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1fitwhile),' shower, dress and-glide intorny library athome to see .'?"i The New York Times thinks so. On August 15, '2002 it had this '
:~I,~whatinateI1alhas arrived while'I was sleeping: The virtual office'," ,to say by way of edltoriak'The shock was magnified!because' the '
f'jJ;ofthe,:yeai;;~027(is, remarkably, not an office at all. Instead, my, ,guardians of shareholder and public iJ;lterests ,~;.i.aP.!¥tb,r~",9irec~
"
j1( , ',,' thom~'s library has been transformed , ,tors, bankers, and lawyers - did not, '.','
U,: ' into a bustling twenty-four hour law prevent, and in some cases enabled, ,
i:?' practice. Sure, we still have our "the chicanery at companieslike:
'it building on WIlshire Boulevard. After, ',Enron and Worldcom." ,r, '
ZL all,I need a place to meet clients, ' ' Of course, there are280 million
/' take depositions and, quite, frankly, people in the United States and only
, get away from home. That being 1.1 million read the New York Times
said, the law firm of 2027 has lost daily (2.6 million Sunday), so logical-
,the separation that told you "ok, ly, more than 275 million people
now I'm at work, and NOW I'm at don't give a damn what the New
, home," The convenience of the law York Times thinks, And a good thing
firm of 2027 requires more self-disci- that is because it's not the law that
pline, more effort, to maintain the will get you - the law has not,
division between home and office. 'changed that much regarding law-:
In her ground-breaking book of yers' responsibilities -'- it's the press. '
" over two decades ago, "The Over- Arthur Anderson had one bad apple, Thom88J.Itt:~Del'mott, Jr.
~: ",; worked American," author Juliet in 80 years of practice and the press' ': ,"" "
, Schor revealed how Americans; unlike any other nation, work ' put it, and its 80;000 employees, out of work in two months.
longer, harder and perhaps less happily than their counterparts 'When the press decides some law firm should go, say goodnight,
throughout the industrialized world. This is now truer than ever. Gracie. The Los Angeles Times weighed in on the same theme on
Back to my story; I walk into the library and flip a switch that September 23, 2002. Nightly news shows treat lawyers much as
slowlybrings the lights up to the perfect, scientifically engineered the Saturday matinee westerns: you knew the lawyer shot Pop for
levels to work by. Millions of federal research dollars were spent his gold claim before the first reel ended.
(Continued on page 2) The various scandals of the day (which seem no different, just
:----------------~---,-~~---, larger than, the scandals of yesterday) target not only the corpo-
---INSIDE --- rate executives (a shiftylot) but also the accountants (we knew
The Demand Requirement in Derivative ACtions - Part 1 they'd get those scalawags) and the lawyers (must be some
by Eric S. Waxman """",,,,,.,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,,,,,,p, 3 mistake). '
Why are the lawyers becoming targets? Didn't the Supreme
'One Day One Trial'; LA County's Jury System
by Hon, James A. Bascue.i..,.: ... "", ..""", .. ,,,,,:,,.,,.,,.,,,, ..p, 5
Court let them off the hook when it ruled there's no such securi-
ties tort as "aiding and abetting?" Not quite. In Congress' eye,
From Prestige to Penury: Increased Scrutiny of where there's crime, where there's a victim, there must be a cul-
Directors and Officers
prit. As in all detective stories, who was present? Let's see, the
by Will Jay Pirkey """"."""."""."""",.,.""",.""" ..,.",,,p, 7
executives, the accountants, the employees (no, too many votes)
Dispute Resolution; 25 Years of Experimentation , and the lawyers. Voila!Time to get them. '
by Hon. L,C. Waddington. """ ... "", ..",.,., ..""""", .. "."",p. 9 Why has the lawyer's time come? Two reasons, which appear
The "Reasonable Particularity" Requirement in Trade Secret Actions good to lawyers but bad to government and the public: Too much
, by Michael J. Kump""".""",,,,,,,,,,,,.,,.,,,, ..,,,,,,,,,,,,,,,,,,,,.p, 10 money and too many clients. The advent of the mega-firm has
Successful Complex Resolution: Follow-Up Is Key
brought on both poxes, Making a lot of money makes anyone a
by Charles G. Bakaly, Jr. """,.""", .."",., ,, ,,,.,,";"'p, 11 choice target and, a lot of clients means conflicts that appear
harmless but turn out not to be.
Letter from the President
 • ~ •• V _.v_. ~ _~
~ • ~_vv~_ V~ ~ ~
Jontinuedfrom page 7 . "Size of D&O Settlements
, :::" '
nents, sought to sue in California. The court overruled Diamond's
lemurrerfinding that the use of "in this state" in Corporations
Jode section 25500 was to be broadly interpreted to include
hose' domiciled in California even. though no sale had actually
aken place in California. . "
"In a, near companion case; Store Media Inc. v. Superior
70urt,20 Qal.4th 449 (1999), the Supreme Court further ex- ,
ianded theapplication of the' CSL. Store Media involved the pri-
zatelstock option plan for employees of plaintiff and select per-
IOns:Employees 'sued claiming they had been rnisleadby false i
eorporate financialstatements whenthey exercised their optionS.. '
rheemployer's demurrer was also overruled because "sale" as
rsedin Corporations o.ode section 25500 inclUdedanysale,public
~rprivate. ',!t:Ffi'\'!i"ii!: "., . ! '" '. ...,.. ',.. ' '
" Whilel:the application of the CSL has been expanded to include
my sale lofstock' involving a California resident, the .extent of a.
)~O's"participation" in that sale is still in flux. " ees has yet to be seen. What is certain is'that the price of prestige
• Actual direct participation in the illegal activity remains the
)bjective basis for suing a D&O. In Central Bank of Denver v.
