Special Advertising Supplement to The National Law Journal

Keynote Speaker:James B. ComeyGeneral Counsel of Lockheed Martin Corporation

A Roundtable Discussion

the evolving role ofGENERAL COUNSELLeadership in Challenging Times

TO THE READER:In the 5th edition of our continuing series, The Evolving Role of General Counsel,

we present a lawyer who has been on both sides of the table in dealing with corporate conduct, James B. Comey, Senior Vice President and General Counselof Lockheed Martin. Before assuming his current position, Mr. Comey wasDeputy Attorney General of the United States — the second-highest ranking offi-cial in the United States Department of Justice. Prior to that, he was the U.S.Attorney General for the Southern District of New York. In each of his formerroles, he was privy to the details of many high-profile corporate scandals — of corporations with the shared traits of flawed communication, flawed culture andflawed compliance.

Mr. Comey shared his observations on corporate conduct and the government’songoing challenge to infiltrate the corrupt business and accounting practices of large,multi-national corporations – many of whom have ongoing contracts with the U.S.Government. He also discussed the DOJ’s tactical decision to prosecute mid-levelemployees who knowingly participated in illegal conduct. The message is a simpleone: the plea, “I was only following orders,” will find no quarter in the offices of general counsel or government prosecutors.

Mr. Comey also reminded us that the familial structure inherent to any corporation needs to be treated with the same sense of responsibility that onewould apply to one’s own family: what you say matters, but it’s what you do thatreally counts. Words like ethics and compliance mean little without action. It isthe responsibility of the leaders — the parents to use Mr. Comey’s analogy — toset the standard through their own conduct. A serious departure might find onegrounded for life.

Our four distinguished panelists addressed several key issues pertaining to corporate ethics and compliance. Glenn Campbell, a partner at King andSpalding, focused on M&A, particularly in the areas of homeland defense &security and IT services. Of particular interest were Mr. Campbell’s commentson U.S. export control laws and the dearth of understanding of these laws thatcan leave an otherwise law abiding and ethical company in a state of serious non-compliance.

W. Jay DeVecchio, a partner at Jenner & Block observed that while SOX hasbeen and continues to be of prime importance to corporations and their boards,it should not be – cannot be – to the exclusion of the fundamental complianceand ethics measures that have kept reputable corporations in good stead allalong. Mr. Devecchio also addressed the liability issue prime contractors risk intaking the assertions of compliance made by their sub-contractors at face value.

Marcia Madsen, a partner at Mayer Brown Rowe & Maw, reminded us thatcompanies doing business with the U.S. Government must be extraordinarilyvigilant owing to the government’s lax or non-existent internal controls. Shespecifically cited several gaffs in the government procurement process fueled bythe consolidation of decision-making authority and the lack of meaningful internal monitoring and process. She also warned of the danger’s posed by interagency contracting which bypasses the government’s competitive bidprocess and the trend toward a combined workforce where private companyemployees are incorporated into the public sector workforce.

Last on this all-star roster was A. B. Culvahouse, Jr., Chairman of O’Melveny &Myers. He discussed the role of independent directors and how investigations madeby these independents have changed in a post-Enron era. He also addressed theongoing challenge Boards of Directors face in balancing the often competing interests of fully cooperating with the DOJ and SEC; vigorously defending againstthe ever-present threat of civil litigation from the plaintiff ’s bar; maintaining shareholder confidence; and preserving the consumer goodwill essential to business success.

Five renowned lawyers — all committed to helping American business dowhat it does best — innovate, grow and prosper — without cutting ethical corners (or worse) to do so. We learned a great deal from each of them, we trustyou will too.

—Brian Corrigan, Esqbcorrigan@alm.com.

ALM Media, Inc. | The National Law Journal

the

PANELISTS

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GGlleennnn CC.. CCaammppbbeellllPartner,

King & Spalding LLP

JJaammeess BB.. CCoommeeyySenior Vice President,General Counsel,Lockheed Martin Corporation

MMaarrcciiaa GG.. MMaaddsseennPartner,

Mayer Brown Rowe & Maw LLP

WW.. JJaayy DDeeVVeecccchhiiooPartner,Jenner & Block LLP

JJaacckk FFrriieeddmmaannChairman

The Directors Roundtable

AArrtthhuurr BB.. CCuullvvaahhoouussee,, JJrr..Chair,O’Melveny & Myers LLP

3August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

MR. FRIEDMAN: I’m Jack Friedman, Chairman ofthe Directors Roundtable. We are a civic group thatoffers programming in about twenty countries andabout twenty cities in the U.S. Our goal is simply tohave the finest programming focusing on Boards ofDirectors and their advisors.

The purpose of this particular series is to acknowl-edge the increasing importance of General Counsel.We are honoring not only an individual today, butthe profession of corporate counsel and giving awider understanding of the leadership role that thebusiness community plays as corporate citizens. It isevident that it’s almost impossible to find a positivecomment about any corporation in the press. Onemight have the impression that the only way to getanything done properly is for the government to beatup on the business community. But, in my view, andI think in most people’s view, it’s really the reverse: Ifthe business community doesn’t take a lead, then thegovernment is never going to be able to handle theproblem adequately. Today’s program will start withremarks from our Guest of Honor. Then each of thepanelists will speak individually and as a group.Finally, we will open up the discussion to questionsfrom the audience.

I would like to introduce James Comey, GeneralCounsel of Lockheed Martin. Prior to his currentrole, Mr. Comey was Deputy Attorney General ofthe United States, serving in President George W.

Bush’s administration. As Deputy Attorney General,Comey was the second-highest ranking official inthe United States Department of Justice (DOJ) andran the day-to-day operations of the Department.He was appointed to the position after serving as theUnited States Attorney for the Southern District ofNew York. In August 2005, Comey left the DOJ toassume his current role as General Counsel andSenior Vice President of Lockheed Martin. We aredelighted to have Mr. Comey join us today. Thankyou.

MR. COMEY: Good morning everybody. And I don’tcare what you may have heard from Judge MichaelLuttig. I have the best general counsel’s job inAmerica and I didn’t have to move to Chicago to getit.

I would like to spend just a few minutes with yousharing some perspectives on what I would call theEnron era, the last let’s say four and a half years starting from late 2001. Perspectives drawn from myexperience as a prosecutor, a U.S. attorney inManhattan, and then the deputy attorney general, anda perspective supplemented by the last ten monthsworking as general counsel inside a major Americancorporation that focuses almost maniacally on some ofthe compliance issues and ethics issues that we all talkabout.

So let’s start with the Enron era. What happened?

People have asked me many, many times over the lastfour years, did we see an explosion in corporate crim-inality in America starting with Enron, followingthrough WorldCom, Adelphia, Imclone,HealthSouth. I mean, you pick off the list yourselves.And the answer is one that’s frustrating to manypeople. I don’t know. I honestly don’t know. I talk topeople with a much longer view, a much longerinvolvement in criminal justice than I and they tellme people are crooks. You’re always going to havecrooks. People are always going to commit crimes.People are going to do bad things. That’s what’sgreat about being in the law enforcement business.You will never run out of people to lock up. And inthe white collar area, people’s crimes, the manifesta-tions of their flawed characters, tend to be reflectedin many ways by the different market conditions.

People with a longer view have said, look whathappened in the eighties. You had a boom in merg-ers and acquisitions. Boom in premium information.And what did you have? A huge number of informa-tion based crimes. Misappropriation, insider trading,that sort of thing. You saw tremendous prominencegiven to Boesky, to Milken, to Drexel Burnham andthings of that sort. In these you saw a run up in themarket unlike any we’ve ever seen before. And thoseconditions drew criminals in a different direction.They drew people to crimes that were rooted in people’s belief that everything would make money.

4 August 2006

Penny stocks, nickel stocks, crap stocks, whateverkind of stock it was, it was going to make money.

And we saw in the Southern District of New Yorkduring that period, La Cosa Nostra, this thing ofours, the Mafia drawn to the markets. They actuallyset up these boiler room schemes with these fabulousnames to sell stocks to old people, to anybody whowould answer the phone. To pump stocks and dumpthem, simply sell made up stocks, to find all mannersof ways to make money. La Cosa Nostra, though,didn’t call itself the Columbo family or the Gambinofamily brokerage house. They made up these names,and I have two favoritesbecause these guys may bedumb but they come upwith great sounding namesthat reek of sort of ox bloodand dark wood paneling.Montgomery Sterling wasone outfit. And StrattonOakmont was another out-fit. And it sounds nothinglike what it was, which wasthree guys named Vinny ina basement in Brooklynmaking phone calls to makemoney. But the marketattracted those criminals forthe same reason that banksattracted Willie Sutton.That’s where the moneywas to be made by crimi-nals. And those people whohave given me this sense ofthe long view have saidlook, look what happenedat the end of the century,the turn of the century. Wehad a change in those con-ditions that was as dramaticas any we had seen. Thebottom fell out. We had hadpeople who could makemoney with anything,always beat expectations,always get to the next quarter higher than you werebefore, always, always, always, all of a sudden take adive.

Warren Buffet says it really well and it’s not justbecause he has more dough than I do. Warren Buffetsays, “just as a rising tide lifts all boats, a quicklyreceding tide exposes all naked bathers”. What hap-pened in late 2001? The tide was unbelievably highand always getting higher. There were people in thatwater that had lost their suits and rather than raisingtheir hands and saying, I need a towel, I need somehelp here; they stayed in the water, and they treadedwater convinced that that rising tide would enablethem somehow to get to a point where they are fundamentally sound business model would pay off.Because right, all the business models are fundamentallysound if I could just get to that next whatever. Yeah, Idon’t have the number of cable subscribers that I need.Yeah, I have wild over capacity in fiber, yeah, I havewhatever, fill in the blank. But it’s going to work. IfI can just stay in this water long enough. And then

something dramatic happened. That water went out.And standing on the beach were a whole bunch ofpeople without their bathing suits. And those werethe people that we at the Department of Justicewanted to talk to. Those were the people whose, I’lljust get to the next quarter was exposed when the bottom fell out. At least, that’s the way that peoplewiser than I look at it. And I think it’s a way thatmakes a lot of sense to me.

So was there a run on corporate criminality? Wasthere a fundamental breakdown in the core humanvalue system? I don’t know. But I know something

that mattered at the United States Department ofJustice. A whole lot of people thought there was.This amazing constellation of Enron, WorldCom,Adelphia, and a number of others that happened inclose proximity from October of 2001 to the springof 2002 created a sense that the system was broken.That the rich people were getting away with it. Thatcorporate executives were all crooks. That the systemwas tilted, was fixed, was broken in a fundamentalway. And despite what your mother may have taughtyou about not caring about what other people think,when you’re in the law enforcement business youmust care what people think because their faith inthe system is one of the pillars of that system.

Another very small, very different example waspart of my life in Richmond, Virginia where I was anassistant U.S. attorney. We had a number of veryhigh profile bank robberies where good people gothurt. A beautiful young gal who had just graduatedfrom high school was shot and killed at point blankrange by some psycho who just wanted to intimidate

the rest of the people in the bank. This generatedgreat fear in the community and a sense that it wasdangerous to go into banks. That there was a run onbank robberies. And I sat with the head of the FBIin Richmond and asked, what are the stats? Howdoes it look? And the answer was bank robberies areactually down as against last year and against the yearbefore. But it didn’t matter because the good peopleof Richmond believed that it was dangerous to gointo banks and that the law enforcers were not protecting them. And it became incredibly impor-tant to us to find some of those bank robbers and to

hammer them and make sure the world heard aboutit.

