17 Corporate Crime Reporter 31(11), August 4, 2003
INTERVIEW WITH ANDREW D. KAIZER, PARTNER, WILMER, CUTLER & PICKERING, NEW YORK, NEW YORK
Last month, Wilmer Cutler & Pickering and PricewaterhouseCoopers released a survey of business executives on economic crime.
According to the survey, some of the nation's leading corporate executives believe that the surge in economic crime has not peaked.
They believe economic crime will continue to grow over the next five years.
That's bad news for the economic system, bad news for the victims of corporate crime, and bad news for federal prosecutors flooded by the ongoing corporate crime wave.
To gain some insight into the findings of the survey, we called on Andrew Kaizer, a partner at Wilmer, Cutler & Pickering's New York office.
We interviewed Kaizer on July 29, 2003.
CCR: You graduated in 1983 from Harvard Law School. What have you been doing since?
KAIZER: I was a litigation associate at Nutter, McClennen & Fish in Boston for about three years. I moved to New York in 1986. I was an associate and then partner at Stillman & Friedman from 1986 until the end of 1999, when I joined Wilmer, Cutler & Pickering, as one of the first partners in its then new New York office.
CCR: What has been your practice?
KAIZER: Since coming to New York, my practice has focused securities enforcement, commodities enforcement, and broker-dealer regulation.
CCR: How did you become interested in that field?
KAIZER: I was interested in white collar defense because it involves real people, often with their liberty at stake, not just who ends up getting the most money at the end of a litigation.
CCR: What are some highlights of your recent cases?
KAIZER: Recently, I've been involved in an IPO-related criminal investigation, and several insider trading investigations.
CCR: What is the size of Wilmer in New York?
KAIZER: In New York, we now have something north of 40 attorneys in an office that began in 1999 with roughly five or six of us. Firm-wide, we have in excess of 500 lawyers.
Most of what we are doing here in New York is litigation related, whether securities enforcement, white-collar criminal defense, securities class action, bankruptcy, broker dealer regulation and investment management-related issues.
CCR: You recently published a report, Economic Crime: The U.S. Is Not Immune. How did this report come about?
KAIZER: We have worked for some time now with PricewaterhouseCoopers (PwC) in connection with various types of matters, many of them involving white collar crime or economic crime investigations.
Two or three years ago, PwC did their first global economic crime survey, which did not include the U.S.
Given the recent evolution of the regulatory environment and law enforcement environment, this time around they wanted to be sure to include data with respect to the United States, and they wanted a partner in that process that would bring specialized legal skills and expertise to bear, in addition to the specialized investigative, analytical, and accounting skills and expertise that PwC can provide.
CCR: What do you mean by economic crime?
KAIZER: In general, it refers to fraud, bribery, asset misappropriation, embezzlement -- things of that sort.
CCR: How many companies did you survey -- how many responded?
KAIZER: I believe that we went to Fortune 1000 companies. We polled a smaller subset of the 1000 for U.S. purposes. We had 91 respondents in the United States sample, from which the U.S. data and conclusions are drawn.
Both the U.S. Survey -- which our firm sponsored -- and the Global Economic Crime Survey 2003 -- which we co-sponsored with PwC -- are readily accessible using links on our firm's web site: www.wilmer.com
CCR: What were the key findings?
KAIZER: There were several interesting findings. One is the degree to which there is a perception that there is misreporting of financial results. About 50 percent of the population that we polled thought misrepresentation of financial results is widespread, but only 2 percent said that it had occurred at their companies.
CCR: You polled CEOs?
KAIZER: The respondents would be CEOs, CFOs, and/or senior executives in a position to address risk management concerns for the company.
CCR: The people you polled felt that economic crime generally is going to increase over the next five years.
KAIZER: Not just financial misrepresentation, but economic crime generally. They do feel that economic crime is likely to increase. The financial misrepresentation issue is obviously a very hot issue right now. Because of that heightened public sensitivity and the very serious, potential direct and reputational risk, and other risks that companies face if there were to be such shenanigans occurring, it is perhaps understandable that a gap exists between what is perceived to be occurring and what actually may be occurring.
CCR: If the top executives believe that economic crime is going to increase, what does that say about their belief in the current control systems?