."irst IruerstateBomk of Denver, 511 US 164 (1994), a public
ouilding authority defaulted on secured bonds and was sued for
aiding and abetting the fraudulent scheme that caused the loss of
.he security. Though the court narrowly decided (5 to 4) that
.here was no secondary liability for aiding and abetting a lOb-5
violation, the majority warned that anyone who uses a "manipula-
.ive device" o~ makes a material misstatement or omission, upon
which a buyer of securities relies, may be liable. '
Currently, "participation" for purposes of the CSL is limited to
.hose who are actively involved in the management of the corpo-
ration or who have insider status, Kamen v. Lindly, 94 Cal. App.
I tth 197 (2001). In Kamen, plaintiff named all corporate execu-
.ives including outside directors as defendants in the market
.nanipulation scheme. A demurrer was sustained without leave to
unend as to the outside directors.
The court citing Denver held that outside directors who did
tot engage in the "day to day management" of the portion of the
xnnpany actually committing the false act or who did not have a
special relationship with the company did not "participate" in the
market manipulation, because the outside directors' only involve-
nent was having signed a false Form 10-K with the SEC. In light
)f the new SEC attestation requirements for CEOs and CFOs fil-
ng lO-ks Kamen's rationale may be short lived.
The flurry of federal securities legislation follows every "crisis".
Provisions of pending legislation, S 1933 and HR 3829, propose
I restoring aiding and abetting in 10b-5 actions, and reinstating
oint and several liability.
I Consequently, we can expect California legislation to mirror
federal law increasing D&O personal liability by limiting previous
avorable judicial decisions.
I .
A Question of Indemnification
As legislatures increase corporate executives' potential expo-
lure for fraud or for a knowing violation of law, the durability of
;he corporate veil and the availability of indemnification for legal
iosts and the resulting civil penalties remain ongoing questions.
I Jnderstandably, advertisements or asset protection by incorpo-
I·ating in Nevada abound.
It has been the SEC's position for over 25 years that it is
igainst public policy for a corporation to inderrmify its directors
md officers for violations of federal securities laws. However, the
mc does not invoke this rule when there is settlement. See D.
3ailey, "SecuritiesLitigation Reform: The GrouiinqImportance of
)'cienter,"The ACE Report (October 1999). California has taken a
:imilar position by making any insurance coverage for fraudulent
._...l ..J!_l... + __ + ~_.:....l r'I""l';.t'r..-..--.':r.
~_ , .....,......
Exploding," The ACE Report
(November 2001). ..
To meet the need of D&Os for personal asset protection insur-
ers have created "wrap around" punitive damage policies and off-
shore affiliates that provide coverage for what is typically exclud-
ed. See D. Bailey, "Benefits of side- A D&Ocoueraqe/' The ACE
Report (January 2001). However, recent financial disclosures
have induced insurers to return unearned premiums and seek
rescission of their policies through declaratory relief. Thomas
Brown, "In House, Full Disclosure", California Lawyer (Sep-
tember 2002) p.33. , ' . "I'
As indemnity becomes limited and personal exposure increas-
es D&Os should become more cautious. With the enactment of
section307 oftheSarbanes-Oxley Act of 2002, D&Os rnayalso
become more suspicious of their own counsel,who is now
required to disclose the executives' management misconduct.
.Whether the recent bad press and new laws result in better judg-
ment by D&Os and more concern for their investors. and employ-
has significantly increased.
- Will Jay Pirkey
The New Ge'f'fJemw Lawyer Responsibility _
Continued from page 1
As the accounting profession merged from hundreds of small
firms into five mega firms, fewer and fewer firms fought for more
and more clients. This led to moral and professional lapses in the
service of maintaining and increasing an income stream. Nothing
new here, but only a couple of arguably slight such lapses at the
wrong place and the wrong time, toppled the giant Arthur
Anderson.
I'm not commenting on Enron or Worldcom because I wasn't
there (although in full disclosure I did represent Worldcom once)
but in 42 years of practice I've never been asked to devise or bless
a dishonest act by a client save once. When I refused, the client
called me a "chicken shit," discarded the idea and went on his
straight Way.Didn't even fire me.
There seem to be four ways. a lawyer might violate a law in
connection with corporate malfeasance: devise a scheme, bless a
scheme, devise a way to secrete a scheme, or fail to uncover a
scheme. With the first three, the lawyer's major risk is a failure to
realize that something is corporate malfeasance. Laws, regula-
tions, and accounting conventions change so fast and are so
arcane Learned Hand couldn't keep up. Here the watchwords are
simply "do your best" and "don't represent flakes." We assume
lawyers are honest. Dishonest ones should be tagged.
It's number four that is unfair and it's where we are going. New
legislation, both enacted and proceeding through Congress, is
intended to place greater burdens on lawyers. The Sarbanes-
Oxley Act of 2002 requires SEC rules yet to be promulgated but
appears to state that a lawyer must report "evidence of a material
violation of securities laws or breach of fiduciary duty ... " It's
vague enough to require extensive court interpretation. H.R. 4013
requires disgorgement of profits and fees for the lawyer "aiding
and abetting any ... violation of the securities laws... "
The final battle will be fought in the arena of public opinion;
that's the media. Everything converged on Arthur Anderson at
once and it was crushed. What Congress seems to be suggesting,
and what the press seems to be insisting upon, is lawyers as
moles, snooping to snitch on the one hand or accepting the possi-
bility of civil or crirninalliability on the other hand. I say: Acts of a
client are not the acts of a lawyer unless the lawyer enables the
client to act.
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