VideoYou aren't paranoid. There really is a target on your back that says "Sue Me." A recent study by PricewaterhouseCoopers LLP concludes that 203 private securities class-action lawsuits were filed against U.S. companies and their directors and officers in 2004 — a 16 percent increase over 2003. In 8 out of 10 of those cases, the CFOs of the companies being sued were named as defendants (see "The Blame Game," at the end of this article).
"Now more than ever, these cases implicate the CFO," says Steve Skalak, a partner at PwC and leader of its U.S. corporate-investigations practice. "That's not surprising; the law, the government, and the public at large are very focused on personal responsibility for accounting fraud."
Private class-actions are not the only arrows aimed at finance executives, of course. The Securities and Exchange Commission routinely names CFOs in its investigations of accounting malfeasance. So does the Department of Justice (DoJ). In many government cases, both departments may be investigating the same CFO simultaneously.
Indeed, at this juncture, "it is almost guaranteed that a CFO will face some sort of legal investigation" in his or her career, says Skalak. "Not every CFO will be in the eye of the storm," he admits, "but today's minor whistle-blowing case may easily be tomorrow's class action if left unattended."
Meet Your New Best Friend
To protect themselves against these multiple assaults, many CFOs have had to hire defense lawyers, either for their companies or for themselves. In fact, lawyers specializing in the defense of finance executives have created something of a cottage industry.
A specialty is certainly required. "It's much more difficult to defend CFOs, because it's harder for them to use the 'Sergeant Schultz' defense," says Stephen Poss, chair of the Securities Litigation and SEC Enforcement Practice Group at Boston-based Goodwin Procter LLP (see "What Does Your CEO Really Know?"). "You need to know the accounting issues as well as the legal issues, and you need to understand how to deal effectively with [the regulators]," says Poss, whose firm represents more than a dozen current or former CFOs in cases that range from SEC investigations to securities class actions to federal grand jury probes. "Saying that a financing or transaction was beyond the understanding of the CFO," says Skalak, is not a defense "that will succeed under current law."
While in-house corporate counsel will not themselves represent finance executives when they are sued in shareholder lawsuits, in-house counsel can provide recommendations for outside counsel. Directors-and-officers-liability insurance companies also will recommend lawyers, or may require that the CFO pick lawyers from a panel of preapproved law firms. CFOs who have weathered similar cases are also an excellent resource. "Word-of-mouth should not be underestimated," says Brian E. Pastuszenski, a senior partner in Goodwin Procter's securities litigation practice.
In any event, he says, finding legal representation may involve a "bake-off" in which several law firms are interviewed by the company named in a suit. When an internal investigation becomes necessary, he adds, the audit committee likely will become involved as well.
The Wrong Instincts
Lawyers with experience in government cases against companies say that tailoring the search according to the agency in charge is often a must — especially if the SEC is involved. Given that body's current focus on cooperation with companies, for example, "the instincts a general commercial litigator has may be wrong in an SEC investigation," says Poss. "You need to know the rules of the game." Taking an abrasive stance during investigative testimony may not be the best approach with the SEC, adds Derek M. Meisner, a former SEC lawyer based in Boston for Kirkpatrick & Lockhart Nicholson Graham LLP. In those cases, acting "more deferential and cordial may be in the best interests of the client" (see "The Limits of Mercy.").
Pay attention to accounting expertise, too. "You don't want a lawyer who cannot do the math," says Poss. "He or she must be able to look at annual reports and know how revenue recognition works — as well as know how the SEC is likely to think revenue recognition works."
Moreover, says Pastuszenski, a good attorney must be able to appreciate the complexities of the accounting rules and, where an error has been made, help a judge distinguish between "alleged manipulation by the CFO of earnings or revenues and what may have been a good-faith mistake." This ability takes on new importance, says Meisner, because regulators lately have blurred the lines "between reckless conduct and negligent conduct."
A lawyer who "considers all the collateral consequences of the investigation" is also a better choice, in the view of Ellen Podgor, professor of law at Georgia State University. The attorney must know if the defendant could lose a license or be barred from doing further business with the government, for example.
Experts disagree about the importance of an attorney actually residing in a certain jurisdiction. Pastuszenski, for example, does as much work in California as in Boston. He points out, though, that it behooves any counsel to be familiar with the judge before whom counsel will appear. Pastuszenski typically associates with a local lawyer in a particular jurisdiction to educate himself about such nuances as the judge's pet peeves.
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