KAIZER: It depends on the economic crime they have in mind. If, for example, it is misappropriation of assets or embezzlement in question, 95 percent of the respondents believe that they have adequate internal control systems. It tends to be either internal or external audit, or tips from whistleblowers that brings to executives' attention whatever wrongdoing might be occurring, rather than internal control systems per se.
Obviously, there is some overlap there between an internal audit function and what the respondents may have been defining as their internal controls.
That said, it does demonstrate that people have greater confidence in their internal controls to catch, detect, and alert them to these kind of issues than may be justified.
That confidence in risk control systems also may be a function of the nature of many of the industries polled here, which are more heavily regulated and so, tend to focus on these kinds of things, but they don't necessarily recognize that some of what is occurring that gets reported in our survey is by people who are either inside or have the means to circumvent whatever internal control system may exist.
CCR: Why would PwC want this report?
KAIZER: This is what they and we do for a living, and we have some expertise in recognizing and considering the trends with respect to how these things occur. We did not participate in their first survey, but what we heard reported about their first survey was that many of those respondents were themselves quite interested in reading about the data and seeing for themselves how they fit into the larger picture of what others were experiencing and perceiving.
CCR: What did you learn from this survey about the control systems and what needs to be done to prevent economic crime?
KAIZER: To the extent that much of it winds up being detected through internal and external audits and whistleblowers, that certainly would suggest that enhancing access for whistleblowers to be heard, and assuring that the internal and external audit functions indeed properly operate, are very important.
CCR: Does it say anything about Sarbanes-Oxley?
KAIZER: I don't know that it does. It certainly is an objective of Sarbanes-Oxley to strengthen the audit system, in a global sense, and to enhance the controls over the audit function of the accounting industry. Whether the objective is achieved, and if so, precisely how, remains to be seen.
CCR: You surveyed the impact of economic crime. The executives believe it impacts staff morale and motivation and it damaged business relationships. These corporate executives appear to understand the risks involved, yet they seem to believe that the current systems in place are not going to prevent economic crimes from happening.
KAIZER: Your question in part suggests that the same people who are controlling the company are perpetrating the crimes. There may be some basis to that with respect to something like the misrepresentation of financial results. But for example, an embezzler, or someone who is stealing from the company, is not part of the power structure that is keenly interested in detecting and ferreting out these people.
One of the major concerns with respect to asset misappropriation is that if you have a faithless employee, who also is someone senior enough and well enough versed in the control systems of the company, it is very difficult to detect that person's misconduct and to keep that person from finding ways to circumvent the control system. It is a serious challenge.
Unfortunately, experienced forensic accountants like PwC, who come in after-the-fact and look at these things, frequently will tell you that where you have an insider dedicated to committing fraud without detection, it is very difficult to prevent that -- not impossible, but a real challenge. You can try and erect walls and set up structures that will allow for rapid reporting by others who might have an opportunity to observe it.
Nevertheless, the very nature of that kind of crime is that it is accomplished by stealth and deceit with a primary focus on going around these control structures.
CCR: Your survey asks -- which types of economic crimes will your organization be most vulnerable to over the next five years. Some are crimes against the company, but some are crimes committed by the company. Asset misappropriation would be a crime against the company. But financial misrepresentation might be a crime by the company.
KAIZER: That's right. That is what I was trying to suggest earlier. If you are talking about misrepresentation of financial results, you are, by definition, talking about people within the organizational hierarchy involved with the conduct you are questioning. If the wrongdoer is someone subordinate to those people who are trying dutifully to control how the company is appropriately run, those are probably most of the categories of economic crimes we are talking about. Those are cases where a crime is being perpetrated against the company, as opposed by the company itself.
CCR: Well, let's go down the list. Cybercrime could go either way -- it could be against the company or by the company.
KAIZER: It's more likely to be the victim of that sort of crime. We're talking about denials of service, or people hacking into a server or database to steal important information, or steal source code.
CCR: Financial misrepresentation would be a crime by the company.
KAIZER: Or perhaps more accurately, a crime by executives of the company.
CCR: Industrial espionage and information brokerage could be both, although the Boeing case shows us it could be high level executives on behalf of the company. Corruption and bribery is crime by the company. Money laundering is crime by the company.
KAIZER: I'm not sure I would agree with either of those. It is frequently the case that companies are victimized in the Foreign Corrupt Practices Act context. It's correct to say that companies can be involved in perpetrating that kind of conduct.
