- The Washington Times - Tuesday, January 28, 2003

As Adam Smith would have quipped, corporate lawyers seldom meet together or through the Internet, even for merriment or diversion, but the conversation ends in a conspiracy to elevate attorney-client confidences above disclosures to forestall financial frauds on the public.
Thus, the Securities and Exchange Commission last Thursday capitulated to brilliantly orchestrated attorney opposition to exposing ongoing or prospective financial deception perpetrated by well-endowed corporate clients. Unless the commission reverses course with alacrity, Congress should enact an attorney "whistle-blowing" obligation for corporate securities transactions. Fraud and massive bankruptcies would dip, investor confidence would climb, and Wall Street would celebrate.
"Where were the lawyers?" asked exasperated United States District Judge Stanley Sporkin in 1990 in presiding over Charles Keating's monumental financial juggleries in cahoots with attorney assistance. Had this professedly honorable profession no obligation to thwart rather than facilitate clear cases of business chicanery? None of the illegalities could have succeeded without lawyer complicity in drafting documents.
Years passed. No satisfactory answers were forthcoming. Little was done within the legal confraternity to confute the dripping derision that a hearse horse dances the polka when a lawyer's inside.
As might have been predicted like Al Capone's recidivism, Enron and cascades of sister frauds appeared a decade later mulcting public investors and fueled by lawyers and the traditional attorney-client privilege.
Fugitive light emerged from the Sarbanes-Oxley Act of 2002. It directed the Securities and Exchange Commission to issue rules calculated to end glaring conflicts of interest and attorney concealments that were the alpha and omega of prolonged corporate deceit. Thus, the commission proposed a rule last year that would have directed attorneys retained or employed by securities issuers to flag legally suspect corporate transactions to deter second and third editions of Enron. No federal judge would be again provoked to voice Judge Sporkin's lament.
The proposal provided that a retained attorney who reasonably believes his corporate client is guilty of ongoing or planned securities violations must: (1) withdraw from representation; (2) notify the SEC of the professional reason for the withdrawal; and, (3) disavow to the commission any opinion or document that the attorney facilitated that he reasonably believes is false or misleading. Parallel ethical obligations were imposed on attorney employees of corporate issuers.
The proposed rule did not stumble on novelty. Bankers are required to know their customers and to report suspicious activities to the government to foil money laundering and other crimes. The SEC proposal similarly demanded that corporate lawyers know their clients' transactions and to disclose to the commission cases where illegalities are reasonably suspected. Lawyers, moreover, unlike bankers, are professional apostles of law saddled with a moral duty to expose corporate wrongdoing at the expense of hapless investors.
No privileged attorney-client communications would be impaired by the proposed "noisy withdrawal" rule. The commission would be alerted to the attorney's belief that corporate violations were afoot (and focus its enforcement eyes accordingly), but not to the substance of any corporate communications to obtain legal advice.
Lawyers whined en bloc that corporations would resist consulting attorneys (and paying handsome fees) if reasonably believed fraudulent transactions or documents were unbosomed to the SEC. More rather than fewer violations would ensue because corporations would choose legal ignorance over the risk of attorney-inspired commission investigations and enforcement actions.
But that self-interested fretting is unpersuasive. Judge Sporkin, holding impeccable credentials as former director of enforcement at the SEC, has underscored that serious corporate transactions would be stillborn without attorney preparation of pivotal documents or opinion letters. A public offering of securities without legal advice is chimerical. Lawyers are gatekeepers of corporate access to financial markets or lenders. If they balk, no corporation passes. Just as banking customers did not dry up with the know-your-customer and suspicious-activities reporting rules, corporate clients would not flee from attorneys holding corresponding reporting obligations.
Additionally, the noisy withdrawal rule would arrest, not promote corporate securities violations. By rocketing the risk of detection and crippling enforcement actions by the SEC and defrauded investors, corporations would turn square disclosure corners.
Approximately 40 states permit, but do not require, attorneys to disclose confidential client information if thought reasonably necessary to expose crime or fraud in which the attorney's services were used. That risk of permissible attorney whistle-blowing, however, has neither plunged attorney employment nor increased corporate illegalities. That experience reinforces confidence that the SEC's proposed mandatory reporting rule would avoid the twin adversities speculated by its detractors.
Attorney-client confidentiality should ordinarily be left undisturbed. But every enlightened legal doctrine is a matter of degree. An attorney, for instance, would be a scoundrel for refusing to alert authorities of his client's guilt in a murder for which another was facing execution. With regard to corporate clients' securities transactions, the balance of competing interests tilts in favor of the SEC's proposed noisy withdrawal directive.
Do you think attorneys would be so shrill and uniform in opposition if corporate clients paid less lavishly?

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