The NASPP Blog

On April 1, 2009, a federal judge ruled in favor of former Broadcom CFO, William Ruehle — see “Separate Representation Is Best for Corporate Officers and Directors” (West Virginia Business Litigation, April 8, 2009). In the ruling, the court ruled that statements made by Ruehle while he was CFO of Broadcom during an internal investigation into stock granting practices are inadmissible in the ongoing case against Broadcom and several officers and directors.

The issue centers on the law firm that Broadcom retained to not only represent the company in the lawsuit, but also to conduct an internal investigation into Broadcom’s historical granting practices. The same firm simultaneously represented both Broadcom and Ruele . Broadcom wanted to disclose certain statements made by Ruele during the course of that investigation. Ruele claims, and the court agrees, that his statements should be covered by attorney-client privilege and should not be disclosed to a third party. This ruling could have serious repercussions for the law firm; it also means that Broadcom may not fully cooperate with the investigation.

This ruling highlights the issues of dual representation and conflict of interest. This particular case deals with issues that may arise when companies and key individuals retain the same legal representation. But, companies should keep in mind that this type of situation could come up inadvertently. For example, if you have a law firm that helps the company with Section 16 filings, which are actually on behalf of the individual Section 16 insiders, then both the individual and the company could be seeking counsel from the same firm. Or, companies often have a designated broker to whom it outsources stock plan administration functions. If that broker also administers Rule 10b5-1 plans for executives and offers financial advice to some employees, then there is a working relationship for both the company and the individual. The company can’t know when or if any of these circumstances could lead to or become a part of litigation, so it must be careful to draw the line between the relationships involved.

The risk of not being able to disclose information in an investigation (to garner leniency from the judge) is one tangible potential consequence of dual representation. However, the general risk of a conflict of interest for a company’s outside advisers exists in other ways as well. Companies often leverage their existing relationships to extend benefits to their executives or other key employees. Whether it is a broker, accounting firm, lawyer, or even a financial advisor that the company has brought in to offer assistance to employees, it is important for all parties to be clear on the relationships involved.

Many of these services are an advantage to both employees and companies; the solution isn’t necessarily to eliminate any situation where both the company and the individual engage the same third party (although there are certainly situations where this is highly advisable). The solution is that both the company and the third party should make clear distinctions between when the company is being represented and when the individual is being represented. One way to contribute to this distinction is to ensure that the company will have a working relationship with a different representative or group within the third party entity. Additionally, companies should be careful not to appear to recommend or require employees to act on advice from a broker, financial advisor, or lawyer.

If the situation Broadcom finds itself in now sounds like a nightmare to you, and you are looking for ways to avoid other stock plan administration misfortunes, check out the session “Night of the Living Dead: Equity Compensation Horror Stories” at our 17th Annual NASPP Conference.

-Rachel