By choosing not to engage in corruption or bribery, however, a company can be a victim and, in a sense, very much involved in a crime although not actively a participant or responsible for the misconduct.
The same holds with money laundering. It may well be that entirely legitimate institutions are in a sense being victimized by those who appear to be using an institution for an appropriate purpose, when in fact they are secretly laundering the proceeds of ill-gotten gains.
CCR: Although we do see repeated examples of financial institutions brought to the mat for laundering dirty money.
So, how do CEOs interpret this survey? Are they thinking -- my company could be victimized by economic crimes? Or are they thinking -- if my company engaged in economic crimes, it would be a hit on our reputation?
KAIZER:Both thoughts may well cross the executives' mind. It would depend on the executive you are asking. The net that we have cast with categorical questions was fairly broad and not specific to any one company or industry.
CCR: Your survey finds that these executives believe (51%) that financial misrepresentation is prevalent in society. But only two percent say that it has occurred at their companies. So, you conclude that these executives are being influenced by media coverage of the current scandals?
KAIZER: Yes. They live in the same world as we all do. It would be impossible to be reading not only the financial press but the general press, as presumably most executives do, and not concluding that there is a keen societal interest in dealing with the tidal wave of concerns about corporate misconduct that began with the Enron scandal a couple of years ago.
CCR: You ask -- how is the crime detected? In the U.S. 50% said internal and external audit. The next largest response was "accidentally." What would they mean by accidentally?
KAIZER: In a highly regulated financial industry, for example, there might be monthly reports that may not themselves be oriented toward identifying or detecting any specific kind of criminal misconduct, but unusual occurrences which are evident in those reports may lead one to ask questions, which then lead to the discovery of there being some misconduct afoot. That would be accidental, in the sense that it was not looked for specifically by a particular control aimed at that particular misconduct.
CCR: Another answer is "tip-off." Does that mean whistleblower?
KAIZER: I would say yes, that's a synonym for whistleblower, which clearly is very important here in the U.S., apparently even more than in Europe.
CCR: The executives responding to this survey do not necessarily have a favorable view of whistleblowers.
KAIZER: I'm not sure I would agree with that. Unfortunately, the press focus on matters that get headlines. And where there are scandals, they deserve the headlines. But the vast number of corporations do, in fact, generally follow the rules, do things forthrightly, and have executives and chief legal officers and others who want to do the right thing. I've dealt with them in my practice. And it is fair to say that they want to create an environment where people inside who observe this kind of misconduct occurring will feel comfortable stepping forward, knowing they will be listened to, and that there won't be any kind of reprisal for their conduct.
CCR: On the other hand, there is a growing body of data showing that whistleblowers are mistreated, shunned, shamed, their families are destroyed. That's has gotten worse over the last 20 years. On the whole, whistleblowers get the raw end of the deal.
KAIZER: I'm not sure I agree with all of that. In Sarbanes-Oxley, Congress sought to strengthen protections for whistleblowers. Any responsible public company now is going to take that responsibility seriously and will see that there are systems in place to make sure that there won't be reprisals against whistleblowers.
CCR: You split out two categories. Internal and external audit. And risk management systems. What's the difference?
KAIZER: Risk management systems may include, for example, electronic surveillance or particular kinds of periodic exception reports that are prepared, maintained, and monitored by a compliance department, which would not be regarded specifically as part of the traditional internal audit function.
CCR: Is it some kind of internal policing function?
KAIZER: Certainly, in the financial institution area, the broker-dealer area, there absolutely are well defined and identified compliance professionals and functions which are separate and apart from the internal audit function.
CCR: You also ask a number of questions dealing with insurance. What did you find?
KAIZER: One of the questions we asked was -- what happens when companies do suffer losses from economic crime?
Most of the respondents were talking about crimes perpetrated against them.
An obvious question is -- to what extent are the victims of these economic crimes able to get some sort of recompense for what they lost. One way a company can try and protect against such a loss is to have some kind of insurance in place -- some sort of surety bond, or other kind of general liability insurance that covers against faithless employees.
The data seem to show that on the one hand there are more companies who take the step of putting in place insurance coverage in the U.S. than elsewhere in the world.