The white collar explosion, whether it was or not,began with what I call sort of the summer of fraud,the summer of 2000 generated the same kind ofpressure inside the government. It was powerfullyfelt that we needed to respond to reassure the goodpeople and to send a shock wave of deterrence at thebad people. Two messages: One of reassurance forthe good folks; one of fear, frankly, for the bad folks.So we set out to do something we had never donebefore and that is to push our white collar prosecutors to deliver cases within the memory cycle.You’ve heard about the news cycle. The memorycycle is that period of time during which people stillremember the bad thing that happened and thatthere is a consequence for that bad thing. The problem with so many white collar cases is that theytake so long to make that folks have forgotten whatthe bad thing was in the first place. And whetherthey know it or not they have internalized the notion

Special Advertising Supplement to The National Law Journal

that the system doesn’t work. People get away with it.Nothing ever happens. When something finally hap-pens, they don’t connect it up. So it became veryimportant to us to deliver some results in the mem-ory cycle. And how do we do that? My predecessor isDeputy Attorney General Larry Thompson, hestarted in inventory at the direction of the President.He became chair of the corporate fraud task forceand created a spreadsheet of every investigationunderway in the United States involving significantallegations of corporate fraud, accounting fraud, self-dealing, insider trading and things like that andstarted checking that inventory, aging that inventory.Every thirty days I want to know, where does thisstand? Where does this stand? And the message wepreached to our prosecutors was, the perfect is theenemy of the good. Do not bring me a hundredcounts four years from now where you are going tonail this company or this person on every one ofthose hundred counts. Don’t do that. Bring me fivecounts of clear crime that you can prove in the nextsix months. That was the message that was sent. Andit is a message that is a hard one for a lot of whitecollar prosecutors because it is very difficult to makewhite collar cases. White collar cases, as they shouldbe, face a very high hurdle. And all of you know whatthat hurdle is. The government must prove what’sinside the mind. The government must prove thatsomeone acted with criminal intent. And prove thatto a jury of twelve who must unanimously agree andprove that beyond a reasonable doubt. That’s very,very challenging.

Drug cases, of which I’ve done some of in mycareer, are very different. [They are] actually thereverse. In a drug case, the mission is to connect aperson to a transaction. Right? All of you know this.I don’t want to pick on anybody but I’ll pick on thisone, the photographers here. If that table is in a hotelroom at an airport Marriott near Kennedy Airportand there is a kilo of heroin in the center of that tableand the DEA bursts in, these three guys, even theguy with the camera, are in huge trouble. And it isnot open to any of them to say, this is illegal? Or myaccountant has reviewed this kilo. Or I have a comfortletter from a reputable law firm and they have said thatthis kilo… no. If you’re at that table, you are going tojail. White collar cases are very different because nomatter how complicated the case, no matter howmany special purpose entities, off balance sheet,reverse repos, no matter how much complicationthere is, at the end of the day investigators are goingto know what happened. They are going to know thetransactions. They are going to know who was at thefigurative table. The mission then though is, whenthey were sitting at that table, what were they think-ing? And it is open to the folks at the table to saysometimes with justification, right, my accountantlooked at this transaction, my lawyer looked at this. Itnever occurred to me that this was wrong. And the government’s burden to make that case is to prove,inside the mind, that that person knew they weredoing something criminally wrong. And that’s theway it should be. I used to say to folks it’s hard toremember now what the summer of fraud was likebut I used to have people when I was the U.S.Attorney in Manhattan yelling at me at public

forums, why don’t you go out at arrest Ken Lay? Whydon’t you go out and arrest Bernie Evers? And I used tosay to them, look you don’t want to live in a countrywhere I can go out and lock somebody up, or wouldlock somebody up because we are all whipped upabout it. You don’t want to live in that countrybecause someday you’ll be in the cross hairs. Youwant the burdens I just laid out. You want the bur-den of proof, you want criminal intent to have to beproved, you want a unanimous jury. You want it to behard.

Now, having said how hard it is, the great thingabout living in this century is that we have inheritedthe last century’s great gift of law enforcement which ise-mail. There was never a window into the mind likee-mail. All of you today, and some of you may havegotten this out of the way already, will say somethingstupid on e-mail. You will say something where thereader can’t see context, can’t see body language, can’tread that you are just kidding, can’t read sarcasm. Youwill say something that can be misinterpreted, or you’llsay something brutally honest. People say things on e-mail that they would not say to their best friend atthe top of Mount Everest whispering through an oxygen mask. I don’t know why that is. There is something about e-mail, about the freedom of e-mail,about I don’t know what it is, but people will say thingson e-mail that you wouldn’t believe.

All of us in law enforcement or have had lawenforcement experience have a favorite. My favoritecomes from a case involving an advanced fee scheme,which was just a rip-off of a bunch of people whowere desperate to borrow money from small businesspeople. And this outfit had these brokers that woulde-mail each other when they were bored during theday. And one e-mailed the other saying: I just hope theSEC doesn’t find out what we’re doing here. And theother knuckle-head e-mails back saying: Forget aboutthe SEC, when the FBI comes, I’m out the window.Now, that’s a pretty good window into the mind thatthose guys knew that they were doing wrong. Andyeah, I could prove to a jury who would agree unan-imously that they did because of that. I’ve triedexplaining to people saying, look, what is it aboutcars that make people feel safe? You’ve all seen this,right? Someone sitting in an automobile, surroundedby glass that can easily be broken, flipping people offin traffic. Right? Some huge guy is just going to getout of his car and just beat the daylights out of you.But you feel safe in a car. There is something aboute-mail that offers that same sense of safety andanonymity and ease of transmission also makes it somuch more tempting. So that’s where we looked.That’s where we always look in law enforcement fora window into the mind. What did somebody say ine-mail? And it’s for that reason, I don’t have time totalk about it in great detail, but it’s for that reasonthat cases involving obstruction became so importantto the government. A case involving anyone screwingaround with e-mail, anyone screwing around withdocuments, and it extended, obviously, to anyonelying during interviews. All of those things becameincredibly important to the government during theEnron era.

So we set out in the summer of 2002 to age aninventory and to send a shockwave. And we thought

5August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

JAMES B. COMEY

Jim Comey has been Senior Vice President andGeneral Counsel of the Lockheed MartinCorporation since October 3, 2005. From 2003through 2005, he served as U.S. Deputy AttorneyGeneral supervising the operations of theDepartment of Justice. Prior to becoming DeputyAttorney General, Mr. Comey was U.S. Attorney forthe SDNY. From 1996 through 2001, Mr. Comeyserved as Managing Assistant U.S. Attorney incharge of the Richmond Division of the U.S.Attorney’s office for the Eastern District of Virginia.

Mr. Comey attended William & Mary and theUniversity of Chicago Law School (J.D. 1985). Heserved as law clerk for then-U.S. District JudgeJohn M. Walker, Jr. in Manhattan, and worked forGibson, Dunn & Crutcher in their New YorkOffice. He joined the U.S. Attorney’s Office forthe SDNY, where he worked from 1987 to 1993,eventually serving as Deputy Chief of theCriminal Division.

“The virtue of deterrence and

talking about deterrence in the

white collar arena is you have an

audience that listens; that watches

CNBC; that reads the Wall Street

Journal; that pays attention. You

have an audience that doesn't

commit crimes high on crack or

desperately emotional. You have an

audience that commits crimes after

reflection . . . you have an audience

that is very responsive to pain, to

fear because they are a people that

have a lot to lose.”

6

that we could send a message of reassurance. And wealso thought, and I still believe, even outside government, that deterrence works in the white collar arena. Again, [it’s] different than in other are-nas. It’s sometimes hard to fit the deterrence modelto some drug crimes, violent crimes, things like that.The virtue of deterrence and talking about deterrencein the white collar arena is you have an audience thatlistens; that watches CNBC; that reads the WallStreet Journal; that pays attention. You have an audience that doesn’t commit crimes high on crack ordesperately emotional. You have an audience thatcommits crimes after reflection. And third, you havean audience that is very responsive to pain, to fearbecause they are a people that have a lot to lose.People with community roots and families and theties of a normal successful person. That recipe, webelieved, made deterrence work in the white collararena and if we could send a scary message we wouldchange behavior.

So what happened? I think a very scary messagewas sent. We thought an awful lot about deterrenceand making decisions about who to charge. And oneof the hardest decisions I made personally was tocharge the middle level accounting people atWorldCom. There was a woman named Betty whowas in charge of accounting in Clinton, Mississippi,and knew she was doing wrong when she made top-side adjustments to their records after the closeof quarters; knew she was getting an illegal order;knew it was absolutely wrong; she was having troublesleeping about it. But she did it anyway. And I insisted that she plead guilty. Not because I everthought that Betty would re-offend. Not about personal deterrence. But because I thought it wasvery important to send the message that, ‘I was onlyfollowing orders’, was not good enough. That if youfind yourself in that position you could think aboutsomeone like Betty. And Betty went to jail for fivemonths and got credit for cooperating. Very harddecision because she was a decent person.

Why did she do it? She told us. Because she had noother alternative, she thought. There was no one Icould go to at WorldCom. I knew the orders werecoming from the top. I need this job. I’m the mainbreadwinner for my family. I support my husbandand my kids. And there is no better job in Clinton,Mississippi than the one I have. What am I going todo? And the answer we tried to be a small part of wasthat you are going to do something other than inten-tionally break the law. And that’s a hard thing, but Ithink it’s a message that had to be sent. I think at theend of the day a broad message was sent. I thinksome good was accomplished from what the UnitedStates Department of Justice did in response to thesummer of fraud. But I think there is a tremendouslimit to what we tried to do.

Now that I just talked about how great we were asprosecutors, let me explain why prosecutors don’tmatter that much. You can’t arrest your way to ahealthy urban neighborhood. You can’t. I have lockedup a lot of people for gun crime and for drug crime.That is not the answer alone to creating a healthyurban neighborhood. It’s a very important thing todo to create the space for the good people of thatcommunity to claim it. For the good people to grow

healthy kids. But you’re not going to arrest your wayto healthy kids. You cannot prosecute your way to ahealthy corporate culture. It just doesn’t work.

The prosecutor’s role is a lot like what I think myrole is as a parent. I have five children. I have twohigh school daughters. One of them is on her way tocollege this fall. And my wife has taught me how tobe a parent in all respects but here is one of the toolsshe has given me. We say to these beautiful brightyoung girls when they go out in the evening, look,someone offers you a beer, or a joint, or some boywants to express his admiration for you in ways thatare inappropriate, you need to say no and should sayno because of the way we raised you. Since you werethis tall we’ve talked to you about what’s right andwhat’s wrong. Your character really your culture, butI don’t say that – but your character should get youthere. I don’t do that. But let me help you out. If youfind yourself wavering and weak and you want thatjoint or that beer or that inappropriate expression ofadmiration, you say to that boy, Gee, I’d love to, youknow, fill in the blank, I’d love to do ‘X’, but my fatheris a maniac. Okay? My father would kill me and you if Idid that. So I can’t. I said let me be your excuse. That’smy role as a dad: To be your excuse. That’s the role ofthe prosecutor in corporate America. To be an excuse.If you get to the prosecutor things have gone so badthey’ve just gone way bad. The prosecutor’s role is tobe that father-figure. That back-up. But what is theanswer? What is the main lesson of the Enron era?That culture and character matter and that there issuch a thing as corporate culture. And that it requiresconstant care and feeding and attention. That corpo-rate executives need to realize that ethics is not some-thing that you leave for people to get at the church orsynagogue or some weekend deal. Ethics is not some-thing you check at the door. Compliance is a fairlynarrow thing. Compliance is the boundary on thisfield. Ethics is how do I behave within those bound-aries. Compliance is about people stepping over thoseboundaries. But ethics is about keeping people awayfrom the sideline at all. And I think for too many cor-porate executives, ethics made them uneasy as sort ofa quasi-religious deal. Huge mistake. I think one ofthe lessons of the Enron era is that if it makes youfeel quasi-religious or not, you must talk to youremployees the way we talk to our children. And raisethem in a way, yeah, maybe they have that prosecutoras a backup. They don’t even think about that prose-cutor, because they know what’s right and what’swrong. And it is constantly refreshed.

