Law Review: Exotic white-collar defenses a boom for lawyers

The size of the slush fund was staggering.

Beginning in the 1990s, U.S. and European officials alleged, Siemens A.G., the Munich- and Berlin-based engineering giant, spread hundreds of millions of dollars in bribe money around the globe to lock down business overseas and freeze out competitors.

The firm set up a special slush fund, managed by a mid-level accounting executive, to make sure the pockets of corrupt foreign officials were well-lined.

It all came crashing down when police paid an early morning visit in 2007 to the executive's home in Munich while rounding up other Siemens executives.

Answering the front door in his pajamas, he reportedly told police "I've been expecting you."

The Siemens case, which was announced in December 2008, resulted in the largest corporate fine ever paid, $1.6 billion to authorities in the U.S and Germany. The investigation struck terror in the hearts of business executives in the U.S and Europe who came to realize that they faced both the prospect of huge criminal and civil fines and that they might also go to jail if it could be shown their employees or agents engaged in overseas bribery.

Yet, as traumatic as such cases are for private companies, defending against them have become enormous profit centers for lawyers and accountants.

The legal fees for the Siemens defense alone, handled by Debevoise & Plimpton L.L.P., based in New York, were in the hundreds of millions.

In Center City, Dechert L.L.P., Morgan, Lewis & Bockius L.L.P., and Duane Morris L.L.P. are among the firms defending clients in these types of cases.

Moreover, there are ample signs that this exotic form of white-collar defense likely will be a boom practice area for years to come for firms with demonstrated expertise.

A recent study by the Los Angeles-based law firm of Gibson, Dunn & Crutcher L.L.P. counted 40 prosecutions by the U.S. Justice Department and the Securities & Exchange Commission last year, a staggering eightfold increase over such prosecutions in 2004.

"With so many active matters in the pipeline, we expect that the continuing upswing in the FCPA [Foreign Corrupt Practices Act] enforcement will continue for the foreseeable future," the law firm said.

But not all of the players in this world of big money and big corruption believe the rising number of investigations under the FCPA is an unalloyed good.

David Howard, a former federal prosecutor who heads up the FCPA practice at Dechert, says such investigations impose enormous costs on his clients and their shareholders, often without the hoped-for improvement in ethics.

"Companies and their shareholders are often better served by policing themselves, such as by firing employees who knowingly break the law and by implementing tough-minded compliance programs to ensure that problems don't recur," he said.

That is the view of Joseph Murphy, a lawyer and corporate-ethics expert based in Haddonfield who advises private companies and governments on how to improve corporate-ethics practices.

Murphy, a founder and part owner of an online corporate ethics training program called Integrity Interactive, says it would be unlikely to expect corporate executives to institute stringent ethics rules without the threat of government prosecution.

But prosecutions often fall short because they focus on individual acts of corruption without addressing system-wide failures.

Murphy said a good ethics program can be far less costly and far more effective.

Murphy's view is that prosecutions will not deter corporate crooks who believe they never will be caught. This is what he calls the Fastow effect, named for Andy Fastow, the Enron executive who engineered so many of Enron's financial abuses.

Far more effective, he says, is instituting an aggressive internal campaign to combat corruption headed by a chief ethics officer, who can't be fired by the CEO and who is answerable only to the board of directors.

He says the government has done too little to promote such programs.

"The preventive stuff is more fundamental, but it costs less," he said.