In-house corporate counsels play a crucial role within their organizations—but never has that role been more important that it is today.

That was the overarching message delivered in a keynote delivered by Judge Jed Rakoff, U.S. District Judge for the Southern District of New York, at Compliance Week 2012. “There has been a huge increase in the both the number and in the power and prestige of inside corporate counsel.” Rakoff said.  “With that increase has come an increase in obligations, responsibilities, and pressures.”

Rakoff focused on three key areas, in particular, that in-house corporate counsels face today:

  • Gatekeeping;
  • Whistleblowing; and
  • Business advising.

Gatekeeping is a “big part” of what inside and outside corporate counsel do, said Rakoff. Historically, when a company has suggested idea for a business practice that may not necessarily have been in compliance with the law, outside counsel used to be the ones who would make that final judgment because they didn't have the same level of stake in the company as in-house counsel. “They could bring a certain objective independence there,” he said.

That is no longer the case. “These days, in-house counsel are better situated to act as gatekeepers,” Rakoff said.

He explained that the need for in-house counsel increased in the 1940s and 1950s as legal costs increased dramatically, and companies began seeking ways to reduce those outside costs. The most inexpensive solution was to bring in in-house counsel, said Rakoff.

Overtime, such a turn of events has made outside lawyers more sensitive to retaining current clients. “What has happened, in my view, is that outside counsel now find it very difficult to say ‘no' [to potential misconduct],” he said.  “They really fear that they're going to lose the client, and they fear that they're being paid according to how much business they bring in.”

As a result, outside counsel also fear that their compensation and prestige also will decline if they give their client a hard time, “whereas in-house counsel that have a much more permanent and trustworthy and confidential relationship with management feel more comfortable saying ‘no,'” said Rakoff.

In-house corporate counsel also play an important role as whistleblowers for their organizations. Under Section 307 of Sarbanes-Oxley, general counsels and CEOs must act as whistleblowers; overall, general counsels have done a “pretty good job in adjusting to this role,” said Rakoff.

In addition, general counsel often is asked by management to play the role of business counsel. Such a dual role, however, can present “tricky legal issues,” said Rakoff, because each has a stake in the final outcome. “By and large, outside counsel have become specialists; we go to them as we would to a doctor specialist,” he said.

Frankly Speaking

During a Q&A session, Rakoff also shared his views on the current state of federal securities regulation. Depending on whether the economy is going through good times or bad, people tend to react either by deregulating or over-regulating. “I think both those reactions tend to be overreactions,” he said. “Our one-track approach of ‘yes, the cure is deregulation,' or ‘yes, the cure is regulation' is too much of a tunnel-vision approach.”

“The notion that we can cure all of the problems of the world through 500 minute regulations is not only misguided but leads to its own problems in the development of American business, which is vital to the economic health of our country,” Rakoff added.

He also said he worries about the necessity of the whistleblower provisions under Dodd-Frank. He likened the matter to similar rights afforded by so-called “qui tam” claims, where individuals can sue on behalf of the government.

Roughly 90 percent of those cases are without merit, said Rakoff, because they're often brought by people who have “an ax to grind” or are “driven by greed.” The question that presents, he said, is whether the ten percent of cases that are meritorious present a high enough positive result to warrant the “very considerable costs and frustrations that accompany the misuse of resources" that the 90 percent of cases without merit create.