The challenge of culture is, it goes bad like air.Slowly. So the people in the room don’t notice it.You’ve had this happen, right? You’re working onsomething, I don’t know whether you’re gutting fishor something really disgusting and you’re in a roomand your spouse or your friend steps into the roomand they say, what on earth is that? And you say whatare you talking about? They say, that stinks. It does-n’t stink. Yes, it does. You know what I’m talkingabout. Why does that happen? You were in the roomwhen that air went foul. You didn’t notice it. Whenyou step into rooms like that and I’ve stepped intorooms like WorldCom, Adelphia, and Enron it stinksto high heaven. But a lot of good people in the roomdidn’t notice that it got all smelly because it happened

August 2006Special Advertising Supplement to The National Law Journal

GLENN C. CAMPBELL

Glenn Campbell is a partner in King & Spalding’sMergers & Acquisitions Practice Group. Mr.Campbell’s practice involves advising clients onacquisitions, divestitures, joint ventures, collabo-rations and licensing transactions; the fiduciaryobligations of directors in connection with theevaluation of transactions; the registration anddistribution of debt and equity securities; andthe disclosure and reporting requirements of thefederal securities laws. His clients include com-panies in the defense, homeland security, con-sumer products and pharmaceutical industries.He is a member of the American, Maryland andDistrict of Columbia Bar Associations and servesas a member of the Corporation LawsSubcommittee of the Maryland Bar Association.

“In many cases you haveindividuals, well meaningindividuals, who don'tappreciate the fact thatwhen they are having aconversation with someonewho happens to be a foreignnational and they are talkingabout some technology theyare working on, thatconversation, in fact, involvesan export of technical data,which may violate the U.S.export control laws.”

bit by bit by bit. There wasnever a day at WorldComwhen Bernie Evers said,listen, we’re going to com-mit the largest fraud inAmerican history onWednesday. Is everybodyfree? Okay. I’ve had caseswhere people kill people.

In Mafia cases they saywe’re going to do itWednesday. If that’s notgood, Thursday is a backupfor us. In WorldCom, whathappened? Thousands ofgestures, and e-mails, andsignals, and body language,and the air went badthrough thousands andthousands of human inter-actions until people likeBetty didn’t feel free to say,no, I don’t do that. It gotstinky as all get out. And itwas hard to tell from theinside.

So the primary lesson ofthe Enron era is that culture matters. And it isincumbent on people whocare about their companiesto be maniacal about thatculture. And to talk ethics with their employees and to constantly watch that air in which they live, because they will be the last ones to notice itgoing bad. I think a hopeful lesson of the Enron era is people get that. I went to a company that is maniacal about that in part because the lesson is hard learned by Lockheed but lots of other companies understand how important it, how it is in their self-interest to be maniacal about ethics.And if they do that, there will always be crooks, butthere will not be the kind of crooks that generateattention in People Magazine and all across thiscountry in a summer of fraud, in the summer of2002. And we will not have the situation where people look at people who work in corporateAmerica as a bunch of crooks. And we will not havea situation where the good people of America doubtthat the system works. That is the lesson of theEnron era. Thank you.

MR. FRIEDMAN: Thank you. Our next speaker willbe Glenn Campbell, a Partner at King & Spalding.

MR. CAMPBELL: I am going to talk today aboutmergers and acquisitions, particularly in the defense,homeland security, and the government IT servicesindustries. There are a number of issues that I thinkare of importance to directors and advisors of compa-nies generally in the context of a particular M&Atransaction. There also are a number of peculiar issuesthat I think are either more relevant or more impor-tant at times in the context of companies likeLockheed Martin. When you look at the M&A areaover the last twenty-five years, there are a number of

developments that have occurred in the M&A worldgenerally that have paralleled some of the develop-ments from a business perspective in the defense,homeland security, and government IT services space.

With regard to corporate M&A law generally thestates historically have been the principal architects ofour governing law. In Delaware, which has long beenthe home for many of our largest corporations, overthe last twenty-five years there have been numerouscases dealing with the fiduciary duty of directors in anM&A context. And despite the number of cases andthe different situations the Delaware courts have hadto address, there still is a fair amount of uncertainty atthe margin on particular issues. If you go back twentyyears to the TransUnion decision, the Delaware courtssent shockwaves through the ranks of corporate direc-tors in this country by concluding that a group ofdirectors who had no personal interest in a transac-tion, but who the courts ultimately concluded did notavail themselves of all the information that was rele-vant to a decision to sell the company in fact could beheld personally liable for the failure to exercise theirfiduciary duty. In the last month, some comfort hasbeen given to directors by the Delaware courts as aresult of the Disney decision, which has received agreat deal of attention. The court concluded thatwhile the Disney directors in hiring a new presidentdidn’t do a great job, and certainly didn’t meet thehighest standards of corporate governance, theiractions did not constitute a breach of their fiduciaryduty.

The other thing that has happened in the last twen-ty-five years in the general M&A area is the increasedevolution of federal law as a source of the law in M&A

transactions. If you go back to the late 1960s whensome abusive takeover tactics received a great deal ofattention, the Government stepped in, as Jim has suggested, and passed the Williams Act. To use Jim’sphrase, the Summer of Fraud, the Government steppedin with both feet in passing Sarbanes-Oxley. I think itis fair to say that it is virtually unprecedented forCongress to move as quickly as it did in 2002, and forsomething to get passed in Congress by almost unani-mous vote, particularly given the political climate inwhich our Congress acts today. With Sarbanes-Oxley,the federal Government has become a much moreactive participant, I would suggest, in the boardroomsof America’s corporations. Every director has heard ofSarbanes-Oxley, and every director asks about theimplications it has for the way the board conducts itsbusiness. And that is a good thing. But I also wouldsuggest that it would be a big mistake to focus onSarbanes-Oxley to the exclusion of other areas of thelaw that for a long time have been important. I knowJay and others are going to talk about some more specific items in this regard am going to try and highlight at a thirty thousand foot level a number ofareas where increased enforcement at the federal level,from both a civil and criminal perspective has had asignificant effect on how M&A transactions occurtoday and, in particular on the way they are conductedwithin America’s defense industry.

During this same twenty-five year period there havebeen enormous changes in the defense industry generally. If you look at the 1990s, we went through awave of fairly significant consolidation. A number ofvery large defense contractors that existed in the 1980sand early 1990s no longer exist. When you look at

7August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

8 August 2006

Lockheed Martin where Jim is the general counsel, itnow includes the businesses of companies like MartinMarietta, Lockheed Corporation, parts of the LoralCorporation and GE Aerospace. Boeing includes theMcDonnell Douglas business, Rockwell and Hughes.Northrop Grumman today combines the longstandingaerospace business Northrop and the Grumman busi-ness as well as Litton Industries, WestinghouseElectric and now TRW. So there has been a massiveconsolidation in the industry and at the same timethere has been a significant growth of a number ofsmaller government IT services and systems integra-tion companies. All you have to do is drive around theD.C. area and you can see many of them. The otherthing that has happened during this same period is a

significant increase in the internationalization of ourindustry. You look up today and you see large companies like BAE Systems having a very significantrole within the U.S. defense industry, including influence on programs that are highly sensitive. Thesechanges in the defense industry, homeland security,and government IT services businesses raise a numberof considerations that are very important in the contextof an M&A transaction. The first is the fact that, inmany cases, particularly with smaller companies, thecompanies have a single customer. So a failure to comply with the rules and the complexity that existswithin the Government contracting arena can havefairly dramatic effects on a company. It can have theultimate effect of suspension and debarment in whichthe company that you acquire can’t do the business that

you intend it to do. These remedies are used sparinglyby the Government, but they exist and as a result theycast a shadow over the diligence and review processthat any company goes through in the M&A area.Some of the other speakers today will talk about someof those activities.

In the case of activities that could result in suspension or debarment there are a number ofmatters that have received publicity lately and are afallout from some of the things Jim mentioned. Thefirst I would like to touch on is significantlyincreased enforcement in the area of the ForeignCorrupt Practices Act. There have been a numberof M&A transactions in the last several years thathave been affected dramatically by FCPA investi-

gations. You can look at the GE acquisition ofInVision Technologies and Lockheed Martin’s proposed acquisition of The Titan Corporation astwo examples. In both of these cases I think it is fairto say that the acquisition itself was one of the reasons why the activity actually came to light.And, in fact, the desire to close the transaction wasthe impetus for reporting the possible criminalactivity to the Government and conducting extensive diligence. The other aspect of these trans-actions to remember is that the Government, nomatter how fast it moves, does not resolve an FCPAinvestigation on a timetable that is consistent witha typical M&A transaction. In both the InVisionand Titan merger transactions, the merger agreement termination provisions had to be

extended because there was no way to consummatethe transactions until the investigation was complete. In the Lockheed Martin/Titan transaction, the FCPA investigation ultimatelyresulted in the termination of a merger agreementthat both parties at its inception thought was intheir best interest.

Another area in the international sphere that I want to address is significantly increased enforce-ment in the export control area. This is an areawhere the Commerce Department has authority,but most significantly in the defense, homelandsecurity, and government IT services industries, theState Department also has an important role. TheInternational Traffic in Arms Regulations and the

related U.S. MunitionsList make it clear thatthe export of certaindefense articles andservices is unlawfulabsent specific licensesand, in some cases is limited or prohibitedwith respect to individuals or foreignnationals from certaincountries. Export con-trol is a critical aspectof any M&A transac-tion where the targetcompany has signifi-cant internationaloperations. And inmany cases, companiesdon’t appreciate thescope of the potentialrisk to the company’sbusiness or theirpotential liability. Ialso think it is fair tosay that with a lot ofacquisitions of smallercompanies those com-panies don’t have theresources or the robustcompliance programsthat are needed toaddress significantexport control issues.In many cases you have

individuals, well meaning individuals, who don’tappreciate the fact that when they are having a con-versation with someone who happens to be a for-eign national and they are talking about some tech-nology they are working on, that conversation, infact, involves an export of technical data, whichmay violate the U.S. export control laws.

Finally, in the general contract area, I would liketo address the nuts and bolts diligence process forreviewing basic Government contracts. It is notparticularly glamorous. It is hard work. But embed-ded in those contracts, embedded in those manypages of references to specific FAR andGovernment contract provisions, are things likeorganizational conflicts of interest provisions.When you look at the consolidation in the defense

Special Advertising Supplement to The National Law Journal

industry in which major platform or weapons sys-tems companies are acquiring companies in thegovernment IT services space, what you frequentlyfind is provisions in contracts which provide that acompany cannot both evaluate a contractor’s performance at the same time its affiliate is performing the contract. In the M&A context,these issues frequently arise and can only beaddressed if people are very careful in reviewing thestacks and stacks of documents made available during the diligence process.

In closing, one additional consideration I wouldmention that is fairly unique to the defense indus-try is the fact that the Department of Defense hasa very significant role to play in the antitrust reviewprocess. We saw it during the 1990s with both horizontal and vertical restraint analysis when anumber of the larger companies in the industrywere consolidating and competition was reducedfrom three to two players for a particular product orin a specific market. We also see it today as theDefense Department is actively considering issuesinvolving a company acquiring a supplier that pro-vides a vital component in a larger product or plat-form that is sold to the Government. It is importantto be aware that the Defense Department will playa very significant role in the review process with thetraditional antitrust regulatory authorities. In somecases, the Defense Department’s opinions will facilitate a transaction that otherwise might appearto result in a significant reduction of competition.In other cases, the Defense Department effectivelywill have a veto over a particular transaction if theadvice to the Justice Department or the FTC is thatit raises significant competition or supply concerns.

MR. FRIEDMAN: Thank you. Before we continuewith the next speaker, I want to make two acknowl-edgements. One is that the co-host for this series isthe National Law Journal. I think you know howpreeminent it is within the legal sphere. After thisevent, the NLJ will publish a custom magazine basedon the transcript of this discussion. It will be sent outto the NLJ readership as well as a select group oflegal and corporate professionals. A PDF will also beavailable via the NLJ website. Secondly, there aremany distinguished people here, including someoneI’ve admired for a long time: I’d like to welcomeWilliam Coleman, who was Secretary ofTransportation under President Ford. Thank you forjoining us today.

Returning to our discussion, I want to ask one quickquestion of Jim. You mentioned how ethics matter interms of setting the tone in a company, what should bedone?

