until last month, lying to your own company's lawyers
was not a crime.
Now it is.
Defense lawyers and civil libertarians are expressing alarm at the
government's aggressive use of obstruction of justice laws in its
investigation of accounting improprieties at Computer Associates, the
giant software company. Some of the lawyers also criticize the handling of
the case by Wachtell, Lipton, Rosen & Katz, a prominent law firm that
the company hired to investigate the charges on its behalf.
On April 9, three former executives at the company pleaded guilty to
obstruction charges tied to lies they told to Wachtell, whose
investigation was led by John F. Savarese, a former federal prosecutor who
also represented Martha Stewart before her trial this year.
The Computer Associates executives were never accused of lying directly
to federal investigators or a grand jury. Their guilty pleas were based on
the theory that in lying to Wachtell they had misled federal officials,
because Wachtell passed their lies to the government. When the federal
investigation became public in February 2002, the company promised to
cooperate fully with the prosecutors.
Tim Lynch, director of the Cato Institute's Project on Criminal
Justice, said he was quite surprised that Judge I. Leo Glasser had
accepted the guilty pleas. An executive who lies to his company's lawyers
should be fired, not prosecuted, he said. Prosecutors are stretching the
law, he believes, in a way that Congress did not intend.
"If an employee is speaking to an internal investigator, the only
sanction for lying to or misleading an internal investigator is discharge
from your company," Mr. Lynch said. "It's improper to let these private
investigators assume some set of quasi-governmental status which is very
unclear to people. The bottom line is that it's not a crime."
Prosecutors disagree with Mr. Lynch's assessment, saying that the
executives knew that their testimony would be turned over to the
government and that they needed to tell the truth.
Defense lawyers say the case vividly reveals the potential traps that
mid- and high-level executives face during internal corporate
investigations, which have become increasingly common.
Prosecutors now demand that companies give up any claim of legal
privilege and turn over whatever information they have uncovered
internally to avoid a companywide indictment that could devastate the
corporation, lawyers say. Though employees are usually warned that their
answers are not protected by attorney-client privilege, they may not have
the same reservations about lying to their own lawyers that they would
have to federal agents.
At the same time, company employees cannot assert a right against
self-incrimination during an internal investigation: if they refuse to
answer questions, they can be fired. So managers may feel they have little
choice but to lie, especially if senior executives are also lying.
Usually, obstruction charges cover behavior like destroying documents
or pressuring witnesses not to testify. There are also laws that make
lying to federal officials a crime even for people who are not under oath.
Perjury laws bar lying in court.
In addition to the obstruction charges, the Computer Associates
executives pleaded guilty to securities fraud. Two of the executives face
up to 10 years in federal prison for the obstruction and securities fraud;
the third, Ira H. Zar, the former chief financial officer, could serve up
to 20 years..
All three men are now cooperating with prosecutors in hopes of
receiving significantly shorter sentences, giving them a strong incentive
to plead guilty to the charges rather than contest them in court. In
March, a former midlevel executive at Dynegy, the natural gas trading company, was
sentenced to 24 years in prison after a jury found him guilty of
accounting fraud. That sentence has unnerved many executives who face
white-collar crime charges, encouraging them to plead guilty in return for
lighter sentences, defense lawyers say.
The Computer Associates investigation, which began more than two years
ago, is being jointly conducted by prosecutors in Brooklyn and the
Securities and Exchange Commission. The inquiry is now focusing on Sanjay
Kumar, who resigned last month as chief executive; Mr. Kumar remains at
the company as chief software architect, although he has no day-to-day
management responsibilities. His lawyers say he has done nothing
wrong.
In their guilty pleas, the executives depicted a broad conspiracy at
the company to lie to Wachtell and to slow the government's investigation.
Just because those lies were told through lawyers rather than by the
executives directly does not excuse them, said Roslynn R. Mauskopf, United
States attorney for the Eastern District of New York.
"Zar and other indicted C.A. officers made false statements to C.A.'s
attorneys that were intended to - and did in fact - obstruct justice,''
Ms. Mauskopf said.
"That the false statements were passed along to the government through
attorneys does not blunt the obstructers' intent or the effect of their
actions. To conclude otherwise would have the perverse effect of creating
a safe harbor for individuals who carry out their obstruction through
attorneys."
But Kirby Behre, a defense lawyer in Washington, said that lawyers are
becoming "almost extensions of the government" because of the increasing
pressure to cooperate with investigations. "I think that's something a lot
of us as criminal defense lawyers feel a bit uncomfortable about."
"There used to be a time when an internal investigation was an internal
investigation to figure out whether there was wrongdoing. Part 1 was
figuring out what happened, and Part 2 was figuring out whether it could
be defended," said a lawyer for a Computer Associates executive who has
pleaded guilty. The lawyer insisted on not being identified because his
client has not yet been sentenced.
"The government won't accept that any more. An internal investigation
has to be an absolute search for the truth and an absolute capitulation to
the government."
Using those criteria, some lawyers expressed doubts about whether Mr.
Savarese and Wachtell did a good job.
In February 2002, after the criminal inquiry was publicly disclosed,
Computer Associates hired Wachtell to conduct an internal investigation
into its accounting practices. By that time, employees had already
publicly disclosed problems with Computer Associates' financial
statements, including its practice of backdating sales to meet its
quarterly goals.
The practice was common at Computer Associates and widely known among
employees, and had been mentioned prominently in a New York Times article in May 2001. Computer
Associates has now admitted backdating more than $2 billion in revenue in
1999 and 2000.
But the executives apparently were willing to take the risk of lying to
Wachtell about the practice. In their pleas, the men depicted a widespread
conspiracy among the company's top management to mislead the firm.
Harvey Silverglate, a criminal defense lawyer in Boston who was not
involved in the case, said Mr. Savarese should have investigated the
company more aggressively.
"Any experienced criminal lawyer has a very good idea when he's being
lied to early on," Mr. Silverglate said. In fact, prosecutors made
progress in their investigation despite the executives' lies, and after
the audit committee of Computer Associates' board hired a second law firm
to conduct its own internal investigation in the summer of 2003, the
conspiracy quickly crumbled.
Internal investigations are very lucrative for law firms, which may not
want to anger their clients by pressing too hard for the truth, Mr.
Silverglate said. As a result, they can put both individual executives and
the company that hired them at risk.
"They look at themselves as servants of these corporate people," he
said. "They do the bidding of the client, and what they're really doing is
the bidding of the government."
Mr. Savarese did not return repeated calls for comment.
Along with the Computer Associates case, he had difficulty with another
case that ultimately hinged on obstruction. Mr. Savarese represented Ms.
Stewart last year, although not at her trial. In March a jury found Ms.
Stewart guilty of obstruction of justice for lying to federal
investigators about the reason she sold 3,928 shares of ImClone Systems. In both the Stewart and Computer
Associates cases, investigators have charged that defendants impeded their
investigations.
