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Rein In Company Lawyers

September 23, 2002

Lawyers must remember that shareholders, not the corporate executives who sign their paychecks, own the company. It's a distinction that some lawyers have forgotten and one that the Securities and Exchange Commission must heed as it creates standards of professional conduct for securities lawyers.

Lawyers were in the room when corporate executives, board members and accountants created the unsavory environment that led to Enron's implosion and the subsequent wave of corporate scandals. Some of the nation's most prestigious law firms played a role in destroying the credibility of the financial markets by looking the other way or by signing off on dubious, at best, legal opinions.

Some lawyers argue that federal standards would jeopardize attorney-client privilege. Others cite the potential for conflicts of interest. But it's doubtful that conflicts of interest will arise or that attorney-client privilege will be breached if lawyers remember whom their clients are. As Sen. John Edwards (D-N.C.) has said, it's time to confront lawyers who "get to thinking that playing squash with the CEO every week is more important than keeping faith with the shareholders every day."

Lawyers long have maintained that the profession can police its ranks with voluntary standards. But simply hoping that lawyers will do the right thing isn't enough. Federal prosecutors this month alleged that Tyco International's chief corporate counsel falsified business records to conceal $14 million in company loans used to buy homes.

Allegations of criminal activity by lawyers are just part of the problem. Investors also must be confident that lawyers are not using their legal acumen to craft opinions that fill the letter of securities law but hide potentially damaging information.

The American Bar Assn. maintains that its voluntary rules, which form the foundation for most state bar review panels, will do the job. The SEC has for years referred questionable activity by lawyers to state bar committees for review and sanctions. But during a recent speech, SEC Chairman Harvey L. Pitt told the ABA he was "not impressed or pleased" by the response when disciplinary cases are referred to state bar groups.

The SEC owes shareholders a tough set of standards that focuses on ethical behavior. Simply meeting minimum legal requirements is no longer enough.

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