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Attorneys Fear Being Turned Into Informers

Ethics: A provision in the reform bill would require company lawyers to report fraud. It could encourage investors to sue them.

July 26, 2002|LISA GIRION | TIMES STAFF WRITER

The corporate reform bill approved by Congress would require company lawyers to report evidence of wrongdoing to boards of directors, a big defeat for the American Bar Assn. and one that could open lawyers to something with which they are all too familiar: lawsuits.

Lawyers also are alarmed by broad language in the bill that they believe could be used to turn them into corporate snitches.

"This very much talks about making lawyers responsible for client conduct in a way that interferes very much with the lawyer-client relationship," said Philadelphia lawyer Lawrence J. Fox, a leading proponent of attorney-client privilege. "It turns lawyers into junior regulators, surveillance operatives, whistle-blowers."

The provision was added to the reform bill out of the belief that company lawyers are often aware early on of corporate conduct that could harm shareholders.

Legal experts on both sides of the bill said it represents an unprecedented incursion by a legislative body into the governance of the profession, which has historically been the domain of the high courts in each state.

Stephen Gillers, vice dean of the New York University law school and a legal ethics expert, said it makes sense to create national standards for lawyers who work with large, publicly traded firms. But he said the bill could be the beginning of a move toward national uniformity of rules on other types of legal work.

"I don't know if it's a first, but it's a significant effort by Congress to assume some responsibility for the regulation of lawyers, who are traditionally licensed at the state level," he said. "I worry about how wide that door will swing."

The bill also was seen as an erosion of the ABA's influence on states' codes of conduct.

"The ABA is worried it will no longer be the 900-pound gorilla, the only player on the block," Gillers said. "But that's a good thing. It's important to have many voices heard on these issues."

ABA President Robert E. Hirshon said the organization supports much of the bill and shares a desire to restore investor confidence. However, he said, some provisions open "a Pandora's box."

The idea that lawyers should report corporate wrongdoing to board members was introduced as a proposal to the ABA in 1998 by University of Illinois law professor Richard Painter. The ABA, which adopts model rules as examples for states to follow, rebuffed Painter.

After the Enron Corp. meltdown, Painter drafted a letter to the Securities and Exchange Commission recommending that the agency impose the rule on securities lawyers. This time Painter had the signatures of 40 law professors representing the most prestigious schools in the country.

The proposal would have required lawyers who work in and for corporations to report knowledge of securities law violations to management. If executives failed to take appropriate action, lawyers would have had to go over their heads to the board. The ABA objected, and the SEC declined to take action, deferring to Congress.

Then Sen. John Edwards (D-N.C.), a trial lawyer, took up the cause, winning approval for a version stricter than the one Painter presented to the SEC. Under the provision in the reform bill headed to President Bush, lawyers would be forced to report evidence--a lower legal threshold than "knowledge"--not only of securities violations but also of breaches of fiduciary duties, such as loyalty and care to the corporation.

Although the provision does not contemplate private litigation, it increases the prospects that aggrieved shareholders will sue a corporation's lawyers for damages on theory that they were aware of a problem but failed to act as required by the SEC, lawyers said.

"The great irony in this is the ABA has been very opposed to any attempt to scale back liability of anybody else but lawyers," Painter said. "They've been very aggressive on any attempt to cut back on punitive damages, to scale back on tort litigation. But when it comes to anything where somebody might be suing lawyers, it's a whole different picture."

ABA President Hirshon said the bill is flawed and may go beyond what Congress intended. "There may be a technical corrections bill that may be used to address some of the unintended consequences of the act," he said. "My bet and my fear is we're going to find them."

The introductory language to the Edwards' provision, for instance, commands the SEC to "issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys." That, Hirshon said, could allow the SEC to require lawyers to disclose information that is now protected by attorney-client privilege rules of the states.

Another provision that would create an accounting oversight board could allow the new agency to impose similar ethical rules on lawyers. The section intended to prevent accounting firms from auditing and consulting for the same company could prevent law firms from working for both an accounting firm and its auditing clients.

"This thing has been done really rushed and really harried," Hirshon said. "I understand the need to restore confidence. But there is a reason why when you start redrafting ethical rules, you need to go slowly. You've got to think it through and hear what the ramifications are."

The ABA is in a better position to consider rules for lawyers, he said. A special task force appointed by Hirshon released its recommendations this week for changes in corporate governance, including a re-examination of its model rule that permits, but does not require, lawyers to inform boards of corporate wrongdoing.

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