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Despots,
Deposits & Directors
Paul Braverman
The American
Lawyer
10-22-2004
In January 2003, Steven Pfeiffer was
elected chairman of Fulbright & Jaworski. Pfeiffer, a partner in the
firm's Washington, D.C., office, became the first person outside Houston
to hold the position. The firm's press release also noted his position on
the board of Riggs National Corp., the parent company of Riggs Bank.
A few blocks down Pennsylvania Avenue from Pfeiffer's office, U.S.
Senate investigators were already looking hard at Riggs because
of reports that money deposited in the bank
had been used by the 9/11 terrorists. The probe would
soon include charges that the bank had evaded an international freeze when
it sent millions to client Augusto Pinochet, the former Chilean dictator.
Last summer, the Senate issued a report on the Riggs/Pinochet
connection, which noted the role Pfeiffer played in the payments. One
eager reader was Baltasar Garzon, Spain's crusading magistrate-judge, who
has pursued Pinochet for years. In September, Garzon issued a criminal
complaint against Pfeiffer and others for money laundering. Garzon asked
the U.S. Department of Justice to freeze Pfeiffer's assets until he posts
a bond and answers questions about the payments. (By mid-October Justice
had not responded to the request.) In addition, the U.S. Attorney's Office
in Washington, D.C., has opened a criminal inquiry into the Riggs matter,
and Pfeiffer has been named in a shareholder derivative suit.
The
relationship between Pinochet and the soon-to-be-defunct Riggs dates to
the 1970s, when Riggs made "vast sums" by financing Pinochet's arms deals,
says Peter Kornbluh, author of "The Pinochet File." The Senate report, by
its subcommittee on investigations, details how Riggs' leadership
"accepted millions of dollars in deposits from him with no serious inquiry
into the source of his wealth ... set up offshore shell corporations ...
altered the names of his personal account to disguise his ownership ...
[and] concealed the existence of the Pinochet accounts" from federal
regulators. The report lays out a chronology:
� In 1998 Garzon
indicted Pinochet for genocide and torture, and froze his bank accounts
throughout the world. At the time, Pinochet had as much as $8 million on
deposit at Riggs.
� In May 2001, acting on that order, a Bermuda
bank froze its Pinochet accounts. That same day, Riggs withdrew $500,000
of Pinochet's money, and sent him 10 cashier's checks for $50,000 each by
overnight delivery.
� A few days later a Riggs executive asked
Pfeiffer, an international finance specialist, to look into the bank's
obligations regarding the Pinochet accounts. Andres Rigo, a senior adviser
with Fulbright, wrote a memo that discussed Pinochet's legal troubles
throughout the world.
� Pfeiffer forwarded Rigo's memo to the
bank's general counsel with a letter describing it as an overview of
"attempts to freeze and/or seize General Pinochet's assets," as well as
efforts by Garzon to locate Pinochet's assets in the United States.
Pfeiffer told Senate investigators that he didn't tell the other
directors, and didn't raise any concerns with bank officials because he
assumed that due diligence had been performed when the accounts were
opened. But the bank had already been cited by the OCC because high-risk
accounts "were not being appropriately identified, documented, and
monitored."
� Several months later, Riggs again sent Pinochet 10
cashier's checks for $50,000 each, and again in April 2002.
� In
March 2002 the Office of the Comptroller of the Currency (OCC), the
Treasury Department agency charged with enforcing money laundering and
bank secrecy laws, learned about the Pinochet accounts. It began to
investigate and pressured Riggs to close the accounts. In June the bank
again queried Pfeiffer: If we close the accounts, can we send the money to
Pinochet, or does it have to be turned over to a court?
Pfeiffer's
answer is unknown. He refused to answer questions from Senate
investigators, and he declined to speak to The American Lawyer,
both times citing attorney-client privilege. But a month later, according
to the Senate report, Riggs closed Pinochet's accounts and sent him the
balance -- more than $5 million. "If he knew that the bank had violated an
international asset freeze, he had, at the very least, an obligation to
both resign from the board and withdraw from the legal representation,"
says Deborah Rhode, professor of legal ethics at Stanford Law School.