MR. COMEY: Well, not to convince you that all Ithink about is parenting, but a bit the way you,again, raise your kids. How did you become the wayyou are? How were you shaped to the character youhave today? Do you remember stuff people told you?Maybe some things. But you were shaped by coaches, teacher, parents, siblings, friends, by whatthey did and how you watched them, again, in thousands of encounters. I mean, there was a daywhen your mom got too much change from the

cashier at the supermarket. And you were with her.You were seven. You were holding her hand and yousaw what she did. I don’t know what she did. I hopeshe gave it back, but whatever she did it shaped you.And you saw how your dad treated somebody of adifferent race, or creed, or color that came throughthe neighborhood. That shaped you. So what I sayto chief executives is that it’s important that you givespeeches, it’s important that you are maniacal aboutethics. And I’ll spare you how maniacal LockheedMartin is. But you can’t get away from it. They arewhispering it to you while you sleep. But the mostimportant thing for a chief executive to realize isthat your employees are like your children. They arelike these amazing sensors that we make. You can’tever turn them off. I mean, I’m sure there are timeswhen you as a parent want to say, look I want todrink beer out of a bottle and scratch my stomach.Move away from me. You know, I don’t want to bebothered with this. You can’t with a kid. It’s alwayson. Employees are always on. They watch you. Theysee you. They listen for gestures. They look for signals. And so the way you reinforce that is you recognize that actually what you do is much, muchmore important than what you say. You got to saystuff but too many people focus on saying stuff andthen forget that ninety percent of it is them watching what you do and modeling it. And now I’llshut up.

MR. FRIEDMAN: Thank you very much. Our nextspeaker is Jay Devecchio, a partner at Jenner &Block.

MR. DEVECCHIO: I’m fascinated by Jim’s last comment about parenting. I have a twenty-one yearold. And he now drinks beer and scratches his stomach and wants me to get out of the way. I’m alsohere to defend the honor of those of us who participate in the “mind-numbing practice” of contract law.

One of the things I think has become apparent isthat culture is important, and that Congress hasattempted to influence the culture of corporationsby passing Sarbanes-Oxley. I also think probablyeveryone in this room has had some exposure toSarbanes-Oxley one way or another. We have seenthe people in the high executive ranks who nowhave to sign certificates saying: “Let’s see, we have tohave internal controls over financial reporting, andwe have to have disclosure controls to support thecertificates. But what do those mean?” Well, we’renot exactly sure, but one of the things we think itmeans, and that most companies have concluded, isthat not only do we need to figure out what internalcontrols and disclosure controls are, but also to sortout how in this process we are going to attend to ourprocedures for complying with laws and regulations.My concern is that a number of entities, LockheedMartin perhaps, that have in place basic, sound, andlongstanding systems for ethics and compliance,may be deflected away from them in ways theyhaven’t been in the past; deflected by Sarbanes-Oxley. People pay attention at a higher level in thecompany to Sarbanes-Oxley issues and, in doing so,may tend to forget the fundamental compliance and

9August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

W. JAY DEVECCHIO

W. Jay DeVecchio is a partner in Jenner & Block’sWashington, DC office. He is a member of the Firm’sGovernment Contracts, Defense & Aerospace, andLitigation & Dispute Resolution Practices.

Mr. DeVecchio represents clients in all facets ofgovernment procurement law, from bid protests,to complex claims and disputes, through suspen-sion and debarment. He also represents clientsin related issues such as criminal and civil fraud,qui tam actions, and internal investigations. Hislitigation practice has encompassed the largestdefective pricing appeal tried to date, the leadingcase on latent defects, and the Eleventh Circuit’sdecision on false claims immunity for Medicarecontractors. His clients are primarily from theaerospace, health care, and technology sectors.In 2005 and 2006, he was named a leadingnational practitioner in Government Contracts byChambers USA.

“Does your internal audit staffinclude supplier issues on itsannual audit plan? No? If not,who does? “I'm not exactly sure,”you say. Who audits and assuresthat your suppliers meet yourquality control standards andmeet your specifications? “I don'tknow.” Do you rotate your buyersto make sure they don't get toocozy with suppliers? . . . Askyourselves these questions. Doingthese things is not mandatory, butit is prudent. ”

10 August 2006

ethics measures that got them into a safe place tobegin with.

I also think it’s sort of the perfect storm, becauseif you look in companies (and I think most of ushave seen this) and ask: “Who in companies gets theassignment to go do this kind of compliance work?”It is the upcoming, rising stars the more juniorpeople. I’m concerned about that because the com-pliance issues that gave rise to Jim’s “memory cycle”those things that got government contractors introuble happened over twenty years ago. As far asyour mid-level managers are concerned thedinosaurs roamed the earth then. My twenty-oneyear old son thinks that. They don’t appreciate, andthey don’t have the context to understand, what thereasons were that got us there, so when they arelooking at focusing on compliance and internal controls, they don’t have the ability, I don’t think, todiscern well enough the underlying problems. Ithink we ought to focus on that. And I have a fewsuggestions I’d like to talk about.

Before that, though, compounding this perfectstorm is another issue that we see a lot of these days,which is a heightened level of focus by theDepartment of Justice, imposing a duty of care oncompanies that is different than before. It is requiring almost a level of perfection, or of vicariousliability, that didn’t exist, it seems to me, four or fiveyears ago. Let me give you some examples to thinkabout, and then let’s tie it in to the culture ofSarbanes-Oxley and Generation X.

An example: A contractor buys specialized circuitcards from a company whose quality control systemshave been reviewed and approved by the govern-ment. It’s a common circumstance. The prime contractor does not have to go out, and, in fact, isnot required to go out, to inspect the quality aspectsof its supplier because its supplier has been certified.Indeed, the supplier provides a certificate of confor-mance and test reports on each batch that say: “Yes,we meet all of your specification requirements, Mr.Lockheed Martin or Boeing or UTC.” And theprime is entitled to, and does rely on, that certifi-cate. It turns out, however, that those certificates ofconformance are bogus. The test results are phony.They are not conducting the tests. Does theDepartment of Justice go after that entity? Not inthis circumstance. The Department of Justice goesafter the prime contractor and says, “Hey, wherewere your systems and controls to make sure thatyour supplier had the right things in place? Wherewere your quality control people?” And that ends upas a civil false claims action against the prime con-tractor.

Here’s another one: A prime contractor in aneffort to get more efficiencies in its procurementsystem decides to narrow the field by selecting downto a few suppliers. It holds a competition and picksa company that has done well for it in the past, andwho offers competitive prices. The deal is that theyare going to get more business if they offer lowerprices and higher quality to a prime contractor. Andthey seemingly do that. But slowly the supplier’sprices start to creep up and the prime does what itnormally does it reviews their costing and pricingand it doesn’t see anything wrong. Unbeknownst to

the prime contractor this sub-contractor has falseinvoices, a second set of books. The Department ofJustice doesn’t go after them on a civil matter. Itgoes after that supplier criminally. It prosecutesthem, as it should, while declaring that the primecontractor is a victim. Then, a few months later,DOJ turns around and pursues the prime contractorunder the Civil False Claims Act for failing to catchthe problem.

There are lots of other examples, and I suggest toyou that these are troublesome in and of themselves.But think about them in the context of your largebusiness. You don’t do everything yourself. You relyon your suppliers and your subcontractors. Askyourself the question: As part of your Sarbanes-Oxley compliance, do you do anything to evaluateyour systems and processes for looking at your sup-pliers who account for an enormous part of yourbusiness? Is that part of the internal controls thatyour CFO and CEO have been looking to? I don’tthink necessarily so. And who, again, are the peoplewho are going to look at these things? It’s going tobe your Generation X.

Does your internal audit staff include supplierissues on its annual audit plan? No? If not, whodoes? “I’m not exactly sure,” you say. Who auditsand assures that your suppliers meet your qualitycontro l standards and meet your specifications? “Idon’t know.” Do you rotate your buyers to make surethey don’t get too cozy with suppliers? That’s some-thing that was done in the ‘80s under the Anti-Kickback Act. “Well, I haven’t looked recently.” Askyourselves these questions. Doing these things is notmandatory, but it is prudent.

And I guarantee you they are not the high-level,attention-getting, consultant-heavy matters thatpeople have been looking at with respect toSarbanes-Oxley. I also suggest to you that that’s partof the problem with Sarbanes-Oxley. When we startelevating the level of review because of the attentionit gets by having our CEOs and our CFOs involved,you might start looking at things that aren’t the fun-damentals anymore. That concerns me. It concernsme because of the memory cycle. The people whoare going to be doing this compliance work weren’tthere in the ‘80s.

Think back, if you can and for those of you whoare in that generation that I’m disparaging, trust meon this one. The notable focus on product substitu-tion, for example the bad circuit cards; those cases hit the headlines in the 1980’s. The NationalSemi-conductor case, which was the case that saidyou have to “burn in” these electronics for the firsttwenty-four hours, even though everyone on Earthknows it’ll work if you only do it for fifteen (and,therefore, we won’t do it for the full time) was in1984 big headlines; big fines; big penalties. That’swhen people started enhancing their quality control.The Department of Justice had put the fear of Godin contractors. Well, the people rising in your organ-ization today have never heard of those things. Andif you look, I’m afraid you may start seeing morelapses in quality control. At least I think so:Anecdotally, we seem to be seeing more with respectto product substitution.

What about the Truth in Negotiations Act —

TINA? Great stuff. Again, the heyday of TINA wasin the ‘80s. In fact, they altered the law in 1986 toeliminate all those defenses that we had establishedto avoid liability. Congress got rid of them. Fine, butwhere were your rising stars then? If you talk to thepeople now who are responsible for cost and pricingdata in a company and you say “TINA,” they thinkof a pop singer, if they think of anything at all.When you say, “Hey, have you done your post-handshake sweep?” They think sweep meansthe last time they ran the pool table. They don’tknow what you’re talking about. They don’t have thecontext of knowing that you have to have cost orpricing data as of a specific time; or that doesn’tmatter what your negotiators know. How are theygoing to know it? What are your systems andprocesses? I don’t know. That’s for you to figure out.But when was the last time you looked at it?

And there is example after example in govern-ment contracting. Kickbacks, the heyday of that was1986, when they passed the Anti-Kickback Act.Now we find renewed Kickback cases. We even havea case in the Court of Federal Claims talking aboutkickbacks, which is a relatively rare phenomenon.

Then there is Procurement Integrity. People incompanies of a certain generation probably thinkProcurement Integrity means you beat up your sup-pliers and get a really good price. For them, that’sgood Procurement Integrity. Some people do paymore attention to it nowadays, to an extent, becauseof the difficulties posed by Darlene Druyan and theBoeing debacle. And they now understand theynow have a little bit of a memory cycle with respectto the issue of what you can and can’t do to engagein employment discussions with former governmentpersonnel. But there is a lot more to ProcurementIntegrity than that. Procurement Integrity goes tothe issue of when you can and can’t get other companies’ confidential information. When you canand can’t get source selection sensitive information.Once again, those issues arose in the ‘80s out ofOperation Ill Wind. I assure you if you ask yourmid-level managers what “Ill Wind” means you aregoing to get a very interesting answer that has noth-ing to do with those cases and those prosecutionsback then. It wasn’t part of their memory cycle at all.But I can tell you that right now, today, many com-panies look to hire people from other competitors,and they’re hiring them for their expertise. Well, ifas part of that you get proprietary information fromone of your competitors, inadvertently or not, you’veimmediately got a problem. You have a potentiallyserious issue under the Procurement Integrity rules.And certainly you have a problem if you’ve improp-erly gotten information from the government. Ifyour folks don’t understand that and recognize it,literally the minute they get the documents, so thatthe documents aren’t copied and aren’t circulated,your problem compounds. Do your people under-stand these issues?

Ask yourselves these questions. When is the lasttime you evaluated your training about these andother ethics and compliance issues? “Well, we do alot of training.” Really? How do you do it? Has yourtraining become so routine it’s become lifeless?“Well, I think it’s very effective.” Really? How do

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you do it? Do you have people that get up there andtalk about issues and discuss things that actuallyhappened in real life, like some of those cases I men-tioned or things that actually happened to this com-pany, like Lockheed Martin? “Well, no. We havecomputer-based, web-based training.” Is that reallythe right way to do it? Ironically, it may be forGeneration X.

Do you feel entirely comfortable that, when youlook at the training you have and at your ethicsorganization, you’re up-to-date? If not, I think youneed to ask yourself the question whether you havedone enough things to get back to the fundamentalsthat the companies knew well twenty and twenty-five years ago, but that they might be missing today.

