Global Crossing Case Figure Not Questioned
The law firm that Global Crossing Ltd. asked to examine a whistle-blower’s allegations about the company’s accounting methods failed to interview the executive, the company’s auditor or make sure that its board knew about the issues.
The allegations by the former finance executive are now being investigated by both the FBI and the Securities and Exchange Commission.
Global Crossing’s general counsel at the time, James Gorton, asked the New York firm of Simpson Thacher & Bartlett last summer to investigate the claims by then-Vice President Roy Olofson, who said the telecommunications company was misleading its investors and bankers.
But Simpson Thacher didn’t talk to Olofson, company auditor Andersen or Global Crossing directors, instead relying largely on executives who assured the law firm that the board and Andersen had debated the issues already.
“This was an accounting issue that the accountants had signed off on and the board had fully discussed in meetings in the spring,” said Richard Beattie, chairman of Simpson Thacher’s executive committee. Beattie said the firm reviewed the board minutes and otherwise relied on what Global Crossing executives told it. “I don’t believe we did anything wrong,” he said.
Simpson Thacher’s actions, which are complicated by the firm’s close financial and personal ties to Global Crossing, in some ways resemble those of Vinson & Elkins, the Texas firm criticized for investigating complaints about Enron Corp. deals that the law firm had worked on.
Unlike Vinson & Elkins at Enron, Simpson Thacher wasn’t involved in the fiber-optic capacity swaps that concerned Olofson. But the multiple roles played by the big firm illustrate how the concerns generated by Enron’s bankruptcy are spreading beyond big corporations and accounting firms to legal workers as well.
Lawyers are beginning to re-examine their conduct in the wake of the Enron mess, and over time, the American Bar Assn. may change its guidelines, said Donald Hilliker, former chair of the Bar’s ethics committee. “Law firms are often at the center of many of these transactions.”
With the hindsight provided by the federal investigations, Global Crossing’s bankruptcy filing, and a board probe begun after the letter was made public, legal experts said Simpson Thacher appears to have erred in cutting short its inquiry.
“They didn’t act like lawyers should act. It doesn’t sound like they did an adequate investigation,” said legal ethicist Susan Koniak of Boston University. “It seems like all they were able to do is give some executives some cover, based on apparently nothing.”
Beattie said the law firm didn’t have an obligation to contact the board in part because Olofson’s five-page letter hadn’t accused the CEO or the general counsel of wrongdoing.
But law professors said the seriousness of the allegations should have prompted Simpson Thacher to determine on its own, or from uninvolved parties, whether they were valid.
“They certainly have a responsibility to understand what the whistle-blower is alleging. And if they need another kind of expert to do that, they should get one,” said New York University law professor Stephen Gillers.
Global Crossing now says the board’s audit committee is looking into Olofson’s claims. The company has said that Olofson was looking for money with a threatened wrongful-termination suit and that the accounting issues he raised were standard industry practice.
“It sounds like something that should have gone to the board” at once, said Hofstra University legal ethics specialist Monroe Freedman. “I infer that that was very poor judgment” on Simpson Thacher’s part.
Legal experts said Simpson Thacher also could have been influenced by its close ties to Global Crossing, which included millions of dollars in annual legal fees, the fact that Gorton and the general counsel for subsidiary Asia Global Crossing Ltd. were both Simpson Thacher alumni, and the fact that some Simpson Thacher partners owned stock in Global Crossing.
Law firm employees could have such investments because Simpson Thacher, like other firms, several years ago began allowing purchases of client stock. Beattie said Thursday that some of the firm’s lawyers held Global Crossing stock, but none had more than $15,000 worth.
“It’s permissible to own an equity interest in your client, but there could be situations in which the lawyer’s equity interest would make it difficult for the lawyer to give independent legal advice to the company,” Gillers said. Those situations are more likely when the investment constitutes a substantial part of the lawyer’s worth, he said.
Simpson Thacher is Global Crossing’s primary outside law firm, and it has advised the company on such deals as its $6.5-billion sale of a Web site hosting subsidiary to Exodus Communications Inc. in the fall of 2000.
In addition to Global Crossing and Asia Global Crossing, Simpson Thacher represents or recently represented Global Crossing CEO Gary Winnick, his Pacific Capital Group, ex-general counsel Gorton, and current or former Global Crossing directors and officers David Lee, William Adrillers and Barry Porter, according to Simpson Thacher’s application to represent Global Crossing during its bankruptcy reorganization.
And if Global Crossing’s board should eventually decide that it was so poorly served by Simpson Thacher that it has grounds for a malpractice suit, it will have one more hurdle. Global Crossing’s current acting general counsel, Rhett Brandon, is a full-time partner at Simpson Thacher.
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Times staff writer Elizabeth Douglass contributed to this report.
