When a company is accused of wrongdoing, who can it call to help repair its
reputation?
These days, the answer has often been Gary G. Lynch, the former director of
enforcement for the Securities and Exchange Commission. In 1994, Kidder,
Peabody & Company chose Mr. Lynch, who is now a lawyer at Davis Polk &
Wardwell, to look into whether one of its bond traders, Joseph Jett, created
$350 million in phony profits. Bausch & Lomb Inc. recently asked him to
investigate some questioned accounting practices. And in July, Mr. Lynch
completed an investigation for Mattel Inc. into accusations that it was inflating
its earnings.
The hiring of an outside lawyer to conduct an independent investigation is
seen as a signal that a company accused of wrongdoing is committed to getting
to the bottom of the situation. And Mr. Lynch, whose high-profile career at the
S.E.C. involved bringing cases against Michael R. Milken and Ivan F. Boesky,
lends a company not just his expertise in finding the facts but a golden
reputation for integrity.
''Gary has an enormous degree of credibility with government officials,''
John M. Liftin, a senior vice president and general counsel for Kidder, said.
''They believe him. They trust him.''
But as much as companies would like the public to believe otherwise, Mr.
Lynch's reports, which cleared top executives at Kidder and Bausch & Lomb,
and exonerated Mattel, are not necessarily the last word. Critics note that Mr.
Lynch was representing Kidder in a case against Mr. Jett even as he was
conducting his fact-finding inquiry. Bausch & Lomb's board kept Mr. Lynch's
report under wraps. So did Mattel, whose accusers objected that Mr. Lynch too
readily shared information with Mattel during his inquiry.
While there is no evidence that Mr. Lynch failed to uncover the truth in
these cases, experts say that independent investigations like Mr. Lynch's, even
the most thorough and objective, are still no substitute for Government
inquiries or court proceedings.
''There are certain inherent limitations on any effort,'' Richard C.
Breeden, the former S.E.C. chairman, said.
Mr. Lynch strongly defended the quality of his work. ''I've worked very long
and hard over a number of years to earn my credibility,'' he said. Although he
declined to discuss the inquiries in detail, saying he was not authorized by
his clients to do so, Mr. Lynch said that he would never do anything to
''tarnish or compromise'' his reputation.
Mr. Lynch is just one of several former Government officials whom companies
have hired in hopes that these people's good names will help restore sullied
corporate images. The group also includes Lynn Martin, a former Secretary of
Labor; Griffin G. Bell, a former Attorney General, and Harvey Pitt, a former
counsel at the S.E.C.
''Sometimes you do have to choose a name player to regain the credibility
that has been stolen from you by the alleger,'' said Peter B. Frank, the vice
chairman of Price Waterhouse L.L.P., which has helped companies look into
charges of wrongdoing.
But critics say that a good name alone is not good enough. Shareholders and
prospective investors are left at a loss to assess the quality of any inquiry,
they say, unless important information about how an investigation was conducted
and how the conclusions were reached is also disclosed. ''The idea that somehow
the name alone is the answer is foolishness,'' said Neil V. Getnick, a lawyer
in New York who has helped draft a series of guidelines for independent
investigators.
''An investor,'' agreed Ralph V. Whitworth, a prominent shareholder
advocate, ''can't find comfort in just the reputation of the investigator.''
Problems can arise because management may seem to have too keen an interest
in the outcome or the investigator may appear to have a conflict that could
affect his conclusions. Inquiries also vary greatly in quality, depending on
the resources and latitude given the investigator.
''A lot of what is called an independent investigation is really advocacy,''
said Edwin H. Stier, a lawyer in Washington and in Bridgewater, N.J., who has
conducted many of these investigations.
Mr. Lynch said he did not dispute the idea that his findings must often
stand up to someone else's scrutiny, either that of regulators or of private
plaintiffs' lawyers. ''In many instances, the results are tested in one way or
another,'' he said. ''That's certainly their job to do it.''
Each of Mr. Lynch's investigations illuminates different points in the
broader debate.
In the Kidder case, Mr. Lynch raised eyebrows because he conducted his
investigation at the same time he was representing the brokerage in its
arbitration case against Mr. Jett. ''The role of advocate and umpire is in
tension,'' said John C. Coffee Jr., a professor of securities law at Columbia
University.
Kidder, which was then a subsidiary of General Electric, filed an
arbitration case in April 1994 with the New York Stock Exchange, asserting that
''Mr. Jett had been engaging in a scheme that created phantom profits.'' As
Kidder's lawyer in the case, Mr. Lynch was required to serve as an advocate for
the firm's views, which were that Mr. Jett acted alone and that Kidder was the
victim of his actions.
Mr. Lynch said there was never any pretense that his inquiry, which he
concluded that July, was purely independent, since Kidder had hired Davis Polk
to represent it in the case against Mr. Jett. He described the inquiry as
''thorough and objective.''
And Mr. Liftin, Kidder's counsel, dismissed arguments that Mr. Lynch was
wearing two hats at the same time. ''We don't think there was any conflict of
interest,'' he said. ''I never took any of that seriously.''
