essential california legal CONTENT | WEEK OF DECEMBER 12, 2011 RECORDER IN PRACTICE A decade post- The past 10 years of financial crises have resulted in a patchwork of reactive legislation, signaling what’s to come

regulatory and enforcement efforts through the company may “implode in a wave of another statute, Dodd-Frank. accounting scandals.” A few months later, While much has been written about the Enron filed bankruptcy in the wake of one of details and ramifications of Sarbanes-Oxley, the largest accounting scandals in history. Dodd-Frank and the other regulatory and Congress promptly responded with an fraud enforcement measures of the past expansive corporate regulatory scheme. Robb Adkins and Sean Meenan decade, this anniversary provides an The Sarbanes-Oxley Act of 2002 was opportunity to pause and look back at the trumpeted by the president as the most far- unprecedented changes in corporate reaching regulation of business practices White-Collar Crime governance, bookended by responses to since the . It imposed two very different economic crises. The enhanced internal controls, auditor en years ago, Enron Corp. government’s separate but related responses independence and financial-reporting collapsed in what was then the paved a rugged terrain of corporate-fraud requirements designed to provide largest bankruptcy in U.S. regulation and enforcement. To understand transparency and prevent the perceived history. Given the current how to move forward, and learn lessons for sleights-of-hand that had kept Enron’s financial turmoil, it is easy to the decade ahead, it is important to reflect financial troubles from the public eye. The Tforget how the collapse, and the bankruptcy on how we got here. act further required senior executives to dominoes that fell thereafter, shook market certify the accuracy of financial reports, in confidence. Congress swiftly passed the Fall of Enron an attempt to deprive executives of claims Sarbanes-Oxley Act in response. Enron was The fall of Enron has been the subject of of ignorance, when the financial picture of then followed by a housing and financial numerous books, an Oscar-nominated the company proved misleading or false. It crisis whose economic ramifications documentary and even a recent Broadway created a new oversight agency: the Public dwarfed the previous crisis. Again, the play. While Enron has come to be Company Accounting Oversight Board. government responded by amplifying synonymous with corporate failure, in early Additionally, Sarbanes-Oxley provided a 2001, Enron was the poster child of success. whistleblower framework, setting forth The company was ranked the seventh procedures for companies to receive and Robb Adkins is a litigation partner in largest in the U.S. and Fortune proclaimed investigate allegations, with protections for Winston & Strawn’s San Francisco and Los it “America’s Most Innovative Company” for whistleblowers. Angeles offices focusing on white-collar a stunning six straight years. and internal investigations, complex civil But as we now know, Enron was in The Current Crisis litigation, financial regulation, FCPA issues turmoil. As the criminal trial would show, Within a few years after the Enron and securities litigation. He was a member the company relied upon a number of collapse, the economy seemed to be back of the Enron Task Force, serving as a trial practices, such as off-balance sheet on track, with the housing market thriving. attorney in the criminal case against Enron transactions, overvalued assets and misuse When the housing bubble ultimately burst, CEOs Kenneth Lay and Jeffrey Skilling. He of reserve accounts, to paint a false picture we experienced the largest economic can be reached at 415-591-1411 or via e-mail of financial health. downturn since the Great Depression. Many at [email protected]. Sean Meenan As 2001 progressed, questions about the perceived failure of self-policing and lack is a litigation associate in the firm’s San financial health of Enron mounted. Five days of regulation in key financial markets to be Francisco office. He focuses his practice on before Enron CEO Kenneth Lay assured the causes of the crisis. complex commercial litigation, class action, public that there was “no other shoe to fall,” Again, the government responded with intellectual property and antitrust matters. Sherron Watkins, an Enron vice president, sweeping legislation. In June 2009, the He can be reached at 415-591-1586 or via alerted Lay of improprieties in Enron’s president declared a proposal, reminiscent e-mail at [email protected]. financial statements, and warned him that of the Sarbanes-Oxley announcement, RECORDER DECEMBER 12, 2011

