Federal Judge Acquits Glaxo Attorney

On May 10, 2011, Lauren Stevens, former associate general counsel for GlaxoSmithKline, was acquitted of six criminal charges surrounding allegations of obstruction and providing false answers to an FDA inquiry in violation of 18 U.S.C. 1519.

In November 2010, Stevens was indicted on four counts of making false statements, one count of obstruction of justice, and one count of falsifying and concealing documents related to GlaxoSmithKline’s off-label marketing of the anti-depressant, Wellbutrin. Last month, U.S. District Court Judge Roger Titus dismissed the charges after finding that prosecutors had given inaccurate and incomplete information to the grand jury about Stevens’ key defense--that she depended on the advice of counsel. However, the DOJ re-indicted Stevens after dismissal and the subsequent hearing ensued.

Steven’s case is noteworthy for several reasons. First, it raises concerns with in-house counsel that deal with federal government agencies, including those handling FCPA investigations or answering compliance-related questions from the DOJ, SEC, and FDA. Second, it involved an attorney safe harbor provision housed in federal statutes, which protects attorneys who rely on the advice of outside counsel. Finally, Ms. Stevens was not accused of taking part in the actual underlying wrongdoing, but was still charged in connection with the wrongdoing. This is unusual because “in most off-label drug cases, the government charges senior business executives, not attorneys” according to John Wood, former U.S. Attorney in Missouri.

Judge Titus’ ruling was equally unusual—in his tenure as a federal judge, he had never granted a directed verdict of acquittal before the defense presented its case—until now. In his opinion, Titus wrote, “I believe that it would be a miscarriage of justice to permit this case to go to the jury. There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

In coming to his decision, he stated, “it is clear that [Ms. Stevens’ statements made to the FDA] were made in good faith which would negate the requisite element [of specific intent to commit a crime] required for all six of the crimes charged in this case.” Moreover, “GlaxoSmithKline did not come to Ms. Stevens and say, assist us in committing a crime or fraud. It came to her for assistance in responding to a letter from the FDA.”

Titus said Congress designed the safe-harbor provision to protect an attorney who is zealously representing her client and “that vigorously and zealously representing a client is no a basis for charging an offense [of] obstruction of justice.” Titus concluded that Steven’s responses to the FDA “were in the course of her bona fide legal representation of a client and in good faith reliance of both external and internal lawyers for GlaxoSmithKline...[and] every decision that she made and every letter she wrote was done by a consensus.”

Accordingly, "I conclude on the basis of the record before me," Judge Titus said, "that only with a jaundiced eye and with an inference of guilt that's inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant."

Got Fraud? Delaware’s Corporate Paradise

It’s no secret why most corporations are incorporated in the state of Delaware or require claims against them to be brought in a Delaware court. Delaware is known for having notoriously lax standards for corporate behavior making the state courts very tolerant of corporate misconduct. In fact, the standards are so favorable to corporations, the directors and officers who played an integral role in the demise of Lehman Brothers may not be liable for their conduct because it is protected by the business judgment rule.

The business judgment rule affords limited judicial review of decisions made by the directors of a corporation under the presumption that they are acting on an informed basis, in good faith, and with an honest belief that the decisions made were in the best interest of the company. However, this presumption generally can be overcome by a showing that a director breached his fiduciary duty or a decision was a result of an irrational process. Therefore, the business judgment rule does not protect director decisions made in bad faith. In Delaware, however, the rule protects directors unless there is a showing that their actions rose to the level of gross negligence. Essentially, there is no remedy under Delaware law for nefarious conduct that is not so outrageous so as to be classified as grossly negligent.

Historically, and in most states, the business judgment rule applied only to directors of a corporation because they are held to certain fiduciary standards, unlike corporate officers. However, in a recent Delaware Supreme Court decision, Gantler v. Stephens, the state’s Supreme Court held that corporate officers and directors are bound by the same standard of fiduciary duties. Presumably, this extends the protection of the business judgment rule beyond directors to corporate officers. This conclusion is consistent with the findings of Anton Valukas, the court-appointed examiner of the Lehman Brothers bankruptcy.

Mr. Valukas penned a nine-volume, 2,200-page report on the company’s ruin. In his report, he notes the expansion of officer fiduciary duties and discusses the ramifications of Gantler, most notably, the larger umbrella of the business judgment rule in Delaware. As such, the conduct of Lehman Brothers’ directors and officers is likely insulated from liability because it does not rise to the level of gross negligence, despite alleged fraudulent transactions involving $50-billion in assets moving on and off its financial statements and the failure to heed to warnings from the company’s risk managers.

The business judgment rule and other protections from litigation for directors are necessary, but Delaware’s exceedingly lenient stance on corporate conduct may leave claimants without any recourse and provide even more incentive for companies to incorporate in Delaware.