Accounting & Tax

Lawyer May Be Charged over Client Probe

A threatened SEC lawsuit would be the first against a lawyer hired to help a company conduct an internal investigation.
Stephen TaubDecember 7, 2004

The Securities and Exchange Commission may bring charges against a lawyer hired by medical-device maker Endocare Inc. to help with an internal accounting probe, according to Bloomberg, citing people familiar with the matter.

According to the report, the SEC notified former Brobeck, Phleger & Harrison partner Christopher McGrath that he may face civil sanctions for his role in an investigation at Endocare regarding the company’s accounting practices during 2001 and 2002. Last month the company announced that the Department of Justice is investigating whether the company and certain current and former officers and directors intentionally issued false and misleading statements regarding revenues and expenses in SEC filings.

“This looks like an expansion of the government’s crackdown on gatekeepers, particularly accountants or lawyers who bless a company’s prior conduct,” said former SEC enforcement chief William McLucas, according to Bloomberg. McLucas, now a partner at Wilmer Cutler Pickering Hale & Dorr, stressed that he wasn’t involved in the Endocare case.

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The threatened SEC lawsuit would be the first against a lawyer who was hired to help a company conduct an internal investigation, reported Bloomberg. If the commission brings a case against a McGrath, it may discourage other lawyers from similar advisory roles in the future, the wire service added.

Bloomberg reported that Endocare’s audit committee hired McGrath in October 2002 to examine “certain transactions and accounting practices” at the company, citing an affidavit McGrath filed the following year in a shareholder lawsuit in Delaware.

He was brought in after Endocare’s then-acting corporate controller, Joseph A. Hafermann, contacted a director and expressed “concerns regarding the accounting for several transactions and other matters,” according to an SEC filing made by KPMG LLP, Endocare’s auditor, in March 2003. Hafermann was fired for “misconduct” two months after McGrath’s arrival, according to the wire service.

Bloomberg noted that it is unclear why the SEC has launched the probe, adding that last year an Endocare press release stated that McGrath had found no “intentional wrongdoing by management.” One month later, reported the wire service, Endocare announced that it was being investigated by the Justice Department and the SEC.

Brobeck, Phleger & Harrison, McGrath’s former law firm, declared bankruptcy last year and is not being probed by the SEC, according to the report. McGrath, currently a partner in the San Diego office of Paul, Hastings, Janofsky & Walker, did not respond to repeated requests for comment, Bloomberg reported.