Lawyers brace for collapse's fallout

If financial markets collapse and there is evidence that senior executives bent the rules, can government prosecutors and class-action lawsuits be far behind?

That is exactly what many white-collar defense lawyers are projecting as the current financial crisis ricochets across the globe and investors call for heads to roll.

Prominent white-collar defense lawyers in Philadelphia and around the nation say criminal investigations and lawsuits will far outstrip those from past crises, even the Enron Corp. and Arthur Andersen L.L.P. debacles of 2001-02. Then, the disclosure that a handful of companies had masked deteriorating finances while executives lined their pockets just before their companies went over a cliff triggered massive government prosecutions.

Prosecutors "are going to be looking at the CEO and CFO level, trying to decide whether statements that were made and decisions that were made involved criminality," said Greg Miller, a former assistant U.S. attorney and a partner in the white-collar defense group at Center City's Drinker, Biddle & Reath L.L.P.

Miller, who has both prosecuted white-collar cases as a Justice Department lawyer and defended targets of federal criminal probes, said the complexity and scope of the current financial meltdown, and the likely political reaction, made this a treacherous climate for any executive in the government's crosshairs.

"From a white-collar practitioner's standpoint, I can't remember a scarier time," he said.

David Howard, a defense lawyer at Dechert L.L.P. whose clients have included Michael Kopper, the first of the major Enron executives to reach a cooperation agreement with the government, said such financial scandals took on a life of their own.

Sometimes, activities that would have been countenanced in quieter times become the focus of relentless criminal probes.

"It is inevitable that investigations are going to follow regardless of whether it is apparent that anyone has committed a crime," Howard said.

The carefully choreographed search by politicians for someone to blame already has begun, with congressional hearings and Justice Department investigations.

What makes the current climate different from past investigations is the scope of the problem. In 2002, as the stock market was tanking and the Bush administration set up its Corporate Fraud Task Force, investigations were limited to single companies, such as Enron and WorldCom Inc.

This time, the entire financial system seems to be engulfed. Many financial institutions were trading mortgage-backed securities, in which millions of mortgages were pooled and resold to investors, including investment and commercial banks. As mortgages went into foreclosure, the value of the securities went through the floor, causing some firms, such as Lehman Bros. Holdings Inc. and Washington Mutual Inc., to fail.

According to Marvin Pickholz, a white-collar defense lawyer with Duane Morris L.L.P., a Center City law firm, prosecutors likely will scrutinize the actions of virtually every actor in the chain, from the mortgage brokers who made the loans to the financial institutions that repackaged and sold them as securities.

The key question will be what did each person know - and how hard did he try to find out - about the asset being sold.

"You have people up and down the line who I suspect are going to be charged with lying to the guy in front of them and lying to the guy behind them," said Pickholz, who is based in Duane Morris' New York office and was chief of the Securities and Exchange Commission's enforcement division in Manhattan before going into private practice.

What worries many white-collar defense lawyers and some of their clients is that prosecutors tend to push the margins of the law to win indictments in reaction to public outrage.

That seems to have been the case with the Justice Department indictment of Andersen, a once sprawling multinational accounting firm with a huge office in Philadelphia. Part of the firm became Accenture Ltd.

Some of Andersen's Houston accountants were involved in obscuring the shady dealings at Enron, going so far as to shred thousands of documents as government prosecutors pursued them in 2001.

Yet, evidence was thin that Andersen's senior managers knew what was going on. In the end, the government's indictment of the entire firm, rather than the handful of implicated executives, was a death sentence. Within months, tens of thousands of Andersen's employees were out of jobs.

The Supreme Court eventually threw out the indictment, but by then it was too late.

Ivan Knauer, a white-collar defense lawyer in Pepper Hamilton L.L.P.'s Washington office, said he expected the government to focus keenly on transactions between the Treasury Department and financial institutions seeking to offload their troubled assets.

Prosecutors would respond swiftly to any sign that the banks misrepresented the value of the underlying asset and caused the government to pay too much, said Knauer, a former senior counsel in the enforcement division of the SEC.

Nicholas Centrella, a white-collar criminal defense lawyer at Conrad, O'Brien, Gellman & Rohn P.C., said accounting and law firms might find themselves the target of lawsuits as well, particularly if they advised financial institutions on their regulatory filings - essentially on how much information they disclose to the public.

"Whenever there is an insolvency, anyone who was an outside investor looks at several sources to recoup the investment," Centrella said. "Any professional associated with that entity comes under scrutiny."