When was the last time you took on the mind-numbing work of taking a look at your policies andprocedures? Would they induce a coma inGeneration X? If they would, you have something todo and you need to pay attention to it.

So in this post-Enron era, it is important to besensitive to internal controls. But heightened sensi-tivity to internal controls can’t mean ignoring thefundamentals that first got you into compliance. Infact, it means, I think, getting back and refreshingyourselves and the people who are the upcomingstars in your organization about the things thatbrought you to the ethics and compliance programsthat, by the way, have been an enormous benefit togovernment contractors. People today in companiesthat are wrestling with Enron and whether or notthis is the right thing to do and what’s the cost ben-efit ratio of it forget this key fact: If you have anorganization that preaches and is “maniacal” aboutethics and affords a mechanism where anybody inyour company Betty in Mississippi can raise aquestion if they have a concern and get it answeredby someone who is not beholden to anybody in linemanagement, who reports directly to the highestlevels of the company, then what you’re going tofind is that you start avoiding all the incipient prob-lems that lead to the things that you are now goingto be required so rigorously to disclose underSarbanes-Oxley. You avoid the civil false claims alle-gations. You avoid the whistleblowers because thepeople in your company never get to that point ofdissatisfaction. They have a mechanism to resolvetheir concerns.

And that’s what’s important about Sarbanes-Oxley. If you want to make sure you avoid an SECproblem, create the culture and the mechanism thatyou need to get there. You do that in part by goingback and evaluating what you did before and to seeif you need to do it again. Thank you.

MR. FRIEDMAN: Thank you. I am pleased to introduce Marcia Madsen who is a partner at MayerBrown Rowe & Maw.

MS. MADSEN: Good morning. We have talked a lotabout internal controls in the post-Enron era. And Iwant to talk a little bit about internal controls in alittle different context – from a different angle. Andthat is internal controls within the governmentrelating to government contracting and governmentcontractors. Just as in private industry when we’re

dealing with shareholder confidence, the public’sperception and confidence in the integrity of thefederal procurement system plays an important role.The trust that we place in government officials tomake prudent and disinterested decisions is criticalto the public’s confidence in the procurementprocess and the government’s ability to handle tax-payer funds wisely. The government’s procurementbudget today is about three hundred sixty billiondollars. It’s about a billion dollars a day. Just sittinghere you can just hear it go click, click, click. It’s alot larger than any private enterprise. So it’s reason-able for one to ask, particularly if you’re a privatecompany doing business with the government, whattype of internal controls are in place for handling allof that money, the taxpayer’s money.

As many of you know, the acquisition communitywas surprised to learn in October 2004 that a verysenior Air Force acquisition official, DarleenDruyun had admitted that her government deci-sions and matters affecting a certain contractor,which was Boeing, were influenced by actions thatthat contractor took on behalf of her family. Shespecifically acknowledged that she was influencedby her perceived indebtedness to that contractor inselecting Boeing for the C-130 AvionicsModernization Program (C-130 AMP). After shemade those admissions during her sentencing, therewere bid protests filed at the GovernmentAccountability Office (GAO) regarding contractsthat were awarded to Boeing for two programs,C-130 AMP and the Small Diameter Bomb (SDB).C-130 AMP is an extensive avionics upgrade for theC-130 aircraft. The small diameter bomb is a minia-ture, two hundred fifty pound, bomb that is intendedto be dropped from an F-15 or an F/A-22.

We at Mayer Brown were fortunate to handleboth of these protests on behalf of LockheedMartin. Both of them were successful — the protestswere sustained. Both cases involved production ofdocuments that reflected Druyun’s role and activi-ties, as well as hearings with testimony from peoplewho knew and worked with her. Based on her longexperience, her reputation, and her understanding ofthe acquisition system, Druyun was in a prime posi-tion to influence those procurements to suit her ownobjectives. The cases were fascinating for what theyrevealed about the extent of Druyun’s power; theway in which she was able to exploit the acquisitionsystem to her own ends; And, most importantly, thelack of internal controls in the procurement processinside the government. For example, GAO found inthe C-130 AMP case that Druyun made herself theSource Selection Authority. GAO found that sheemployed a forceful management style and that sheleft no doubt as to who was in control from the out-set. Surprisingly, despite a very voluminous docu-mentary record that made her actions quite clear,the government took the position in these cases thatDruyun did not significantly affect the actions ofother agency personnel involved in these acquisi-tions. We referred to that as the ‘Darlene whodefense’. GAO did not accept the government’sposition. GAO said that the record was replete withdocumentation showing her influence. I can giveyou a couple of quick examples. In the C-130 AMP

11August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

MARCIA G. MADSEN

Marcia G. Madsen is a partner in Mayer, Brown,Rowe & Maw LLP’s Washington officeGovernment Contracts practice, as well as thefirm’s Chair, Homeland Security Practice Group.Ms. Madsen specializes in government contractsand litigation, strategic alliances, negotiations,and performance disputes. She also litigates bidprotests and claims disputes before the GAO, theBoards of Contract Appeals, and the Court ofFederal Claims. Ms. Madsen is the Chair of theAcquisition Advisory Panel and the FederalistSociety Government Contracts Committee.Chambers USA 2006 selected her as a LeadingLawyer in her area, calling her a “superb protestlawyer” and “a strong attorney who makes agood impression.”

“. . . [T]he government lacks a

good regime of internal controls

with disclosure requirements that

are similar to Sarbanes-Oxley. It

means the companies dealing

with the government are faced

with a very unequal regulatory

regime. It places a huge burden

on the company to have a highly

disciplined ethics compliance

and disclosure program that

requires a heightened level of

attentiveness to whether the

governments’ actions are

legal. ”

12 August 2006

case, GAO found, and this is all from the publicdecision, that she drove the evaluators to downgradetheir ratings of Lockheed Martin and other con-tractors and to improve the ratings of her favoredofferor. Now, there were a number of peopleinvolved in this procurement; -- probably close to ahundred people involved in this procurement. All ofthem could see what was going on. Where were theinternal controls? Where was the ethics training?Why did no one raise his or her hand and say, “Youknow, this doesn’t look right to me”?

GAO also found that the contracting officer inthis case expressly directed the destruction of docu-ments, so GAO said it had no confidence that GAOhad received the complete record. Again, wherewere the internal controls inside the government?Where is the ability of that contracting officer tosay, “I don’t think that’s such a good idea”?

In the SDB case, there was an issue regardingwhether Druyun had a role in adjusting the programrequirements to the detriment of Lockheed Martin.Despite the government’s denial, GAO found sig-nificant involvement by Druyun in that process.There was testimony of Druyun’s boss, the AssistantSecretary of the Air Force, that he had removed herfrom the position of Source Selection Authority(SSA) for the SDB procurement. In fact, he thoughthe had appointed another person, Druyun’s deputy,as the Source Selection Authority. And in one of themore troubling moments and in some ways incredible, I guess, moments of the case, there wastestimony that showed that each of these people, theassistant secretary and Druyun’s deputy eachthought that the other was functioning as the SSA.

“I thought you were doing it. Oh, I thought youwere doing it.” And neither of them performed thatrole. Rather, Druyun just forged ahead with her ownagenda.

As you can see, both of these cases raise signifi-cant concerns about the internal controls within thegovernment in the management of the procurementprocess at very, very high levels. Now, since this hap-pened, DOD and the Air Force have undertakenvarious studies and assessments regarding how theDruyun situation occurred. They’ve learned that sheacquired considerable power without the types ofchecks and balances that might have helped to avoidthe misuse of that power. They have learned thatsome of the emphasis on efficiency and streamliningthe procurement process in the mid-90s may haveactually contributed to her consolidation of power.Given the power that she held, and the length of hertenure as a senior Air Force official, her case is prob-ably an exceptional one, but the lessons remainvalid. Checks and balances, internal controls areimportant to any large complex organization. AndDarleen Druyun didn’t obtain her power and posi-tion overnight. A lot of us in the room have encoun-tered her for many years in many different contextsand were well aware of the strong personality — andthat was visible even from the outside. So internalcontrols are a big issue in the Druyun saga.

There are some other issues in the procurementsystem right now that are under review that alsoraise questions about internal controls and expendi-ture of government funds. In my current extracur-ricular activity I am chairing a Federal AdvisoryCommission called the Acquisition Advisory Panel,

which is looking at some of thestreamlining measures and so-called acquisition reform measuresthat were put in place in the1990s. The panel is supposed toreport back to Congress and theAdministration, and it’s taking alook at a number of issues thathave been put in place that aresupposed to increase the discre-tion of contracting officials andmake it easier to spend the taxpay-er’s money. I can tell you that it’spremature to talk about the find-ings of the panel. They’ll be publicin a few months. But we’ve heardsome very, very interesting testi-mony. Time doesn’t permit me totalk about it all in detail, but Iwanted to talk about a couple ofimportant issues. Two key issuesthat the panel is examining areinteragency contracting and thecombined workforce.

Let me talk about interagencycontracting for a second.Interagency contracts are contractvehicles that allow one agency tobuy from another agency’s con-tract without going through a for-mal, competitive procurementprocess to establish a new con-

tract. It really features the ability of an agency tomove money directly from the program side of theagency onto another agency’s contract and obtainthe goods and services that it needs without goingthrough a competitive procurement. It’s an attrac-tive, expedited acquisition vehicle. It’s supposed togive agencies the ability to leverage the govern-ment’s buying power and provide a simplified andexpedited method of acquiring goods and services –and it does that. The panel has heard some veryinteresting testimony about these contracts. Forexample, we learned that for 2004, over $140 billionwas spent through interagency transactions on thesekinds of vehicles. Testimony and reports by theGAO and the DOD Office of Inspector General(DODIG) have indicated in reviews they haveundertaken that there are serious issues regardingthe use of these contracts to direct work to specificcontractors. Studies and audits by the DODIG andthe GAO indicate that a significant portion ofawards, close to fifty percent in some of their studies, under these vehicles are being directed to aparticular source without any type of competition.Obviously, these questions raise serious issues ofinternal controls.

GAO has found in one of its reports that orderingunder interagency contracts is often handled byentrepreneurial fee-for-service government organi-zations. One of the things government did in themid-90s was set up entities called assisting entitiesor franchise funds that operate like a business andprovide contracting assistants to other agencies for afee. This gives the contracting unit a financialincentive for placing the order. Managing the finan-

Special Advertising Supplement to The National Law Journal

cial incentives can be a challenge. GAO is concerned that it might lead the contracting activity to emphasize revenue generation as opposedto good contracting practices that are in the bestinterest of the government. The acquisition of interrogators for the Abu Ghraib prison in Iraq wasthe product of one of these contracts. It was an orderplaced by one of these assisting entities calledGovWorks at the Department of the Interior. Inthat case, none of the parties to that transactionstopped to look at whether the contract applied tothose services, whether it was appropriate to placethe order in that way, or whether it was permissibleto use those services in that manner. And that’s thecontractor, the government “owner” of the contractvehicle, and the party that placed the order — nointernal controls. There’s a big gap in accountabilitybetween the owner of the contract vehicle, the user,and in some cases, the contractor in these vehicles.

The second issue that the Panel is taking a hardlook at, which also has significant internal controlsimplications, is the question of the combined workforce. In the 90s, as many of you know, the sizeof the government was reduced substantially,particularly the number of people working in theacquisition function. In many agencies, the workthat those people formerly performed is being performed today by someone who actually is anemployee of a private sector contractor. The contractor personnel work side-by-side with agencyemployees in the same offices — on the same projects and programs — particularly if it involvesIT related services or management consulting related services. So those people are working at agovernment office. They are participating in decisions that that government office is making.

One of the issues the Panel is looking at is whatkinds of standards these people are observing whenthey are in very closely connected government decision-making space. What kinds of ethical constraints are they subject to? What’s the impact ofall of this for contractors?