calling for a “sweeping overhaul of the U.S. are provided a financial incentive to report not increase. Government agencies are in- financial regulatory system, a transformation wrongdoing to the SEC, and while the award creasingly joining forces to pursue investi- on a scale not seen since the reforms that may be reduced for an employee’s failure gations and bring parallel actions due to the followed the Great Depression.” The result to first report a matter internally, there is no breadth of the current crisis and budgetary was the Dodd-Frank Reform and requirement to do so. pressures. The current crisis is broader than Consumer Protection Act. Like Sarbanes- Evidencing the patchwork quilt of those that have come before: It includes not Oxley, Dodd-Frank was designed to respond corporate regulation from the past decade, just the financial and corporate arena but to the then-current crisis and its perceived we are left with a situation in which a also the mortgage and housing market, and causes. It instituted myriad regulations company that fully complies with the includes potential fraud schemes that would directed toward regulating derivatives and Sarbanes-Oxley internal reporting prey upon the hundreds of billions of dol- swaps, lending standards and executive procedures nonetheless faces the prospect lars in Recovery Act and TARP funds. As a compensation, among other things. Similar of learning of alleged wrongdoing for the result, enforcement agencies are increas- to Sarbanes-Oxley, it created a new agency: first time with a knock on the door by the ingly working together to attack current the Consumer Financial Protection Bureau. SEC or other agency, fueled by a fraud matters through collaborative federal- It also redefined the rules and regulations whistleblower complaint that was never state efforts. that protect and incentivize employees to brought to the company’s attention through The increased collaboration among the report fraud. its internal reporting structure. In the alphabet soup of enforcement and regula- months ahead, many compliance counsel tory agencies is also due to a collateral ef- More Patchwork Quilt and white-collar practitioners will be fect of the current financial crisis: declining Than Tapestry watching to see how such a scenario may agency budgets. In the current downward While both acts relate to corporate fraud, impact enforcement agencies’ views as to budget cycle, agencies are working in con- each was enacted in response to the whether a company is acting as a good cert more than ever before. This trend is perceived causes of a particular crisis. This corporate citizen. exacerbated by a change in the mission of was not a single deliberative decision to set This is but one example of several that the FBI in the post 9/11 world, shifting re- forth a harmonized regulatory scheme have been the subject of detailed sources to counterterrorism and creating addressing various issues in the corporate commentary, revealing the often rugged a need for other agencies to play an in- and financial world over a number of years. terrain created by separate remedies to creased role. The overarching lesson from Instead, the result of the overlapping crises with different perceived causes. this increased collaboration is clear: Gone legislation proved to be a patchwork quilt are the days that inside or in-house coun- of related, but often incongruous corporate Lessons for the Decade Ahead sel can assume that the state or federal regulations. With a perspective on the past decade- agency with whom they are dealing is act- The acts’ whistleblower provisions long cycle of crisis and response, what ing alone; it is increasingly likely there are provide a window into the separate lessons prepare for the road ahead? As the additional state or federal agencies in- responses to very different crises and the axiom goes, history never repeats itself volved, resulting in overlapping criminal, resulting incongruity. While Watkins was precisely, and specific lessons from broad civil or regulatory exposure. not a whistleblower in the strict sense — she trends are elusive. But if anniversaries are The final lesson to be drawn on the did not report outside the company — the a time to reflect and look forward, there are anniversary of the Enron collapse is that it unheeded red flags raised by her and others several broad lessons to be drawn from the will not be the last. And the pattern of prompted Congress to include in Sarbanes- past 10 years. reactive legislation will add to an already Oxley a road map for companies to provide First, despite the inconsistencies, complex regulatory and enforcement a venue for whistleblower warnings and the Sarbanes-Oxley, Dodd-Frank and the environment. course of action to take to address such enforcement actions taken under them complaints. Corporations responded by send one clear message: enforcement and In Practice articles inform readers on implementing detailed policies and regulatory agencies are engaged in the developments in substantive law, practice procedures to facilitate internal reporting, corporate and financial arena in ways that issues or law firm management. Contact protect whistleblowers and investigate could not have been contemplated a Vitaly Gashpar with submissions or questions alleged wrongdoing. decade earlier. This trend of governmental at [email protected]. Years later, when the current financial action is unlikely to abate in the near term. crisis blossomed, regulatory and For example, the SEC recently announced enforcement agencies were criticized for that it filed 735 enforcement actions in the failing to react to warning signs and last fiscal year — the most in SEC history. complaints. Congress responded with In addition to the sheer numbers of Reprinted with permission from the December 12, 2011 additional and different whistleblower enforcement actions, there has been a edition of THE RECORDER © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without provisions. According to the rules change in the collaborative approach to permission is prohibited. For information, contact 877-257- promulgated under Dodd-Frank, employees fraud enforcement that should continue, if 3382 or [email protected]. # 501-12-11-01