Pfeiffer is still on the Riggs board, and the bank still uses Fulbright
for IP work.
That dilemma is only one facet of the ethical
quagmire in which Pfeiffer is now mired, much of it caused by the
ambiguous position he occupies -- as both a lawyer for Riggs and as a
member of its board. (He now heads the corporate governance committee and
chairs Riggs Bank Europe Limited.) In an e-mail declining an interview
with The American Lawyer, Pfeiffer wrote that lawyers "regularly"
hold both positions. But while once common, the practice has become much
less so. Today most firms either ban or strongly discourage the practice.
Consider the potential conflicts that confronted Pfeiffer. Riggs
had spent years accommodating Pinochet, and refusing to return his money
after it closed his accounts would harm the relationship. "If I'm on the
board of directors, it's harder to give objective advice," says Susan
Koniak, professor of legal ethics at Boston University School of Law.
"I've got another interest to worry about, namely my own."
If
Pfeiffer put the bank's interests aside and decided the assets were
frozen, was he obliged to ensure the bank complied with the freeze? "As a
lawyer, no. As a director, maybe," says Charles Elson, professor of
corporate governance at the University of Delaware. "A director is a
monitor of management and has a fiduciary duty to follow up on things that
could have a material effect on the company." Elson adds that the
potential for compromise cuts both ways. Fulfilling the director's role of
vigorously challenging management could cost the lawyer his client.
As a bank, Riggs had a duty to make a complete disclosure to
regulators, says Charles Intriago, publisher of moneylaundering.com. But
the Senate report concluded that "Riggs appeared to take affirmative steps
to hide the relationship," a relationship Pfeiffer knew about since at
least 2001.
As for Pfeiffer, if the OCC decides he violated money
laundering rules, it could start proceedings to ban him from the banking
industry. Federal criminal charges are a possibility if the violation was
"knowing or through willful blindness," says Intriago. Pfeiffer is
represented by Howard Shapiro and Russell Bruemmer of Wilmer Cutler
Pickering Hale and Dorr, in the various investigations, and by Sullivan
& Cromwell in the civil suit. Sullivan & Cromwell didn't return
phone calls seeking comment, and Wilmer declined to do so.
The
director-lawyer conflict is reflected in the American Bar Associations
Model Rules of Professional Conflict, which say that a lawyer must resign
from a board if there's a "material risk" to his independence. The ABA has
even weighed banning the practice. Malpractice insurers don't like the
dual role because it increases a law firm's liability exposure,
particularly at a time when firms are sometimes named as co-defendants
along with their clients. "It's a higher hazard area because there's no
clear line to define what function the lawyer is performing," says Anne
Marie Davine, who works with law firms at Marsh Inc., an insurance
brokerage subsidiary of Marsh & McClennan Companies, Inc. She adds
that some carriers insist on language excluding coverage for clients that
have members of the law firm on their board.
Garzon's case against
Pfeiffer seems to be lost somewhere over the Atlantic. As for the
complaint, a copy of which was obtained by The American Lawyer, a
Justice spokesman wouldn't comment on whether it was received, saying only
that the department would respond "as it considers appropriate," if and
when it does.
Garzon might not like the response. His complaint
against Pfeiffer, like his complaint against Pinochet, is based on
"universal jurisdiction," the principle that some crimes are so heinous
that perpetrators are subject to prosecution anytime, anywhere. It's
doubtful that Justice subscribes to the doctrine, say experts on
international law, and any acceptance of it would likely be limited to
crimes such as genocide and torture, not money laundering.
But
that doesn't clear Pfeiffer. Senate and U.S. Attorney investigations
continue. In April, Pfeiffer was named in a shareholder suit brought by
Milberg Weiss Bershad Hynes & Lerach (now Milberg Weiss Bershad &
Schulman). The suit alleges the bank's reputation (and market value)
suffered because Pfeiffer and other directors ignored warnings that some
Riggs clients were connected to al-Qaida, as well as warnings about Riggs'
shoddy money laundering controls. Milberg wants Pfeiffer and the other
directors to return the compensation they received while they were
allegedly in breach of their fiduciary duties.
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