Jack Coffee, Corporate Gatekeeper

Jack Coffee, Corporate Gatekeeper
By Adam Liptak
Adam Liptak, the national legal correspondent for The New York Times, writes the paper’s “Sidebar” column, which covers developments in the law. He was also a member of the reporting teams that examined the Jayson Blair and Judith Miller scandals and covered the U.S. Supreme Court nominations of John G. Roberts, Jr., and Samuel Alito.
Professor John C. Coffee, Jr., has a disc jockey’s voice and a mischievous wit. In his famous “white collar crime” seminar, he uses these gifts to teach his students something beyond codes, case holdings, and a healthy fear of the S.E.C.
He starts by reciting the facts of cases the class chews through each week.
The Adolf A. Berle Professor of Law and the director of the Center on Corporate Governance, Prof. Coffee is at ease in many disciplines. His academic work is informed by continuing participation in live legal cases. He is super­humanly prolific. And he is regularly cited by the courts and quoted in the press.
But it is his sense of narrative tension that sets him apart.
Prof. Coffee uses a modified Socratic method to draw out the holdings and contradictions in the decisions he discusses in Black Letter Law/White Collar Crime, the seminar he teaches with Judge Jed S. Rakoff. But he does not rely on students to set the scene.
Instead, he makes the mundane facts of insider trading cases sound like dark comedies. His summaries are little essays on moral blindness, greed, rationalization, and ambition. They are worthy of Mark Twain.
Similarly, in his powerfully fresh new book on the failures of lawyers and other professionals to prevent the recent financial scandals, Prof. Coffee demonstrates that, in the end and on the whole, a great deal can be explained by what economists call incentives and what novelists call human frailty.
The conflicted loyalty of gatekeepers
In a characteristically aphoristic aside, for instance, he makes this observation about executive compensation in his new book Gatekeepers: The Professions and Corporate Governance, “More stock options means more fraud.”
“An epidemic of corporate and financial irregularity crested in the United States in 2002,” Prof. Coffee writes in Gatekeepers. The scandals prompted calls for corporate-governance reforms, mainly focused on boards of directors.
But Prof. Coffee would look elsewhere for effective reform.
“Most of what can conceivably be done to make the board more active and independent has already been done,” he writes.
“The board of directors is the prisoner of its gatekeepers,” he says. “They’re only going to wake up and recognize there’s a problem if a professional alerts them. I think a strong, good lawyer telling a board that something illegal has happened, and they have responsibility, will activate them because they are risk-averse.”
But the gatekeepers – the lawyer giving advice, the invest­ment banker writing a fairness opinion, the securities analyst circulating a report, the credit agency rating a security – are often subject to dual or conflicting loyalties.
Gatekeepers kicks off with perhaps the best brief exposition of the Enron and WorldCom scandals in print. (Prof. Coffee is generous, though, in crediting the journalists and others on whose work he relies.)
“My book was actually written to be accessible to practi­tioners and avoid an overemphasis on theory,” he says. “I have some academic colleagues who say, ‘You left the theory out.’”
In the book, he sketches out a few lessons and diagnoses.
“Crimes may have been committed at Enron,” he writes, for instance, “but the greater social problem lay in the stupidity it revealed.”
In the cases of both Enron and WorldCom, the professional watchdogs meant to ensure the integrity of the companies’ con­duct and disclosures failed. The key mystery, Prof. Coffee writes, is this: “Why did the watchdogs not bark?” The main answer is conflicts of interest. “Typically the party paying the gatekeeper will be the party that the gatekeeper is expected to monitor.”
In addition, he writes, lawyers and accountants are profes­sionally averse to supervision: “They protect their autonomy; they resist broad duties to the public; and they invest very little in self-policing.”
At the same time, lawyers and accountants were being named much less frequently in securities class actions in the aftermath of two important U.S. Supreme Court decisions and two federal statutes, all limiting their liability. Probably as a consequence, the Enron and WorldCom frauds were not revealed by outside professional watchdogs.
