- The Washington Times - Sunday, March 23, 2003

April may well be the cruelest month for lawyers practicing before the Securities and Exchange Commission; that is, if the Commission has its way with a new rule, set for adoption April 7, that many believe would strike a dagger to the heart of the attorney client relationship.
In enacting Sarbanes-Oxley, a nostrum intended to curb the notorious corporate excesses of the 1990s, Congress addressed the role of lawyers as decisionmakers in a highly regulated scheme of corporate governance involving outside directors, outside auditors and management.
The measure directed the SEC to promulgate rules requiring lawyers for corporate issuers of securities who became aware of possible violations of the federal securities laws, or breaches of trust on the part of the management, to report the facts "up the ladder" to the in-house general counsel; the chief executive officer; the audit committee of the board of directors; in some cases, a special committee consisting solely of outside directors or even the full board so the problem could be corrected and necessary remedial action taken.
Most lawyers for corporations had done this anyway, but the new statute provided bright-line guidance to a Bar beleaguered by the investigations of Enron, Tyco and WorldCom to cite but a few notorious examples.
The SEC was quick to publish a new rule implementing the new "up the ladder" reporting regime. It will become effective in August. Then, it went a step beyond anything authorized in Sarbanes-Oxley. Amazingly, it proposed an additional rule requiring all lawyers practicing before the SEC, who report a violation "up the ladder," and are not satisfied that their client is responding appropriately, to resign and notify the SEC that they were resigning for "professional reasons." The SEC called this a "noisy withdrawal" rule, but it is really a euphemism for "blowing the whistle" on the client.
The Bar immediately viewed the requirement that the lawyer "rat out" the client as undermining a relationship built on confidence, trust and zealous devotion to the client's interests. Its reaction was so strident and so negative that it drove the SEC to a fallback position.
Extending the time for comment on "noisy withdrawal," the commission floated as a "spoonful of sugar" an alternative proposal that would require the lawyer to resign, but would shift to the client the obligation of tipping off the SEC that the lawyer had resigned for "professional reasons." Of course, either formulation is equally obnoxious as the minute that the SEC got wind of the noisy withdrawal, it would obviously pressure the lawyer for the whole story information that would certainly intrude on the attorney client privilege.
The proposed rule would ride roughshod over state Bar rules which impose no obligation on the lawyer to report even a client's criminal activity, except that a lawyer may report to the authorities facts learned from a client that present an imminent danger to life or limb.
Only a minority of states permit the lawyer to report criminal activity involving a client's intended financial fraud. And all states limit severely the circumstances when a lawyer is required to withdraw, and even curtail the circumstances when a lawyer is permitted to withdraw paralleling the unthinkable situation where a surgeon withdraws from the case with the patient cut open on the operating table.
Although the SEC claims its rules trump state Bar rules regulating lawyers' ethical conduct, it is conceivable a lawyer might be disbarred for doing what the SEC would have him do. State grievance committees frown on lawyers who take action against their clients' interests or disclose clients' confidences without permission.
No court and no legislature in the United States has ever gone so far as to suggest a lawyer must, let alone may, "blow the whistle" on his client. A lawyer in private practice does not hold himself out as an enforcement arm of the SEC. The relationship of trust and confidence exists so the lawyer can advise as to how to bring client conduct in compliance with the requirements of law. The SEC rule would totally undercut this as no client would fully trust a lawyer who might be obligated to disclose confidences to the regulators.
Critics see the proposed rule as marginalizing the lawyer so he is not brought into the key discussions among corporate management where the lawyer will have a chance to intervene and prevent the client from acting contrary to law. And, this is certainly fair comment. The rule, moreover, contains a glaring loophole in that it imposes no similar obligations on either the attorney or the client under the circumstance where the lawyer is fired for pointing out alleged wrongdoing that the management refuses to remedy, as opposed to the situation where the lawyer is required to resign.
Certain securities law enforcers take the position that in the context of a public corporation, the client is the "investor" not the management that retained the lawyer. There is, therefore, in the mind of the regulator no compromise of the professional relationship if the lawyer blows the whistle. But this thinking is necessarily wrong. Does a lawyer for a corporation owe a duty to an investor who might also be a competitor seeking some advantage from confidential information?. And where does it end? Is a lawyer to share the client's confidence with holders of the company's debt whose interests are antagonistic to those of the stockholders? And even if the client is the investor, the client certainly is not the SEC.
None of these considerations appear to have swayed the unruly passions of an SEC hellbent on passing a new regime of tough regulations. Corporate lawyers see this as a "hinge moment" in the history of their profession, but they find themselves without much political support. Lawyers have long been an unpopular profession. Shakespeare's Dick the Butcher proclaimed in the play "Henry VI" that, "The first thing we do, let's kill all the lawyers."

James D. Zirin is a partner in the New York office of Sidley Austin Brown & Wood LLP.

LOAD COMMENTS ()

 

Click to Read More

Click to Hide