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SEC Wants Attorneys to Stand Up to Companies' Misconduct

Lawyers assail rule to force securities counsel to quit in the face of persistent wrongdoing.

May 19, 2003|Jonathan Peterson | Times Staff Writer

WASHINGTON — "It is the duty of an attorney: . . . (e) to maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client."

California Business & Professions Code section 6068(e)


WASHINGTON -- First came tough new rules for accountants. Next, regulators unveiled steps to keep financial analysts on the straight and narrow.

Now -- and much to their discomfort -- it is the lawyers' turn for a new code of conduct.

In one of the final pieces of regulatory business inspired by Enron Corp. and other corporate debacles, the Securities and Exchange Commission wants to require lawyers to, in effect, blow the whistle on financial misconduct if a company refuses to fix it after repeated, in-house warnings.

Critics are using such terms as "Orwellian" to describe the proposal, which the SEC could vote on as early as this summer. The plan is drawing fierce resistance from the legal bar, which views it as an assault on attorney-client privilege -- the long-standing practice of keeping communications between attorneys and their clients confidential -- and an unnecessary federal incursion into a domain largely controlled at the state level.

The SEC proposal also may be prompting questions inside corporate boardrooms about the privacy of lawyer-client conversations that always have been considered secret.

"In my view this is not in the public interest," said Hayward D. Fisk, vice president and general counsel at Computer Sciences Corp. in El Segundo. The proposal could backfire, he warns, in effect taking "the lawyer out of the inner circle of senior executive deliberations."

Under the proposal, corporate lawyers who discover ongoing financial misconduct would be obliged to quit and report their resignation to the SEC. They would not have to disclose what they found, but the act of resigning could serve as a warning flag to federal investigators.

Although the rule wouldn't apply to every corporate attorney, it still would hit a significant segment of the bar -- those lawyers who advise companies in a broad range of matters involving the SEC, from routine quarterly reports to documents disclosing major financial events. It would apply to outside attorneys as well as to in-house counsel. An alternative SEC plan, which also has drawn criticism, would require companies to specify whether a lawyer quit for ethical reasons.

"How far they will intrude as a federal agency into the private self-regulation of this guild -- my profession -- is one of the largest questions on the SEC's current agenda," said John C. Coffee Jr., a law professor at Columbia University in New York.

The outcome, he added, is far from clear, given the bar's stiff opposition.

"It's still an open question whether there's going to be significant regulation of attorneys," he said.

The SEC proposal seeks to answer a question that regulators have asked for decades.

"Where were the outside accountants and attorneys?" U.S. District Judge Stanley Sporkin, a onetime SEC enforcement chief, asked in a 1990 ruling on the savings and loan crisis, the high-profile financial scandal of the time.

More recently, lawyers and other professionals have been accused of failing to sound the alarm on conflicts of interest, deceptive accounting practices, shady tax schemes and similar misdeeds at such firms as Enron and Global Crossing Ltd., among others. With that in mind, Congress called on the SEC to upgrade ethical standards for lawyers, accountants and financial analysts when it passed the Sarbanes-Oxley corporate reform bill in July.

Regulators have made clear their plans for accountants and analysts. Earlier this year, the SEC approved a new rule to enhance the independence of accountants from the firms they audit. This month, regulators and 10 big Wall Street firms approved a $1.4-billion settlement that aims in part to ensure that stock analysts provide honest research.

But coming to terms with lawyers has taken longer. In January, the SEC approved a new rule specifying that lawyers should report ongoing, serious financial violations up the corporate chain of command and, if need be, ultimately to the board of directors.

It held off, however, on the controversial whistle-blower requirement, a policy dubbed "noisy withdrawal." Regulators were still digesting a barrage of criticism from the legal and corporate establishment, including complaints from the American Bar Assn., Business Roundtable, American College of Trial Lawyers and the American Corporate Counsel Assn., as well as state and local bar groups.

One letter, signed by 77 law firms, warned that the SEC lacked congressional authority to impose such a rule. Attorneys voiced their concerns from as far away as Tokyo, Tel Aviv and Caracas, Venezuela.

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