? ‘You may find that some [parties] could be the client and not be the client,’ Flood says. ‘Imagine if the CEO comes to the GC and says: “Something is going wrong, what can we do?” and the GC says: “Let me think about it”. The in-house counsel almost has a split duty. The CEO may become a liability at that point and the general counsel may no longer be able to work with them, telling them they need independent representation.’
Sometimes the duty is not to any client but to the state. Rewind just back to September this year when the UK High Court found ex-Times and News International lawyer Alastair Brett had behaved recklessly when his paper resisted an injunction to protect the identity of anonymous police blogger Nightjack. It was subsequently revealed a Times reporter had hacked the blogger’s email account. Why relevant? Because it underlines the need for in-house lawyers to remember duty to a court must trump loyalty to a client. And for many in-house lawyers this principle remains clear cut.
One senior in-house counsel at a European bank remarked that ‘whichever way you look at it, the role of the in-house lawyer is not to brush things under the carpet. The lawyer, in whatever context, is first and foremost an officer of the court and that brings obligations.’ And those obligations extend to whistleblowing, he continues. ‘If someone brings you something that looks credible you should look into it.’
This is being taken on board in some companies, where GCs and in-house lawyers are training the business about their role and professional obligations – and why ‘a company conscience makes for good business.’ So says one former GC. ‘There is something an in-house lawyer can never lose sight of. It’s a comment I read once from a leading GC that went something along the lines of – “a nay-sayer may not get a seat at the table but a yea-sayer may be indicted”. It’s a very important point because any GC who becomes an appeaser and acquiesces to business demands - whether they be political, financial or otherwise - can become a major part of a cultural problem.’ She goes on: ‘The reality is that professional standards by and large dictate that in-house lawyers will always be lawyers first and - sometimes to the regret of employers - employees second. I would say an in-house lawyer can play a role of “company conscience” by being a legal-moral sounding board for the business and the Board.’ But it’s a two-way street; a business must respect the thresholds lawyers have, although this does not preclude legal or ethical solutions that are commercially focused.
'The tone at the top was one that suggested:
“there are lots of things we like to do and not all of them
are ethical or legal, but we’d still like to do them to get the results we want.”'
According to one famous whistleblower, former Lehman Brothers associate general counsel Oliver Budde, the apple might be rotten to the core – on Wall Street at least. ‘On Wall Street the tone at the top was one that suggested: “There are lots of things we like to do and not all of them are ethical or legal, but we’d still like to do them to get the results we want.” This was often a little or sometimes a lot over the line in terms of legality or ethics.’
Post-Lehman, Budde concedes, things are better. ‘Compared to my time in-house [1997-2006] there is now much more awareness of the importance of distance and separation for in-house lawyers. There was not nearly enough distance at Lehman and very little ability for the legal department to say no. Even when individual lawyers did say no, as I did, we would be overruled. At that time it was up to us to put up with that or resign.’
A culture of whistleblowing
The UK’s Financial Conduct Authority (FCA) claims whistleblowing calls from employees about employers to its helpline rose by 35% last year.
One FTSE 100 ethics director told GC that in his view, there’s still, for some, a clear tension between the need for a company to behave ethically – and the role the in-house GC takes. An assumption that the in-house lawyer will lead on ethics in the future was misguided. ‘I would expect more UK companies to follow the US lead and have specific roles for ethics,’ he said.
Ed Stacey, partner and head of PwC Legal’s employment team, agrees. ‘If you look at a hypothetical example, if something starts to get into the public domain, you’d expect the GC to be all over it. But the vast majority of whistle-blowing issues don’t escalate to this.’ One of the best solutions he’s seen in organisations is an anonymous hotline. ‘They seem to work very effectively in allowing people to raise concerns without fear, because they won’t be identified. It allows that hotline to be separate from the legal department. The legal department may not ever hear it of it, until it becomes significant.’ And many in-house lawyers agree that the provision of multiple different avenues for whistleblowers to raise their concerns is a good thing. However, there still needs to be the fundamental desire for these concerns to be both heard and acted upon.
Hear no evil, see no evil
But is it wise for GCs to be kept unaware of whistleblower allegations? If corporate counsel function as the ‘corporate conscience’ then surely not, particularly as whistleblowing cases, when they hit the headlines, often tend to revolve around fraud or accounting issues. But the majority of hotline cases are often concerning quite small personal things to do with someone’s boss, says Stacey. ‘These might be allegations of bullying or reporting an inappropriate relationship with a member of staff. A volume of information around that, frankly, they [a GC] won’t be interested in.’