Noting that he was praising an “unlikely champion of the public interest” in the Enron case, Prof. Coffee writes that it was short-sellers, “motivated by self-interest and the expec­tation of high profits,” who “deduced that Enron was a house of cards.”
In the WorldCom case, too, the company’s internal audi­tors, not the fancy profession­als, detected the fraud.
Lawyers have resisted embracing a formal gate­keeping role, Prof. Coffee writes, though for years they served as reliable elder statesmen who might give their clients unvarnished, independent advice.
That has changed, Prof. Coffee says, with the rise of in-house general counsels. He does not seem to hold such lawyers, whose interests are closely aligned with the executives to whom they report, in especially high regard.
“The general counsel wants to hold on to the business,” Prof. Coffee states, “and he only wants the specialist to know his small part so the specialist can’t start advising the CEO generally.”
That means that big-firm lawyers sometimes find them­selves in an unaccustomed role.
“These guys find the world is very different. They used to be getting business because they were Cravath – the aristocracy,” he says. “Now they’re out there flying to the West Coast at six o’clock in the morning to go to one of these dog-and-pony shows to get the work.”
But the larger issue is not the tension between in-house and outside lawyers but rather the conflict between lawyers’ conceptions of themselves as zealous advocates for their clients and a duty to people who trade in their clients’ securities.
“Generally, lawyers say they are not gatekeepers,” Prof. Cof­fee says. “We are advisers to a client with a duty of zealous representation, no duty to be fair or to give full disclosure to anyone else. My view is that the securities attorney should be a gatekeeper.
“To make the lawyer a gatekeeper,” he adds, “we have to give him a true gate to guard. We’ve moved from a sys­tem in which we primarily made the critical disclosures in a prospectus to a world in which we primarily make the critical disclosure in these periodic reports with the S.E.C. The private market used to force the attorney to certify to the investor-purchasers that he knew of no material false statement or omission. I would like the same representation being given by the lawyer to the S.E.C. with regard to the quar­terly and annual reporting, in which he’d say, ‘After an inves­tigation I deem reasonable for this purpose, I am not aware of any material misstatement or material omission.’”
The point, says Prof. Coffee, is this: “What that would really do is give the lawyer leverage to say to the client, ‘I can’t give this opinion unless we say more.’”
In the end, though, even in a legal-ethics regime that per­mits lawyers to expose some sorts of financial fraud, Prof. Cof­fee writes in Gatekeepers, “‘Blowing the whistle’ on the client is perceived as career suicide, and mass suicide should rarely be assumed or predicted.”
Divorce and the hot stock tip
The 11 students who turned up for a securities-law class on election night in November were a little droopy and distracted as they shuffled into an eighth-floor seminar room. The mood did not last, due partly to the affectionate and amusing needling between Prof. Coffee and Judge Rakoff, who have taught together for 18 years.
But it was mostly Prof. Coffee’s narrative sense that drove and lifted the evening. When the talk turned to law, he was candid.
“The lines become quite thin,” he tells students. “Some of these cases become quite hard to explain.”
Consider, he says, the case of Donna Yun. She was getting divorced and negotiating with her husband over splitting up their assets, including some stock of his employer. Her husband, David, told her the stock would soon drop and that they should assign a lower value to it.
Prof. Coffee pauses to remark on that honorable disclosure.
“The way most divorcing spouses would do this,” he says, “is he’d give her all the stock and keep the house and the Mercedes.”
Ms. Yun, the tale continues, called her lawyer to talk about the matter from the real estate office at which she worked. A co-worker overheard her and traded on the information. Cue the S.E.C., which sued Ms. Yun.
An appeals court reversed a judgment for the agency and granted the defendants a new trial based on an incorrect jury instruc­tion that required the agency to prove only that Ms. Yun’s decision to speak in front of a co-worker amounted to “severe reckless­ness.”
Again, Prof. Coffee focuses on the human reality of the situation.
“He and I don’t know this,” he says, looking at Judge Rakoff. “Neither of us has been divorced. We hear that people going through divorce are often under severe strain.”