I think it’s threefold. First, the government lacks agood regime of internal controls with disclosurerequirements that are similar to Sarbanes-Oxley. Itmeans the companies dealing with the governmentare faced with a very unequal regulatory regime. Itplaces a huge burden on the company to have ahighly disciplined ethics compliance and disclosureprogram that requires a heightened level of attentiveness to whether the governments’ actionsare legal. Not just whether your company’s actionsare appropriate, but whether governments actionsare appropriate. Second, it may place a company ina very difficult position if the company has determined an action that its government customerhas taken, or wants the contractor to take, is unde-sirable or impermissible. You know you shouldn’t doit but, you have got a government customer on theother side who may be perfectly willing to go aheadwith the transaction and who is not sensitive to theethical issues. The government’s lack of internalcontrols may place the contractor in a very awkwardposition. In essence, the contractor has to monitorthe government’s behavior. And third, with respectto the combined workforce, it’s very important to

understand that if you’re a contractor and you’reproviding services, where are your people? What arethey doing? Which offices are they working in?Who is giving them direction? What kind of stan-dards are they subject to? Are the ethical standardsthat your company imposes enough or do they needadditional guidance and direction particular to thespecific work they are performing? Many govern-ment agencies including DOD and GSA are work-ing hard to address these issues as we speak. Thereis quite a bit of discussion in the press about some ofthese topics. They don’t have this problem solved.The challenge they face is maintaining enough discretion to accomplish their mission, balancedwith a need for accountability. Maybe we shouldapply Sarbanes-Oxley to the government?

MR. FRIEDMAN: Thank you. I would now like tointroduce Mr. A. B. Culvahouse, the Chairman ofO’Melveny & Myers.

MR. CULVAHOUSE: Good Morning. I’m going totalk very briefly about the role of independent direc-tors, and investigations conducted or overseen byindependent directors, in the post-Enron world.After listening to my fellow panelists I think I’veprobably been at this work longer than anybody atthe table. I first came to Washington in to stayeighteen months to work for Howard Baker on theSenate Watergate Committee on the least sexy partof that investigation, which was the very many U.S.and in some cases foreign corporations who madeillegal corporate contributions to both major presidential candidates in the 1972 election. I wasthinking about those issues because the first specialreport voluntarily publicizing corporate wrong-doing, including unlawful political contributions,that I recall seeing, was authored by John McCoy ofthe Milbank firm for Gulf Oil, which then becamea paradigm for the next stage of my career workingfor my then senior partner and still senior partnerBill Coleman, investigating payments by U.S.corporations to foreign government officials.

For some of you who are as old as I am will recallStanley Sporkin, the then Securities and ExchangeCommission’s Director of Enforcement, essentiallysaid in the late 1970’s to corporate America that ifyou have paid foreign officials, and if you will hireindependent counsel and do an independent inves-tigation to disclose to the SEC all you know, theSEC will forebear enforcement. Many of our clientsat the time were outraged by Sporkin’s policy, but Ican tell you they would love to have that sameenforcement forbearance extant today, where wenow find ourselves with a number of prominentindependent counsel and independent committeeinvestigations, including those done in connectionwith Enron and related cases. Examples of inde-pendent investigations include Enron itself, withthe Powers report; obviously WorldCom; DavidBoise in Tyco; Hollinger where our firm workedwith Richard Breeden; Warren Rudman and Paul,Weiss for Boeing, and for Fannie Mae; and JimDoty and Baker Botts for Freddie Mac.

Similarly, if you look at the “backdating” issueswhich are now in the financial press, of the sixty or

so public companies that have announced that theyhave stock options backdating issues, it appears thatat least thirty of those have entered into some sortof treaty with the SEC and the Department ofJustice where the Government will forebear anactive investigation while an independent commit-tee of directors and an independent counsel ofstature does a full blown investigation and report,finds facts, and keeps the SEC and the JusticeDepartment informed. That is a very good policyfor lawyers who work as independent counsel. Ithink it also is quite a good policy for companies,but it’s fraught with difficulty. Now, I will talk a little bit about some of that difficulty.

First, sitting independent directors, while independent under the New York Stock Exchangestandards, almost always were on the Board ofDirectors when some of the bad conduct occurred.Those directors, by the time a committee of inde-pendent directors is created by a resolution of thefull Board of Directors to review those allegations,likely have already been named in civil securityactions as defendants. So the question is, are thosedirectors sufficiently independent? Having triedrecently to convince people of stature to join Boardsof Directors who are under current investigation bythe SEC and Justice Department, one finds that thepossible solution of going out and finding newdirectors who are purely independent, who were noton the board at the time of the bad conduct allegedlyoccurred, is a very difficult task, particularly with allof the other pressures on public company directorsoccasioned by Sarbanes-Oxley and otherwise. Thesubstantive corporate law in some states does allownon-directors to serve on independent committees,and that is an alternative where you might have alittle more luck in convincing someone of stature toserve temporarily as a member of an independentcommittee, without having to be a full-fledgedDirector. There also are interesting issues about corporate indemnities, the cost of “D&O” insuranceand so forth, but it is the independence requirementand time commitment that are the big hurdles increating an independent review committee.

The independent committee and its counsel are“deputized,” as I mentioned before, by the SEC andthe Department of Justice. That is a fact that has tobe remembered because, as the former GeneralCounsel of Computer Associates found out,obstructing an inquiry by an independent commit-tee and its counsel is tantamount, in the eyes of theDepartment of Justice, to obstructing theGovernment’s inquiry, because that committee andits counsel are reporting its information and findings to the Government. In the case of thebackdated stock options issues, independent committees are reporting on the results of theirinvestigations virtually every week to the SEC andthe Southern District of New York, the NorthernDistrict of California and other United StatesAttorneys.

The Board of Directors itself faces some verytough issues on what to do once its investigation iscompleted, and resolving those issues is becomingincreasingly more complicated in the world inwhich we live. The Board is under considerable

13August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

pressure by shareholders, regula-tors, customers, and the press. Ifyou are representing companiesinvolved with alleged backdatedstock option issues, these arefront page stories, you and yourclients receive calls everyday totake prompt, aggressive remedi-al action, such as terminatingresponsible executives for cause,holding back compensation, andsuing executives for damages. Ofcourse, your partners who arehandling the shareholders derivative cases will advise that aBoard’s showing that type ofindependence from companymanagement also helps substan-tiate that the Board and its inde-pendent committee is sufficientlyindependent, disinterested andmotivated to protect the share-holders’ interests, that they canbe trusted to protect the share-holders. Conversely, personalcounsel for management will tellcompany counsel and counselfor the independent committee,quite properly that if the Boardtakes such action, if executivesare terminated, if they are terminated for cause, if theBoard holds back executivecompensation, that theDirectors are substantiallyincreasing the likelihood intoday’s environment that theSEC will bring a fraud chargenot only against management,but also against the company.And as we all know too well, ifthe company consents to anSEC fraud charge, or is found bya court to have committed secu-rities fraud, that fraud violation will substantiallyincrease the costs of settling the civil securities casesfiled against the company. A study that we commis-sioned recently indicates that the cost of settlingcivil securities cases, where there is a parallel SECconsent decree consenting to a Section 10-b fraudviolation, is increased six to ten times compared tocivil settlements where there is no parallel SECfraud violation.

So the Board is sitting there saying we have foundbad conduct by management. It’s conduct that inTemple or Sunday School is objectively bad. On theother hand, if you take aggressive remedial actionagainst management, you could cost the companyadditional money in settling its way out of the civilcases and the enforcement proceedings. It is easierto resolve these issues in extreme cases likeWorldCom, I believe, where revenues were madeup. Or in a company where the reported new facto-ry in Iowa did not exist, but it gets much more dif-ficult when you’re talking about conduct that thedirectors and independent counsel believe to be

objectively unacceptable, but may not be so materi-al or clear cut that the Board and counsel believesthat the SEC and DOJ will bring fraud chargesagainst the company in any event. That is the dilem-ma facing Boards of Directors today in these back-dated stock option cases, as they work their waythrough trying to do the right thing from a corpo-rate governance point of view, protecting the share-holders’ interest, sending the message that needs tobe sent throughout the company and to corporateAmerica that this cannot and will not be tolerated;and yet, when taking remedial action againstresponsible management, not give the SEC, theJustice Department and worse yet the plaintiff ’slawyers such advantages that you’re spending com-pany money for fines and civil settlements that oth-erwise would not have been spent. You now havecounsel for individual executives suggesting that thedirectors themselves could be liable to a receiver ifthey take disciplinary action against their clientsthat the increases geometrically the cost of civilcases and SEC fines. There really are interesting

issues, fun issues, and I don’t thinkthey are going to get any easier.Hopefully the government willbegin to show some degree of for-bearance for companies that takeaction against those responsible,but have the temerity, if you will, tosay “this is not an admission tosecurities fraud, we are going toresist spending our shareholder’smoney when it’s not justifiable.

As someone who has criticizedSOX in public, let me just say theone odd and unexpected result ofSOX is that there are very fewcompanies that have backdatedoptions issues after SOX waspassed. Because of the promptreporting required by SOX of thegrant of stock options, it appearsthat virtually every company thathas made disclosures of backdatedoptions issues treats it as eventsthat occurred prior to the passageof SOX. So that is one totally unex-pected benefit of SOX, and a goodone.

MR. FRIEDMAN: Thank you. Avery dominant issue for many com-panies is the question of how muchshould they cooperate with thegovernment in terms of the attor-ney-client privilege. Also someboards feel that they should justgive up and do whatever the gov-ernment tells them to do to savethe company. They believe thatsuch cooperative behavior mightget the company better treatmentunder sentencing guidelines, etcetera. Jim, maybe you’d like to trythat.

MR. COMEY: My view of this has not changed asmuch as you think it would. It’s a different animalwhen you’re in an industry as regulated as the oneLockheed Martin is in. It is not a someone said tome, how do you grapple with questions about whatto disclose to the government. And I said, well giventhat there are thousands of government auditors inour offices, it is a very different calculus than some-one who is in the, you know, soft drink businessdeciding whether or not to tell the governmentsomething. We have a relationship with the govern-ment that’s close to symbiotic. So it’s not as hard acall to make in our world as in others. But I spent alot of time, obviously, on this issue of attorney-clientprivilege wavering. Whether it was the touchstoneof effective cooperation by a company. And I’m verypleased, as I told my fellow panelists this morning,that I resisted the temptation to fix a couple thingsin the Thompson memo because it would have ledto it being called the Comey memo. And I’ve toldLarry Thompson I’m pleased to leave it to him. Letme just offer the government perspective on some of

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the issues on attorney-client privilege waivers. I metquite often, as often as they wanted to with repre-sentatives of very different bar groups to talk aboutthis issue. And folks would come in and say, look,it’s terrible out there. All of your prosecutors arereflexively asking us to waive privilege and it’s awful.You’ve created a culture of waiver. And I would say,look, help me here. Because I cannot for the life ofme as deputy attorney general get my arms aroundthis. I’ve heard this complaint. I heard it when I wasU.S. attorney in Manhattan. And what I did therewas to try to put in place a trip wire is I announceda policy that no assistant U.S. attorney could ask formaterial that was covered by any colorable assertionany assertion really, I didn’t even put colorable anyassertion of work product protection, or attorneyclient privilege without going to the chief of thecriminal decision, who was then a woman namedKaren Seymour. And that was a tripwire that I hadin place for eighteen months before I becamedeputy attorney general. And nobody came andasked. And so that told me offered a couple of possibilities to me. One, my assistants are just dis-obeying me, which I had a hard time believing.Second, nobody’s asking, companies are coming infor a waiver. Or companies are coming in kind ofwith an understanding of what’s expected so no one addresses the issue head on. It’s a bit of a dancegoing on. There is never a request made, so theassistant never has to take it up the chain. And that’sentirely possible. What I’ve said to the bar groups islook, you’ve got to give the policy makers at theDepartment of Justice examples because there are alot of people inside the government who think, andI’m not just trying to be funny, but a lot of themthink that the private bar has a case of the vapors.That this has become an issue where everybodyknows it happened, it’s never happened to me, butI’ve heard about it from so and so. So these surveysshow everybody knows about waivers of attorney-client privilege that were inappropriate, but theDepartment of Justice has precious few examples. Inever got any when I was Deputy attorney generaland I would say to the defense bar, look, God knowsyou know how to complain. That’s your job. Bumpit up the chain. Bump it up to the U.S. attorneys.Let’s get these surfaced. And the response would be,well, companies are reluctant to do that because theydon’t want to be the squeaky wheel. They just wantto get it taken care of and move on. And I’m notsaying that’s not a reasonable explanation. But I’mjust trying to offer you some of the frustration frominside the Department of Justice. Robert McCallumwhen he was acting deputy attorney general as youknow, I think, announced a policy that each U.S.attorney had to create the kind of tripwire that I cre-ated in the Southern District of New York and thatwas a decision I didn’t take part in because I alreadyknew I was going to Lockheed Martin and Ithought my involvement might taint that. Someonemight say that I took a punch or threw a punch thatI shouldn’t. So I gave it to Robert and Robert madethat call in an effort to try to gather some of theinformation to raise it up to the U.S. attorneys. AndI’m sure that’s still a work in progress. What the private bar has to understand is this though, the

