In Your Own Defense

Why representing finance executives in lawsuits is both an art and a science.

You 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.

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