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Lawyers' New Ethical Duties

September 02, 2003

Lawyers don't take kindly to other people telling them how to do their jobs. But in the aftermath of Enron and WorldCom, corporate scandals in which attorneys coached companies on what they could get away with, change is in order. They should be required to report corporate wrongdoing that threatens to destroy shareholder wealth and strip employees of their hard-earned pensions.

Congress has ordered the Securities and Exchange Commission to create minimum standards of ethical conduct for attorneys on the payroll of publicly traded companies.

The American Bar Assn., no doubt hoping to head off stricter rules, has voted to give corporate attorneys more freedom to alert top executives and board members about suspected fraud and other criminal acts.

That voluntary approach is not enough. The SEC should adopt a proposal that would require attorneys to resign if their top bosses and board members fail to correct significant breaches of securities law.

Lawyers counter that corporate executives may simply cut lawyers out of decision-making, and that the proposal would make them an arm of the law, shredding attorney-client confidentiality. But the rest of society also has rights.

Attorneys already have an ethical obligation -- and in many states are encouraged by their bar associations -- to alert authorities if they learn that a client threatens murder or serious bodily harm to another person. The same should go for finding corporate executives making phony deals to inflate revenue or otherwise put the company in harm's way.

The SEC's requirement that lawyers quit as a last resort is what's known as a noisy exit. Everyone will notice, including regulators, even if the lawyer stays silent. The SEC has delayed a decision on the rule until at least the fall, but the bar association and its state counterparts have made it clear that they oppose such a rule.

SEC Chairman William H. Donaldson said during a July 30 speech, "attorney conduct rules make it clear ... that when an attorney represents a corporation, his or her client is the corporation and not its management." That means ending the practice of "simply identifying a new line of legally acceptable behavior and how to maneuver the loopholes that accompany it," he said.

Attorneys who balk should remember what happened to the accounting profession, which was complicit in the corporate frauds and now answers to the Public Company Accounting Oversight Board.

It's unfortunate that the new rule may intrude on the client relationship, but disclosing a damaging fraud is not that different from warning police that a client has dispatched a hit man.

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