The Evolving Role of the In-house Counsel
By Sharmeen A. Khan
Regional Compliance Director, Africa/Middle East & Pakisan, Pfizer
I left my practice at a law firm to become an in-house counsel for a pharmaceutical company in 2005. Today, I am practicing as a regional compliance attorney for the same company. The road to navigating the internal environment of a company, after training as a lawyer, is full of unanticipated challenges. Most organizations treat the lawyer in their companies in equal measures; as a ‘pain’ or as a business partner. You could be the overly diligent policeman constantly on the lookout for any legal violation, or you could be working hand-in-hand as a partner, putting your loyalty to the company above the law. There have been countless instances of in-house counsels putting their own careers at risk to protect a company’s dirty secrets. At the same time, we also have labels thrown at us by the practitioners, ranging from ‘gatekeepers’ to ‘nannies’ to and ‘watchdogs’.
Before Enron, the view of the in-house counsel was that of the management’s trusted advisor: in with the boys, with clear obligations to the clients’ interests, first and foremost. Post Enron, this view has entirely shifted. There is more liability to the federal regulators, the public, shareholders and the SEC.
What are those liabilities facing the in-house counsel? In Pereira v. Cogan (2003) (US) the Chapter 7 trustee of Trace International sued the general counsel, claiming that he did not adequately advise the board on its obligations to review a transaction benefiting the company's controlling shareholder, an inappropriate arrangement devised by counsel. In USA vs. Steven (2010), the general counsel of a pharmaceutical company was taken to court for having allowed the company to continue promoting off label claims by her colleagues on a product.
In Securities and Exchange Commission v. Steven Woghin (2004), the General Counsel for a software house had participated in a widespread practice that resulted in improper revenue recognition (the “35 day month”), violations of GAAP and the filing of materially false financial statements. The findings in this case were that the Counsel knew or was reckless in not knowing that his teammates, the other lawyers in the company, were approving backdated contracts that were improperly recorded in prior quartersQuarters. Further, the counsel attempted to influence his colleagues’ answer when they were interviewed by outside counsel. The counsel was sentenced to two years in prison.
In US v. Mark Kipnis (2007) [Conrad Black/Hollinger International], the general counsel for a media conglomerate had prepared contractual documents, memorializing illusory non-corporate agreement between senior managers and subsidiary, and then had advised the board to make disclosures to its audit committee; disclosures which were inaccurate and misleading. The general counsel had done this despite having obtained no direct financial benefit, contrary to the gain received by other management members. However, as a result of the findings, the general counsel was still convicted on several counts of mail fraud at the first instance.
Fact: Major corporate fraud cannot occur without the clear complicity, or blatant negligence or complete incompetence of its chief lawyer. There may be various arguments to the contrary, but let’s face this: . No data manipulation, backdating of important agreements, false and misleading submissions, overt or implicit fraud can take place without the legal signoff. In some shape or the other. Therefore, these scenarios have been a game changer for the in-house counsel.
Apart from the liability to the profession, to prevailing government laws, and the interests of the client and shareholder, there remains is a liability to ensure that the client exercises diligence as well. There is a liability that the client does not commit fraud. There is a shift from telling the client, you can and cannot do this, to, you must not do this and you must report this.
Unfortunately, the good in-house counsel is no longer in with the boys. In fact, the in-house counsel, no matter how glamorous, may now be wearing the garb of the gatekeeper or the nanny. Anyway, whatever your view of this is, here are some practical recommendations that you can use to provide your colleagues within your organization with some comfort, and this is said keeping in view that Pakistan’s legal environment, is not there yet with the SEC and FDA of the US.
1. Do the right thing. Obviously.
3. Maintain confidentiality of communication; so that the company may be able to exercise some privilege on the documentation and communication. Having said that, the courts are not that clear about in-house lawyers enjoying the same level of privilege that is assumed for outside counsels.
5. Lack of knowledge is a poor excuse at best, and reckless in an in-house counsel. Few processes require a higher level of diligence and purview. Those include interactions with government officials, sale of business assets, disclosures and, lawsuits of course.
6. The in-house counsel does not need to be part of the “team”. In-house counsels must be independent, objective professionals.
7. Always encourage all employees and business units to involve the legal department early.
8. Work with multi- disciplinary teams to better understand the government entity that you are dealing with.
9. Always keep the dialogue civil. Within and outside the organization. The Government will always appear to be unfair.
11. Finally, lawyers can avail themselves of the “bona fide legal services”, defense.
The author is the Regional Compliance Director, Africa & Middle East, Pfizer Inc.
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