government is not going to sacrifice the core valuethat it clings to and should cling to. If you wantcredit for leniency, you want leniency in a chargingdecision, you have to cooperate. Cooperation meanshelping us get the bad guys. If it comes to a pointwhere you have to turn over work product protectedmaterial or privileged protected material to help usget the bad guys and you don’t do that, don’t complain to us and say you need leniency in thecharging decision. I think as citizens of the UnitedStates it is not an unreasonable thing for the government to say. How you get there is much morecomplicated. I’ve seen very sophisticated lawyers gointo the government and say, look, I’m very worriedabout the plaintiff ’s class action bar. Let’s worktogether. I will help you get the bad guys and youwill help me get you claims of waiver. Let me firstsuggest you interview the following five people andlet me also suggest you look in the following five filing cabinets. After you’ve done that, talk to me.And sometimes that works. Now, you’re sitting therethinking, well, the plaintiff ’s lawyer can still make aclaim of waiver there, but it’s a little bit harder.Sophisticated lawyers know how to get this doneand sophisticated U.S. attorneys should know howto work with them. But again, my message is, theDepartment of Justice is having a hard time seeingand touching this issue. If you find yourself with anexample you have to find a way to raise it up, even ifyou strip out details and give somebody like PaulMcNulty, my successor a sanitized version of a specific example where there was an abusive requestfor waiver. And the last thing people need toremember is that the Department of Justice looks atthis and hears a lot of crying about attorney-clientprivilege. What their thinking is, we don’t wantprivileged communications in the core sense of that.We don’t want advice that lawyers gave companies.What we want is facts gathered by lawyers workingfor companies. Yes, that’s privileged. It’s also workproduct, but the department thinks of it really aswork product and they have respect for the workthat the lawyers at this table do for me and protection for the facts they gather, protections fortheir opinions, their advice to me. I care passionatelyabout that. All I’m trying to tell you is from the government’s perspective and this is a perspective I’dlike the ABA to get because I think it would makeit much easier to discuss it with the government isthat if the following situation happens: CompanyXYZ discovers a multibillion dollar fraud and theirCFO is implicated. The interview of the CFO hegives it all up and they go to the government andsay, we’ve discovered a four billion dollar fraud. Wewant to report that to you, we don’t want to waiveprivileges. We’ll cooperate with you in any way wecan. We’d like not to be prosecuted. And the agentsfor the government then go out and approach theCFO and he takes five. The government is going tocome back to the company and say, okay, we needthe notes of your interview. And if Jay did thatinterview, we need Jay to testify against the CFO inthe grand jury and maybe at his trial, if he’s sillyenough to go forward after that kind of compellingcredible testimony, Jay. And the company is certainlywithin its rights going to say, no we don’t want to do

15August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

ARTHUR B. CULVAHOUSE, JR.

Arthur B. Culvahouse, Jr. is the Chair of O’Melveny& Myers LLP. In addition to his executive duties asChair of the firm, Mr. Culvahouse has an active cor-porate governance, transactions, enforcement,internal investigations and compliance, and strate-gic counseling practice. Mr. Culvahouse is a mem-ber of the President’s Foreign Intelligence OversightBoard, appointed by President Bush in October2005. Mr. Culvahouse also serves as a member ofthe Board of Trustees of the Brookings Institutionand The U.S. Chamber of Commerce Commissionon the Regulation of U.S. Capital Markets in the21st Century.

“So I think it’simportant for us,particularly those of us responsible formaintaining the ethics and the culture and theprofessional integrity of our respectiveinstitutions, to reallyinculcate that we mustnot, again, becomemasters of the technicaland forget our obligationas counselors.”

that, we don’t want to expose that, we don’t want towaive that. The government is going to say, that isnot cooperation. You did not help us get the badguy. You will not get leniency in the charging deci-sion. And I don’t think that’s shocking to the peoplein this audience. What I have told to privatelawyers, and I am now a member of a lot of generalcounsel organizations. One in particular, I had ameeting, it’s general counsel for the Fortune 100and there were about 50 of us in the room and I wasalone with a whip and a chair on this issue, and whatI said is you’ve got to look for common ground withthe government that balances what you have to rec-ognize as an important value of getting the bad guyswith important values that we as in-house counselcare about. You need to think about things like, say,Farbers. You need to think about ways to createselective waiver doctrines so that the public policyinterest of getting the bad guys can be served andyou don’t serve yourself up to plaintiff ’s class actionlawyers. There has got to be a way to cut this knotthat doesn’t involve people from the defense barscreaming that the government’s out of control, andthe government saying you’ve got a case of thevapors. There is a way to work this out. Some of thesteam has to be taken out of the debate, but I thinkthere is a way to work it out.

MR. FRIEDMAN: Over the years the DirectorsRoundtable has hosted SEC officials many times. Anissue is whether in today’s disclosure environment andsecurities markets any public company can avoid shar-ing some information about alleged misdeeds.

MR. COMEY: Yeah, I think there are ways. And Ioffer an example of kind of doing a dance thatwalks close to the line, but balances the competinginterest of getting the government the informationthey want while avoiding the slam dunk claim of

wavering later civil lit-igation. I’ve seen itdone. I’ve done it inworking with when Iwas in the governmentworking with outsidecounsel. As I said, itcould be a bit cutebecause there couldstill be argumentsmade by plaintiff ’scounsel that eventelling me as a prose-cutor which file cabi-nets to look in acts as abroader waiver. But Ithink that companiescertainly have astronger argument tomake if they are able todo that. But again,that’s the interest. Thegovernment’s interestis in getting the badguys. The governmentdoes not care aboutwaivers for waivers

sake. And if it does, those are people we need tostraighten. Now, the response I get when I talk tomy colleagues, general counsel, and say okay, whohas actually had an abusive situation with theDepartment of Justice? Very few hands go up. Andwhat they say, which, again, is a reasonable thing tosay, and I’m not in a position to say it’s not right, isto say, okay, it’s not so much the Department ofJustice, it’s a culture that’s been created. We see itfrom regulators of all stripes and we see it fromstate AGs because they think this is the cool thingto do. That may be so. Again, you notice I was con-fining myself talking about what the U.S. attorneyswere doing. That was something that I tried veryhard to control and get my arms around. But ifthere is a broader culture of waiver out there, that’snot something I’m qualified to address. It may wellbe so. And the answer may well lie in some of thethings I talked about.

MR. CULVAHOUSE: Jack, let me leap in whereangels fear to tread. I think the pendulum is swing-ing back a little bit. I do believe that the SEC, stateattorneys general, and Congress, have been muchmore adamant on privilege waiver issues than per-haps DOJ. But the Department of Justice in manycases is piggy-backing on the SEC investigations, sothey aren’t in the front line in any waiver requests.And for what I would call eggshell defendants ortargets, companies like government contractors,investment banks, banks, and other companies thatreally rely on good standing with the government orwith government agencies -- state, local, or federal -- there is a lot of pressure on them to capitulate. JoeGrundfest, the former SEC commissioner, has awonderful speech on “egg shell” defendants whomust capitulate. His view is that it is only the ExxonMobils of the world that really could defend a crim-inal investigation anymore in the way that many

companies would wish to defend themselves. I thinkJoe may be engaging in a bit of hyperbole, but he hasa very valid point. I hope the pendulum has comeback toward protecting the privilege.

But I must admit that in some cases waiving theprivilege is appropriate. It is our fault as lawyers.We’ve allowed ourselves, instead of being counselorsand advising our clients on what is the right thing todo, what is the wise thing to do, we’ve become mas-ters of advising client of what colorable argumentthere is to allow the client to do what they want todo, no matter how poor it may look in the clear lightof day with the absolute clarity of hindsight. And asJim said, a lot of the facts and the mindset of whatthe company and company management had inmind at the time can be revealed in the legal advicethey received. So I think it’s important for us, par-ticularly those of us responsible for maintaining theethics and the culture and the professional integrityof our respective institutions to really inculcate thatwe must not, again, become masters of the technicaland forget our obligation as counselors.

MR. CAMPBELL: If I could just add one thing andapproach it from a slightly different angle, that ties into some of the things Jay said. I think the basis of ourdiscussion is the big investigation, the very publicinvestigation, the very large dollar issues when thisbecomes critical and a big concern for companies.That presumes we already have gotten to the pointwhere there is something very significant that hasgone on for a significant amount of time and finallywas discovered, after which there was a massive inter-nal investigation. I think part of what companiesneed to do is learn from industries like the defenseindustry, and to a degree, the healthcare industrybecause of some of the problems that it had back inthe 1980s, and think about the fact that virtuallyevery government agency has some sort of voluntarycompliance program. And to think about a coopera-tive approach that is consistent with internal trainingprograms that are not the sort of “web-based, teno’clock at night, while you are watching T.V. athome” training program Jay alluded to, but is consis-tent with a real program where the company actuallyhas a culture of compliance that addresses hard issuesup front. Then, when you have problems that arisebecause inevitably individuals from time to time strayfrom where they ought to be going, the problems canbe dealt with at a time and in a way that in most casesdoes not raise these difficult privilege issues involvingsignificant, high dollar, bet the company litigation orgovernment investigations. I would suggest that themore a company does on the front end and the morea company, as Jim suggested, creates a culture that isconsistent with doing the right thing, the less oftenthat company actually has to address these harderissues. Then you don’t have to go to the Governmentand say, look, there is a huge problem here, and howare we going to deal with the securities lawsuits?

MR. FRIEDMAN: I am afraid that we might gothrough this whole session and have the only eventin Washington that doesn’t mention the word“Congress”. Lest we get disoriented when we leavehere, let’s cover Congress a bit. I’m actually sur-

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prised that it didn’t come up earlier.

MR. COMEY: I heard it mentioned. Does that coverit?

MR. FRIEDMAN: What’s that?

MR. COMEY: I heard someone mention it.

MR. FRIEDMAN: It must be incredibly difficult whenyou’re dealing with the government as a key customer.With political and public opinion shifts; and nationalsecurities law for exports. Trying to do long-term corporate activity is challenging when you don’t knowmilitary spending budgets five or ten years out. Canthe panelists comment about your experience withsome of the issues you face in terms of Congress intervening on the whole process?

MR. DEVECCHIO: I would say that sometimeswhen we see Congress involved it is in the sense ofan unguided missile. Somebody has a problem, orthey are facing a debarment or a suspension, andthey want their Congressman to get engaged. Or onthe other side someone wants their Congressman tolook into what their competitor is doing and raise anissue with the agency. I always caution, you can goto your Congress person but you never know whatthe consequence of that is going to be. So one needsto be very, very careful about doing that.

But generally, I don’t think you see a lot of con-gressional pressure other than letters that go acrossthe transom; people in government will pay atten-tion to them but not too much, because they aresensitive to the appearance of undue influence.

The other thing I wanted to say, just briefly overthis issue of the privilege, is that I think the onlyrational thing to do when you’re dealing with a com-pany and a government contractor is to say to theexecutives before you commence an internal inves-tigation “Look, you might as well forget about theprivilege because if push comes to shove, you aregoing to be disclosing this to the government.” Andyou don’t know, just like you don’t know where yourcongressional unguided missile is going to go, youdon’t know where this investigation is going to go.The only responsible thing to do is to assume thateverything that your lawyers turn up is one way orthe other is going to be at the doorstep of the gov-ernment if you want to continue to do business inyour industry, unless you’re Exxon Mobile. I thinkthat if lawyers take a different position than that,they’re doing a disservice to themselves and certain-ly to their client.

