The SEC has freaked out the assembled corporate lawyers of America by pointing out that there is a difference between maintaining attorney-client privilege so you can provide your client with a fair defense on the one hand, and becoming an accessory in large-scale on-going corporate fraud on the other. The SEC's action is, I think, a very hopeful sign on the corporate control front. Now we will see just how much lobbying clout the assembled corporate lawyers of America have as they try to stop it.
Posted by DeLong at January 09, 2003 08:58 AM | TrackbackWSJ.com - Proposed Rule Could Turn Lawyers Into Whistle-Blowers: ...Despite a high-powered lobbying campaign by corporate lawyers, the Securities and Exchange Commission is moving toward approving a new regulation that some lawyers say would compel them to blow the whistle on clients. A majority of the five commissioners is currently leaning toward instituting some form of "noisy withdrawal" requirement, according to people familiar with the matter. That rule would require a lawyer who sees evidence of a client company committing a "material" securities-law violation -- and is unable to get the company's board to stop it -- to quit and inform the SEC that he is quitting for "professional considerations."
The proposal, which arose from last year's wave of corporate scandals, has elicited a chorus of criticism from law firms, bar associations and corporate lawyers, who contend that it would severely damage the attorney-client relationship. "It paints a target on your client," says Lawrence J. Fox, a Philadelphia securities litigator who has represented lawyers accused of wrongdoing. "It's clearly a dramatic breach of confidentiality. It would make the lawyer into a regulator." Congress ordered the SEC to enact a new professional-conduct rule for lawyers in last year's Sarbanes-Oxley Act, which called for stricter rules to enforce corporate governance. The most controversial of a long slate of regulations required by the bill is a directive to adopt rules "setting forth minimum standards of professional conduct for attorneys" practicing before the SEC. Those rules, Congress said, should require outside and company lawyers to report "evidence of a material violation" of securities laws by a company "up the ladder" to senior executives or the board...
My TV-derived legal knowledge is that attorneys are 'officers of the court' and are obligated to report crimes, no?
Posted by: Matt on January 9, 2003 09:30 AMIn a related, remarkable and relatively unremarked development, Judge Harmon laid down a groundbreaking cornerstone of liability theory with respect to "deep-pockets" professional collaborators.
http://www.chron.com/cs/CDA/story.hts/special/enron/1711427
"U.S. District Judge Melinda Harmon denied motions to dismiss from J.P. Morgan Chase, Merrill Lynch & Co., Barclays, Citigroup, Credit Suisse Boston and CIBC, as well as those from Houston law firm Vinson & Elkins and former Enron auditor Arthur Andersen."
The pre-Xmas decision and supporting opinion breaks new ground, but is said to be meticulously argued on accepted principle and precendent.
If "people respond to incentives", this is big. The collateral damage could also be extensive.
Posted by: RonK, Seattle on January 9, 2003 09:33 AMDear Ronk -
Please do explain further.
Posted by: on January 9, 2003 12:20 PMResponding to Matt -
The lawyer's ethical line is drawn between past and future crimes. If he tells me, "I did it", its priviledged and I have to keep my mouth shut. If he tells me, "I'm going to do it" I, as an officer of the court, have the obligation to drop a dime on him.
It is standard practice to make this distinction clear to clients (on a hypothetical basis, of course) so that even the dumbest of them doesn't put his lawyer in the unfortunate position of having to squeal.
I assume that any SEC rule in this vein will focus on improper actions that would lead to future crimes.
Posted by: Rod, Esq. on January 9, 2003 01:15 PM
Thanks Rod....
Posted by: on January 9, 2003 01:59 PM2 questins re this topic from a wireless engineer, anybody know? (Thanks in advance).
(!) I understand that there is a problem with Sarbanes-Oxley in terms of specificity. This could be a future liability for an SV start up or chip maker pitching for funding.
Asking w/future industry health concerns in mind.
*********
2. I have the projected productivity and experience curve information that you, Brad, I belive were was looking for. As directly impacted by the expected collapse in bandwidth (bit per second) pricing in the next 24 months.
Parallel to the collapse of transistor prices in the last 30 years 100M-fold down to 7/millionths of a cent.
Created the core opportunity for everything from the PC itself, INTC microprocessor advances, to software to intellectual capital creation --> and the huge impact on ptoductivity you write about.
Is there a general email here to send the info to you?. May be helpful given the productivity wizardry here.
Eric
Posted by: Eric on January 9, 2003 03:38 PMNot exactly.
A lawyer may not reveal any privileged information regarding a past crime. With respect to future crimes, he (1) may not aid the client in the commission thereof, and (2) he may--but need not--report a client contemplating a crime that would cause physical harm to a person. With respect to economic crimes, while he still may not aid the criminal, he may not violate privilege. As a result, a "noisy withdrawal" is the typical remedy. The most commonly cited case for this involves a husband and wife drafting a joint will, where the husband asked the lawyer privately to help him set aside some his estate for a mistress. Interesting decision.
Posted by: Joe on January 9, 2003 03:44 PMIn a related, remarkable and relatively unremarked development, Judge Harmon laid down a groundbreaking cornerstone of liability theory with respect to "deep-pockets" professional collaborators. ... The pre-Xmas decision and supporting opinion breaks new ground, but is said to be meticulously argued on accepted principle and precendent.
The decision, which I read on the plane over Christmas, keeps one law firm off the hook and lets the other off. Why? One was alleged to have assisted in preparing allegedly misleading
public statements; the other just did plain-vanilla legal work (setting up corporate entities, drafting contracts, etc.). That's the important distinction.
Those who have posted a lawyer's ethical responsibilities forget one thing: the SEC has now determined that it makes the rules, and that the tradition of rules handed down by a court, after consultation with the bar, with due respect for precedent, is at an end.
The requirement that a lawyer make a noisy withdrawal is completely inappropriate, and ultimately will engender a great deal of suspicion between corporate clients and their lawyers. It will not lead to better disclosure but instead to a division of labor, so that no one law firm will know everything the client is doing. (One for accounting vehicles, another for securities disclosure, and yet another for securities defense, with the last knowing everything, but only after the fact.)
Posted by: Thomas on January 9, 2003 06:56 PM
I agree with Thomas. I don't understand what lawyers have done to prompt this proposal, which strikes me as a misguided response to the problems with the accountants. Lawyers must not lobby as well in Washington.
Preferred stocks are not going to be tax exempt, nor are REIT stock dividends. Bonds, of course, are not tax exempt. Awful, awful, awful.
Posted by: on January 10, 2003 01:54 PM