However, if the FCA or the EU follow the lead of the Securities and Exchange Commission (SEC) in regulating Wall Street, this view could become a thing of the past, for the financial industries in particular. One senior counsel at a large US bank told us: ‘The biggest piece of practical advice I would give any in-house colleague – in any sector – is: don’t ignore anything. No matter how minor, off the cuff or humorous a remark by the water cooler may seem, you should look into it.’ This might seem dramatic but, as our source explained, ‘The whistleblower can claim even an off the cuff remark was internal reporting which was then ignored. We’ve seen this used time and time again by plaintiffs’ firms representing whistleblowers.’
No pay, no gain?
The US approach seems flawed. Despite the Dodd-Frank banking reforms introduced in 2010, there remains a plethora of conflicting and contradictory regulations. For example, the whistleblower reward programme introduced under Dodd-Frank allows the SEC to award a whistleblower between 10% and 30% of the overall fine levied on a company found to have committed wrongdoing. But some corporate counsel on the frontline dealing with such claims believe that this has made the whole area murkier and open to abuse.
On the face of it, the logic is easy to follow. ‘The general notion is “here’s a truth teller and they are not getting fair reception”. The whistleblower is working in an organisation that isn’t credible, or is not responding to her or his issues. Therefore the framework is predicated on the notion that the company should be punished for being “bad”,’ explains a senior in-house source. But perhaps the system is swooping down on wrongdoers too quickly. Another senior US in-houser argues that ‘we often don’t even get the chance to investigate internally first. The first time we hear of anything is often via the SEC. Increasingly, many of us feel it’s just not fair that we’re not allowed in good faith to look into it.’
Another in-house counsel at a large global financial services firm told GC, ‘You don’t have to raise it in the firm. If the government decided to bring a case or force a settlement in an overheated enforcement environment such as the US, the whistleblower might walk away with tens of millions of dollars. It leads many to do this for purely financial gain rather than out of a sense of integrity.’ They’re not wrong on the financial gain front: the SEC announced in September its largest ever whistleblower payment of $30 million to an informant. However, whistleblower Oliver Budde refutes the charge that the recent activity has been purely motivated by financial gain. ‘At the end of the day, anyone whistleblowing has to have something real to report.’ He adds that, ‘Even with the bounty programme, I am not aware of any tidal wave as a result. Overall there is very little whistleblowing given the size of the industry on Wall Street.’
And outside the US, businesses should not be quaking in their boots just yet. In the UK, the Bank of England Prudential Regulation Authority (PRA) and FCA jointly rejected an SEC-style whistleblower award, worried it would not address fundamental wrongdoing in financial institutions, finding little evidence that such rewards impact the quality of leads to regulators. Bounties are an idea Paul Moore, ex-head of regulatory risk at HBOS, has little time for: ‘You shouldn’t be speaking up,’ he says, ‘for the purposes of making money… [it’s] because you care about the difference between right and wrong. It feels wrong.’ But given the experiences of some former whistleblowers, there is an argument for compensation because taking that step may preclude future employment in their field.
‘Ideas of fairness aren’t protected by whistleblowing. Only actual breaches of law or regulation. You have got to be
able to prove there is a breach of the law.’
Too hot to handle
Should an in-house lawyer be the one blowing the whistle? It’s actually a good fit for someone with legal expertise, as the validity of most claims hinges on legality. Paul Moore would know. The former barrister was sacked from his role as head of regulatory risk at UK bank HBOS in 2004 after expressing concern about the excessive risks the operation was taking (though it wasn’t too long before he was vindicated). What is his advice for potential GC whistleblowers or GCs investigating cases a decade on?
‘The most important thing to do is gather the evidence, get the facts. Ideas of fairness aren’t protected by whistleblowing, only actual breaches of law or regulation. You have got to be able to prove there is a breach of the law.’ But the fly in the ointment for a GC is legal privilege – something Moore doesn’t have a ready answer for. ‘If you are giving advice as a lawyer to a corporate client within your own organisation, I don’t know what lawyers’ duties are if they’re being asked to look at things that are illegal.’