Like any outside counsel, Mr. Lynch's investigation of Kidder was
handicapped by his inability to subpoena documents or force the parties
involved to talk and to punish them for lying. Mr. Jett, for example, refused
to be interviewed.
Some questions arise, however, from what was left out of Mr. Lynch's 85-page
public report. He concluded that Mr. Jett acted alone. But some interviews,
disclosed in subsequent S.E.C. proceedings, at least raised a doubt about
whether others at Kidder knew what Mr. Jett was doing and countenanced his
actions. For example, according to notes from a Davis Polk interview, David
Bernstein, who served as an assistant to the head of the fixed-income division,
described the trading profits as ''not really false profits, rather advanced
profits.''
''We didn't view it as false, just accelerated,'' he was quoted as saying.
The lawyer for Mr. Jett, Kenneth E. Warner, said, ''My client is an innocent
man, and the report was grossly unfair to him.''
Mr. Lynch stands by his report. ''There is nothing in any of the interviews
that is inconsistent with the facts,'' he said. And the S.E.C., which conducted
its own investigation, essentially supported Mr. Lynch's conclusions and found
that Mr. Jett's superiors were not responsible for anything but a lack of
proper supervision. It has been two years since Mr. Lynch finished the
investigation, and, he said, ''the conclusions in the report hold up extremely
well.''
Mr. Lynch estimated that his firm billed Kidder for roughly 10,000 hours of
work on the investigation, which, if billed in a conservative range of $200 to
$300 an hour, would mean that Kidder may have spent $2 million to $3 million
for legal services.
In contrast to the Kidder report, the Bausch & Lomb case raises
questions about whether outsiders can trust an inquiry that remains largely
cloaked. Mr. Lynch, who was brought in last fall to conduct an independent
inquiry concerning accounting irregularities, reported directly to a special
committee of the board, which was made up of independent directors. When he completed
his investigation, most of what the public was told was contained in a few
paragraphs in a company news release.
''The Special Committee found no evidence that any executive officer of
Bausch & Lomb participated in or was otherwise aware of the irregularities
that led to the restatement or any other irregularities within the scope of the
Special Committee's review,'' the April release said. Earlier, the company
restated its 1993 and 1994 financial reports.
But experts question whether such limited disclosure is enough. ''A report
has value,'' Mr. Stier said, ''only to the extent that it can withstand attack
from all conflicting opinions.''
In fact, Mr. Lynch did not actually write a report. Bausch & Lomb's
board, which continues to be under investigation by the S.E.C., chose to have
Mr. Lynch explain his findings orally. In general, such oral reports ''would
have much less utility,'' Richard H. Walker, the general counsel for the S.E.C,
said.
Neither Bausch & Lomb nor Mr. Lynch would comment on why there had been
no written report.
''I've never seen a blue-ribbon panel do an investigation, make a report and
then have nothing in writing,'' said Matthew Fusco, a lawyer who represents
some shareholders in a suit against the company.
The other question that arises in such cases is just how independent the
investigator is from management. In the Mattel case, Mr. Lynch reported to the
board's audit committee about his investigation of charges by a former
employee, Michelle Greenwald, that the company improperly accounted for certain
transactions. When he finished in July, the committee issued a news release
stating that the inquiry ''found no evidence that Mattel accounted for sales
and costs associated with sales in a manner which is inconsistent with generally
accepted accounting principles.'' and that the company's accounting of certain
royalty payments also conformed to those principles.
But questions were raised by Mr. Lynch's decision to forward quickly to
Mattel officials a letter from Joel M. Kozberg, Ms. Greenwald's lawyer,
outlining concerns about the investigation and referring to additional
evidence. Mr. Lynch denied doing anything improper at the time, and Mattel said
the letter was sent to it simply for follow-up. ''We saw this as entirely
appropriate,'' said a company spokesman, Glenn Bozarth.
But Mr. Lynch's move, critics say, raised questions because the letter
appeared to have been sent without Mr. Lynch's first examining it. ''It's
something that should not happen,'' Barbara Ley Toffler, head of Arthur
Andersen & Company's consulting business on ethics, said in an interview
earlier this year.
The company released Mr. Lynch's findings a few days after receiving the
letter.
Since details of the investigation were never disclosed, it is also unclear
how Mr. Lynch arrived at his conclusions. There appears to be some
contradictory evidence, including a summary of a slide presentation given by a
Mattel executive, which describes two quarters of results as ''manufactured,''
according to an internal memo obtained by The New York Times. Another internal
Mattel document called for the company to develop better systems to account for
product-related costs associated with certain sales tactics.
While companies can always choose to conduct an internal inquiry, hiring an
outside lawyer for an independent investigation calls for further safeguards,
experts say. Not only is it important to emphasize the investigator's need for
independence and an array of skills, as called for in the guidelines set forth
by Mr. Getnick, but companies are also likely to find that investors and other
interested parties will expect a fair disclosure of much of the evidence found
during the inquiry.
''The most important thing,'' Mr. Pitt, the former S.E.C. counsel, said,
''is to restore confidence, both internally and externally.''