On the other hand, even with respect to those companies where there is insurance coverage in place, most of the time the recovery is not complete.
Oftentimes, it is relatively small or a modest fraction of the actual loss. It is unclear why that is.
As we suggested in the report, one theory is that companies either self-insure or have deductible arrangements on their insurance policies that would preclude them from getting a recovery unless there is a certain amount lost, or that some of the losses are small enough that they are simply not within the scope of the coverage.
CCR: Could it also be that the insurance policy does not cover instances where the company or executives are responsible for the crime?
KAIZER: Obviously, if you have a faithless employee embezzling assets, it is not uncommon to have some kind of surety or fidelity bond to cover that sort of misappropriation. If it is a financial misrepresentation, that may or may not be covered by insurance. For example, shareholders might seek to recover their losses through some other process like a restitution fund.
CCR: You are not talking about cases just where there is a criminal prosecution, are you?
KAIZER: Again, this comes to the distinction between perceived prevalence and actual incidence. Also, there may have been instances were respondents had in mind situations where criminal activity occurred, but there was no criminal prosecution.
CCR: In terms of financial misrepresentation, the vast majority is not criminally prosecuted.
KAIZER: I'm not sure I can agree. To be sure, the federal government, as powerful as it is, nevertheless has limited resources, and they have to make their best judgments as to the most efficient use their resources to catch people who have broken the law, punish them, and deter others from doing so.
CCR: The question is -- what's appropriate? To many reporters, it was clear that the SEC under Harvey Pitt was giving it up. Then Elliot Spitzer came in to take up the slack.
KAIZER: Are you one of those reporters?
CCR: Just asking a question here.
KAIZER: The SEC has a long and a fine tradition of looking out for the individual investor.
I don't know enough about what was truly going on at the SEC before Mr. Spitzer and his office undertook his recent investigations a year or two ago to say that there is some cause and effect between the New York Attorney General and the SEC being where they are now.
CCR: Do you agree with the respondents of the survey that economic crimes are likely to increase over the next five years?
KAIZER: I don't sit on their same perch, so I can't say that I would agree or disagree. There certainly has been a lot of attention on corporate crime generally. And we now have a federal Corporate Fraud Task Force.
One of the things that is consistent in these surveys is that there is a considerable concern about cybercrime, although the actual incidence level is, in a relative sense, not that high.
One of the reasons that we are not seeing a larger number there yet is that it is the sort of conduct that has not become completely transparent to the public. For example, the public at large are only now becoming generally aware of identify theft issues. The threat and potential harm from hacking crimes, while not yet well publicized, is very substantial. There are serious concerns that those kinds of crimes will grow as the sophistication and ready availability of technology grows exponentially. Executives in information-based businesses have to be keenly aware of, and concerned about, this.
CCR: Defense attorneys have to be conflicted on this. You can't really cheer when Larry Thompson goes to the White House, as he did last week, and announces all of these criminal prosecutions of corporate fraud. But on the other hand, it's great for business. You keep adding lawyers, never a dull moment.
KAIZER: Frankly, I am not particularly conflicted about this, but really not for the reason you suggest. I, for one, care enough about where our overall economy is right now that I would delighted to see less of this conduct, and thus less of this work, around.
Believe me, there is more than enough work for the lawyers, and the lawyers are fully occupied as it is.
I do share the concern that people must understand that there is right and wrong, and I think executives do understand that by and large. There have been some examples where that wasn't the case. What the Corporate Fraud Task Force has undertaken is very important. And God willing, their mission will be a successful one.
Some of us who do this for a living thought a year or so ago that we would be winding down, but from what I hear from friends on the prosecution side, things are still quite active and there are a number of substantial investigations in the queue, and I don't think we are seeing the end of it yet.
CCR: The insiders who you surveyed don't see the end of it, which seems troubling.
KAIZER: That is troubling, and to the extent that they will continue to be the victims of that crime, it is particularly troubling. Whether they might be part of the problem, and not part of the solution, we can't tell from the survey. It doesn't get split out. It is fair to say that people are legitimately concerned that economic crime per se is not going away any time soon.
[Contact: Andrew D. Kaizer, Wilmer, Cutler & Pickering, 399 Park Avenue, 31st Floor, New York, NY 10022. Phone: (212) 230-8830. E-mail: andrew.kaizer@wilmer.com]
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