[PEN-L:33671] coercive asymmetric information

["Ian Murray" <seamus2001@xxxxxxxxx>]

washingtonpost.com
Lawyers as Stool Pigeons?
SEC May Force Attorneys to Blow Whistle on Corporate Clients

By Kathleen Day
Washington Post Staff Writer
Thursday, January 9, 2003; Page E01


A Virginia lawyer who learns a client is about to shoot someone must
tell the police, the idea being that preventing physical harm is more
important than honoring the hallowed notion that what a client tells his
attorney is confidential.

Now the legal community is battling a plan that would require that same
lawyer to alert regulators if a corporate client is about to inflict
financial harm, such as inflating profit.

Under current ethics rules, lawyers would not be obligated to blow the
whistle on their business clients. But the Securities and Exchange
Commission could change that, under a proposed rule that would require
lawyers to tell the SEC about problems that companies refuse to fix.

"Why shouldn't lawyers have to report that to the SEC? Because lawyers
aren't policemen," said Susan Hackett, general counsel for the Corporate
Counsel Association, the trade association for full-time, in-house
company attorneys.

"Clients have to feel free to bring dirty laundry or problems or
questions to their lawyer," Hackett said. "When a client doesn't know if
the lawyer might take something to a regulator, the client is not likely
to tell the lawyer anything significant."

The SEC, which regulates the nation's securities markets and publicly
traded companies, proposed the rule last fall. It must issue a final
rule by Jan. 26 to comply with anti-fraud legislation Congress passed in
July in response to a string of recent corporate scandals.

In the legislation, the Sarbanes-Oxley Act of 2002, Congress told the
SEC to set standards of professional conduct for in-house and outside
attorneys who advise public companies. The law says the standards must
at least require lawyers to report problems all the way up an
organization, even to the board of directors if need be, until the
problem is corrected.

This "up-the-ladder" reporting requirement suffices to fulfill the
mandate set by Congress, business and lawyer groups have argued in
letters to the SEC. These groups include the American Bar Association;
the Securities Industry Association; the Business Roundtable, which
represents chief executives at the largest U.S. companies; financial
services firm J.P. Morgan Chase & Co.; and mutual funds and investment
companies.

If a company fails to take corrective action, then an attorney should
stop representing the company, they say. But they argue that lawyers
shouldn't be forced to take two additional steps that the SEC's proposal
would require. Those steps would be for lawyers to notify the SEC that
they no longer represent the company and to make clear which documents
filed with the SEC -- such as an annual report -- they believe are
"tainted" or no longer accurate.

These two steps amount to what the business community calls a "noisy
withdrawal." In theory it raises a red flag without forcing lawyers to
give authorities specifics about what their clients divulged in
confidence, law professors say. Critics of the SEC's proposed rule,
however, say its practical effect would be to turn lawyers into police
who, by raising an alert, would be betraying their clients. That's
because alerting the SEC to a problem usually leads to an investigation
by the agency, they say.

The legal community argues that this will make clients unwilling to
speak freely. That, in turn, will make it hard for lawyers to advise
clients on how to comply with securities law, because they might not be
given all the facts.

Hackett and others argue that even if a lawyer learns that a company's
annual report contains misleading statements, the lawyer's obligation is
to alert the company, not the SEC.

Critics also object to a federal agency imposing national conduct codes
on states, which traditionally have set professional standards for
lawyers based on model codes attorneys write for themselves. Hackett
describes it as the "nose under the camel's tent" that could lead to
more agencies seeking to turn lawyers into spies.

State laws generally say lawyers can't disclose what a client says in
confidence. Doing so can lead to professional sanctions, including being
disbarred. States generally allow an exception to prevent someone from
suffering physical harm. A handful of states, including Virginia,
require a lawyer to speak up in such instances; Maryland and the
District do not.

Forty-one states also allow -- but don't require -- an exception for
lawyers to go to regulators with a noisy withdrawal if they think a
client's actions will inflict economic harm on investors or others.

In its proposal, the SEC noted that "existing state ethical rules have
not proven to be an effective deterrent to attorney misconduct."

Supporters of the new rule say that is a good argument for change.
"Client confidentiality is important, but why should we protect
confidences of a client who is a cheater?" said Stephen Gillers, a
professor of legal ethics at the New York University School of Law.

David Becker, a former SEC general counsel now in private practice, said
there would be one certain outcome of the new rule. "There will be more
lawyers hired," he said. "Everyone will want someone else's opinion as
to whether their opinion is reasonable as they go up the ladder."