Crucially, corporate reporting lines remain ambivalent at best. ‘The only people who can dismiss a whistleblower should be the non-executive rather than the executive,’ says Moore firmly. ‘The power to remove should be outside executive control. A definite separation of powers. Frankly, it didn’t work in my case. I had very strong written feedback from the audit committee but nevertheless when the chief executive fired me, they turned turtle. If they had supported me then the chief executive would have to have gone.’
There remains some talk - in the financial sector particularly - about heads of risk being on boards, but nothing substantial has happened, says Moore. A chief executive can still remove ‘trouble makers’ by presenting it as redundancy or a cultural ‘not fitting in’, he says.
Moore’s integrity cost him his job - and changed his life. ‘Until there’s proper protection for GC positions, plus the whole answer to legal privilege, then it’s still very risky,’ he says. ‘It’s a self-evident truth that there was nothing in it for me in raising the HBOS concerns, but nevertheless I was allowed to be replaced by a sales manager as head of risk.’ Someone who had never advised on risk management in their life.
Shortly after Northern Rock went down there was a job going as head of risk with the troubled UK finance company. ‘But,’ says Moore, ‘I was told by the headhunter I was too hot to handle.’
Moore’s story echoes that of whistleblower, Oliver Budde who has not worked in-house since his resignation from Lehman in 2006. As with Moore, his concerns soon proved justified, but this doesn’t seem to have been enough. ‘Once you have become a whistleblower,’ he says, ‘you definitely are too hot to handle, as the sense is: “There’s a person who dares to speak their mind and so is of less utility to your typical management team than one who will be interested in keeping the salary going and shutting up as called for.” Budde’s advice for lawyers who feel they need to report wrongdoing is to ‘have a rainy day nest egg put away, because standing up for your integrity may mean you sacrifice your career.’ A stark choice, it would seem.
But for Budde it goes back to the bigger ethical question for business and its legal representation as whole. ‘It’s a sad state of affairs, but if there were no incentives for managements to go after these illegal or unethical additional profits, then there wouldn’t be a problem.’
Are lawyers collateral damage, suffocated by a corporate miasma on Wall Street? The answer is simple, says Budde, who feels the legal profession as a whole has avoided some difficult issues raised by the global financial crisis and its own inability to blow the whistle.
‘Lawyers as a group need to come clean about their participation in the global financial crisis. One thing no one ever talks about is the lawyer’s role in the crisis. But none of the bad things we have read about, not a single one, would have happened without a sign-off at one or more key points from a lawyer. Someone in the legal department said “go ahead”.’
Oliver Budde: A whistleblower on Wall Street
As associate general counsel at Lehman Brothers, one of Budde’s tasks was preparing the annual proxy reporting statement which disclosed particulars of executives’ packages to shareholders. He uncovered an issue relating to how the bank reported its restricted stock units (RSU) that it granted to top executives.
RSUs are shares which are granted to employees as part of their annual compensation. They will often not vest immediately - rather they depend on performance or tenure with the company. Once vested they are considered income, should be reported to shareholders and are liable for taxation. Budde discovered that Lehman was under-reporting some of the RSUs that vested over a longer period and was therefore also under-reporting senior executives’ total pay. At the time this was not illegal but was certainly not best practice. Budde told us that practices such as these did not go unnoticed by other employees, including other in-house lawyers, but as he describes, ‘many people inside Lehman in private conversations would acknowledge and agree with me, but couldn’t make the sacrifice to say anything because of mortgage, kids and so on.’
Disillusioned with a culture that was ‘sufficiently grey’, Budde decided to walk away in 2006.
Later that year the SEC changed its rules to make unvested stock reportable. Budde accessed Lehman’s first annual public filing under the new rules, expecting to see the wrongs he had identified put to rights. But he alleges that the bank was still under-reporting, particularly in regards to the compensation awarded to CEO Dick Fuld. As a result of this, in the congressional hearing following the collapse of Lehman, Budde alleges that Fuld was able to under-estimate his total compensation between 2000-2007 by over $200 million and therefore lied in his testimony to congress.
In April 2008 Budde reported his concerns to the SEC, but received just the standard pro forma response. He also raised his concerns with Lehman’s board but was again ignored. Whilst this practice was not what directly led Lehman to collapse, Budde argues that it was indicative of a wider culture of bending the rules.