MR. COMEY: We don’t really deal with Congressmuch. We do plenty but if you think I’m going tosay anything about it in a mailing that you say isgoing to go to tens of thousands of people. I justwant to be careful to disassociate myself from theunguided missile remark that Jay made. I love every-body in Congress and find them very supportive.

MR. CAMPBELL: One thing I just want to mentionin terms of Congress, and Jack eluded to it is whatyou are seeing from time to time is that Congress

does weigh in on issues. If you look at the currentdebate that’s going on with the entire Sifius process,which up until recently with the Dubai ports acqui-sition most people didn’t know about. It was some-thing that was done behind closed doors. Peoplethought of national security as something that theCIA and others took care of. Now people walkingthe streets, and if you listen to talk radio, they’retalking about the Sifius process, which in andamong itself is fairly remarkable. But in connectionwith your business, whether you’re talking about itin the context of an acquisition or just your ongoingbusiness and relationships you have with other par-ties because everybody in the government contract-ing business has significant relationships with othercompanies both domestically and abroad. I thinkyou always have to think about kind of the frontpage effect and what are things going to look like ifthe press gets a hold of or writes an article aboutwhat you’re doing. I think in many ways if every-body thought of that, it’s not that you wouldn’t dothings, but you would make better decisions attimes. I mean, we’re going to get out of Congresspresumably some amendments to the Sifius process.It’s become a very political issue with a number ofpeople, but at the same time we all have to recognizewe’re operating in an increasingly global world. Andthe U.S. defense industry is today dependent in sig-nificant part on the contributions of many foreigncompanies both their operations here in the U.S. aswell as their operations around the world.

MS. MADSEN: I guess I was well, speaking of whereangels fear to tread but having had an earlier careerworking in Congress. You know at least for govern-ment procurement, I mean, Congress is really apartner in the process. They provide the money.Every year when we look in the defense authoriza-tion bill there are new provisions that effect the pro-curement process which results in new regulations.So it’s just part of what we do to remember thatCongress has a very vital interest in how theDepartment of Defense and all other federal gov-ernment agencies operate. What they buy, how theybuy it, where they spend their money and thatCongress is just going to do oversight. That’s justpart of what we do and the Constitution givesCongress that role and it’s a legitimate role for themto take, you just have to factor it into the way you dobusiness in this area.

AUDIENCE MEMBER: This is directed to JimComey more than anyone I suppose. Going back topoor Betty and her non-options. What mechanismsdo general counsel set up for in-house complaintswhen management is in generally such control so asto cause an employee to be fearful to make a com-plaint? I think of inspector generals or the Office ofProfessional Responsibilities. I don’t see those incorporations. What is the future outlook to avoidthe problem of the whistle blower?

MR. COMEY: That’s a great question and you heardsome of my colleagues refer to it I didn’t want to bragon Lockheed Martin too much. I was pleased that theydid. And I think that my company has one of the best

examples, and it’s not unique, but I think it’s the goldstandard. And that’s to have an inspector general whois called the ethics officer that is embedded in each ofthe business areas. There are hundreds and they reportup through an organization that’s headed by an ethicsofficial who reports not to me as a general counselbecause the concern would be, I’d be trying to shape itsomehow for a legal outcome reports directly to theCEO and like the Office of ProfessionalResponsibility, OPR of Justice, keeps an inventory, getsback to people on what the result was. It’s a separatemechanism. It conducts investigations. It has a data-base that’s searchable so that if someone is a repeatoffender and has moved within the huge company thatI work at, you can track it and say, oh, this is the thirdtime that accusation has been made. It’s very much likean IG or an OPR at the Department of Justice. It’svery effective. Lockheed Martin has very little laborlitigation. Very little employment litigation. For thoseof you who are looking to do more work withLockheed Martin on labor litigation, I’m pleased toreport that there isn’t any. And I think one of the rea-sons for that is I forget who said it, maybe it was Glennwho said it that there is a vent, there is a steam valvewithin my company for someone that has a concernthat their boss is mistreating them and it can be any-thing: That I saw him stealing; I think he’s hostile towomen; I think that he is a racist; I think he is work-ing on company time. All of those accusations arereported and they can be reported anonymously to theethics organization. Every single one of them is run toground and a written report is kept in a computer system. And if it was not anonymous there is a reportback to the complainant about what happened. Thatis very healthy and creates an environment in whichpeople don’t feel the need to go to the outside becausethey know they’re going to get real honest to goodnessindependence insight. People like Betty, there should-n’t be any Bettys at Lockheed Martin because peopleshould know and we preach this, you got a problemyou can talk to someone anonymously, you can slip anote under the door. It will be run to ground what yousay. And that’s the ultimate, I think, protection. And atthe same time reinforces the culture. So anyway, that’smore of a bragging on us. But that’s the way to do it.And it’s been someone said I think you said there isnever anything positive in the newspaper. The WallStreet Journal ran a piece on Lockheed Martin’s ethicsprogram the second week in June. It was entirely positive. Not for lack of trying, I suspect. But it’s a verypositive story about this ethics program.

MR. FRIEDMAN: Last question.

AUDIENCE MEMBER: I’m going to ask Mr. Comeyto address the issue of backdated options on theassumption that Lockheed Martin does not have thisproblem and I’m going to . . .

MR. COMEY: I’m pleased to confirm that.

AUDIENCE MEMBER: I would like to ask the panelhow a firm might advise companies with this issue. It’sclearly unethical. I can’t imagine anyone thinking itwas okay. It’s a personal aggrandizement issue and itgoes directly to the board and it’s, dare I say, the attor-

17August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

neys advising the board. If you were at the SEC now,what would you consider an acceptable action on thepart of the company? Is it enough for a company to say,well, we looked at this and it was bad and we’ll neverdo it again?

MR. COMEY: I don’t think I’m qualified enough toanswer that for a good reason. I know enough aboutthis issue to know I’ve done the due diligence whatneeds to be done inside my company, and we don’thave this problem. And so not to focus on it a wholelot more. I mean, I think A.B. [Culvahouse] may be ina better position to say what companies would suggestto the SEC as a way to keep them from initiating anenforcement issue. So I don’t mean to dodge it, but Iwould just be a dummy making stuff up. So I’ll just askA.B. [Culvahouse] maybe.

MR. FRIEDMAN: Well, I hope you charge a lot foryour advice on these matters.

MR. CULVAHOUSE: One has many different fact sit-uations. There are “real” backdated options, or whatwe’re starting to call “white out” backdated options,where three years later someone says, well gee, ouroptions would be a whole lot more valuable if theywere dated in February three years ago rather thanNovember three years ago. So the month gets changed.And there have been reports of those people beingfired and their options voided, and I think those arevery serious issues. You have Commissioner Atkins ofthe SEC saying that backdating options, or lookingback and picking a favorable strike price in the past, isnot in and of itself illegal. You have to look at the planand whether it is allowed by the plan. But what isproblematic is the disclosure and tax issues. If you havean executive compensation table in your proxy state-ment that says all options were granted at fair marketvalue on the date of grant, but the date of grant and thestrike price don’t match up, then you have a problem.Yes, it is a non-cash charge, and, in some cases you canargue how much were the shareholders really harmed?On the other hand, this practice creates difficult con-trol and integrity issues under Sarbanes-Oxley, andbooks and records issues under the 34 Act, part of TheForeign Corrupt Practices Act that’s often ignored. Idon’t think we’re anywhere close to understandingwhat the SEC is going to do as a matter of enforce-ment policy. I think there are many investigationsunderway, but less is known about what companiesmay decide to do. I think there are going to be termi-nations of those people who clearly were involved inthe “whiting out” kind of fraudulent activity. I thinkthat’s just straight up fraud, as Jim would say.

MR. COMEY: One of my favorite cases in theSouthern District of New York when I was U.S. attor-ney involved we prosecuted three guys who made sixmillion dollars betting on horse races that were over,very much like “The Sting.” And one of them wasinside guy at an outfit that collected betting informa-tion from around the country and then transmitted itto tracks and results information and they took advan-tage of a few second delay that if they knew the resultthey could place the bet. The problem is that they got

greedy like a lot of these executives and exposed them-selves by winning six races in a row in which five ofthem were like fifty to one long shots and exposedthemselves. So people can’t contain themselves and settheir hair on fire and run around and then be shockedwhen the SEC notices them or when they get prose-cuted. So I know something about something thatsounds very similar. Betting on races that are over.

MR. CAMPBELL: Let me approach it again from aslightly different perspective. We spent a lot of timetoday talking about controls, ethics, and how compa-nies operate. And I know you suggested that perhapsin the end it really didn’t have an affect on the market.Maybe there were some tax issues and there are sometechnical legal issues. I think there is a much broaderissue here, putting aside what the legal analysis ulti-mately dictates in these cases. In many of these cases,in virtually all these cases, you are talking about thesenior most people in the company doing things thatfundamentally are unfair, and that involve compensat-ing themselves in a way that is not transparent. And, asJim suggested before, when you talk about how toestablish a culture within a company of good behaviorand ethical conduct, it is impossible if what you havegoing on at the senior most ranks of the company ispeople backdating options to advantage themselvespersonally. If they are really worth the compensation,then the board ought to decide that it is going to payBob or Mary a very large bonus and just put it outthere. But it is impossible to talk out of one side of yourmouth about controls and ethics and make people signcertifications, because I as the CEO have to sign thesecertifications every quarter, and at the same time act ina way that’s is fundamentally inconsistent. Peoplemake a mistake when they assume that informationlike this, even if it ultimately doesn’t show up on thefront page of the Washington Post, doesn’t becomeknown within the company. People know who is outfor themselves, and that plays into the culture and theethical underpinning that is necessary for a successfulcompliance program.

MR. FRIEDMAN: I’d like to just finish with a quickquestion of our Guest of Honor. It’s a personal ques-tion. In the very little free time that you have, whatdo you like to do as far as vacations or hobbies orphilanthropies? What are your interests besides yourwork?

MR. COMEY: Again, I spent my entire career in gov-ernment. Until this point philanthropy has not been abig option. But I have five kids from first grade to anow freshman in college, so most of what I do involvesmy children and trying to stay in shape. And thatleaves me very little time for anything else. So I live avery pedestrian lifestyle and I’m going to keep it thatway because my wife keeps saying, I know you’re goingto screw me over again and go back to the government.And I keep saying no dear, no, I won’t dear. So I’m afairly ordinary suburban dad.

MR. FRIEDMAN: Our thanks to Jim Comey, the dis-tinguished panelists, and especially to our audience.Thank you for joining us. ■

18 August 2006 Special Advertising Supplement to The National Law Journal

JACK FRIEDMAN

Jack Friedman, Chair of the DirectorsRoundtable, is an executive and attorney active in diverse business and financial matters.

He has appeared on ABC, CBS, NBC, CNN andPBS, authored numerous business articles in theWall street Journal, Barron’s and the New YorkTimes.

Mr. Friedman has served as an adjunct facultymember of Finance at Columbia University, NYU,US (Berkley), and UCLA. He received his MBA inFinance and Economics from Harvard BusinessSchool and a J.D. from the UCLA School of Law.

ABOUT THIS PUBLICATION

The Roundtable Discussion, held July 13th,2006, at The Decatur House in WashingtonDC, was co-hosted by the marketingdepartment of The National Law Journaland The Directors Roundtable. The text ofthe panelists’ comments, edited for clarityand brevity, follows. This custom publica-tion is included as a special supplement toThe National Law Journal and was producedindependent of the NLJ’s editorial staff.

The National Law Journal, an ALM publication, in partnership with TheDirectors Roundtable, a civic group whichorganizes events globally on issues relevantto corporate directors and their advisors,organizes these events to create an open dialogue in which to discuss matters effect-ing the legal and corporate worlds.If you are interested in more information onthese events, please contact Brian Corriganat 212.545.6277 or bcorrigan@alm.com

August 2006the evo lv ing ro le o f GENERAL COUNSEL : Leadership in Challenging TimesSpecial Advertising Supplement to The National Law Journal

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19August 2006

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