Prof. Coffee does what he can to harmonize lines of cases and to tease out categorical propositions. But he also takes into account the incentives and ambitions of the prosecutors involved, and sometimes of the judges.
The seminar is a pleasure, Judge Rakoff says, because it is so lively and so timely.
“When any new issue comes along, he immediately sees it not only in narrow technical terms but also in its broader com­plexity,” Judge Rakoff says of his co-teacher. “There has never been a class, ever, where he hasn’t come up with some new hypo, some new wrinkle.”
Indictment of the month
Prof. Coffee agreed to an interview on the condition that it not take place in his office, where teetering stacks of paper threaten to overwhelm this suave man in a pinstriped suit. He emerges, quickly shutting the door behind him.
Seated comfortably in the faculty lounge, Prof. Coffee, 62, reveals that he started his legal career in 1970 at Cravath, Swaine & Moore, where he worked for six years as a transac­tional lawyer. He taught at Georgetown for a few years and joined the Columbia faculty in 1980.
Those were different times in academia.
“It was probably more of a smaller, old boys’ club,” he says. “There was a lot of courtesy given. If someone in the field didn’t like a given person, that person would not be a candi­date for appointment even if the rest of the faculty said he was an extraordinarily talented young person. And so there was a system of more deference. We didn’t have formal rules about voting. We had this notion of substantial consensus.”
These days, he says, “It’s a much larger group, a much more diverse group, and we work more on majoritarian rules.”
The place of corporate law in the legal academy has changed, too.
“Back in 1980, I asked to teach a seminar on tender offers. And they said, ‘Can you fill a whole seminar with that? Will it be enough for a whole semester?’ Now we have a mergers-and-acquisitions course with more than 100 students.”
The class he teaches with Judge Rakoff, Prof. Coffee notes, is in some ways limited.
“We’re not really trying to figure out what causes crime,” he says. “We like the simplest theory. We think people probably committed the crime because there was gain and personal interest. We are not going to give you the sociological theories based on the story of your childhood.
“We’re interested in the battle between defense counsel and prosecutors and, basically, two themes: the amount of discretion that federal prosecutors have, which is enormous — you can apply these statutes to seemingly humdrum, pedestrian transactions where often no one was aware they were even exposed to the criminal law. And I think there are hundreds of human resource offices in corporations today not sleeping well because they just put a date of April 1st rather than May 15th on a stock option. The other theme that I like is misconduct within large organizations and other kinds of bureaucracies and how they have ways of blink­ing at facts. You can manage to filter out and repress information.”
It is important, he says, to keep things fresh in the seminar.
“We try to get the indictment of the month in,” he says. “Stock options are new this year. Market timing was new last year. And it’s partly getting the students to really look at the detailed facts. Students would like a sort of a simple picture and then to tell you their view, which is that bad people should go to jail.”
Prof. Coffee is among those professors who are as comfort­able in a classroom as they are attending to outside activities. That might mean co-writing articles or editing books with colleagues both at Columbia and at other law schools, where corporate law offerings have expanded to meet changes in the business world, as well as student interest.
“Constitutional law used to be the aristocracy of some legal faculties,” he says, “but I think that, more recently, areas like corpo­rate law have come into their heyday. They have more dynamic change and more intellectual growth, in terms of merging law and economics, whereas constitutional law is still a doctrinal field without a new intellectual foundation coming in for it.”
For Prof. Coffee, a segment of many afternoons is devoted to being wired in the Law School’s TV newsroom for an inter­view with MSNBC, CNN, and other national networks. When he returns to his office, it is often to find a message to call a newspaper reporter. (A recent Lexis search showed that he’d been quoted in The New York Times at least 236 times.)
He keeps his hand in many of the big litigations of the day, often as a consultant to the law firms involved. And he appears as an expert witness from time to time. Judges and jurors appreciate his lucid, accessible conversation style.
“You want to persuade and convince people,” says Prof. Cof­fee. “You don’t want to show, ‘I know more theory than anyone else.’ That’s the danger of the academic.” ■