In a world wallpapered with regulation, big companies can't avoid brushing up against the law from time to time. They inevitably hire a small cadre of people who cut corners, ignore procedures, and make deals with the devil. That's why managers are grateful for so-called attorney-client privilege -- the bedrock principle that forbids lawyers to reveal confidential communications with their customers. It's an essential component of our adversarial system -- a pledge that executives can confide in their lawyers and develop the best defense possible without fear that sensitive or incriminating secrets will leak out.
But now, this cornerstone of the American legal system is under attack. Angered by evidence that lawyers helped white-collar criminals rip off shareholders, the feds and the courts are starting to shoot new holes in the rule. In January, the Justice Dept. hinted that it would go easier on companies under investigation if they waived the privilege. In June, the Internal Revenue Service went to court to force the Dallas firm Jenkens & Gilchrist to name clients who used tax shelters that the agency is investigating. This fall, the Securities & Exchange Commission will begin weighing a proposal that could force lawyers who suspect wrongdoing, and can't make the company stop it, to resign publicly from a company's service -- a process known as "noisy withdrawal." Even the American Bar Assn. is ceding ground. On Aug. 11, in a divided vote, the ABA altered its ethics rules to allow lawyers to turn in their law-breaking clients.
All of this raises a scary question: Can you trust your lawyer with your secrets anymore? For the majority of executives, the answer is yes. Most of the day-to-day questions that executives ask about sexual harassment, workplace safety, intellectual property, and pollution regulations will remain as confidential as ever. But if you are implicated in the wrongdoing -- especially if a hot topic like tax evasion or securities fraud is involved -- then watch out. A new day has dawned. Your words may come back to haunt you in court. "Clients have to be aware that they are at very high risk of enforcement," says Keith Bishop, formerly California's top securities regulator and now a partner at Buchalter, Nemer, Fields & Younger in Los Angeles.
This is not entirely bad news. Rather than looking the other way when managers misbehave, lawyers are being called upon to be a moral compass for their clients, steering them through the gray area between aggressive practices and outright fraud -- and blowing the whistle when necessary. "It will force lawyers to take the blinders off," says Susan J. Hackett, general counsel of the American Corporate Counsel Assn.
But clearly, executives are going to have to tread more carefully with their attorneys. One area where the impact of the new assault will be felt is independent investigations conducted by outside lawyers after a company gets into hot water -- such as the one Wilmer, Cutler & Pickering performed for Enron (ENRNQ ) Corp.'s directors last year. While such probes were once off limits to federal prosecutors, investigators now target them as an easy source of information. The idea behind the policy shift: If Justice can get companies to turn over their own internal investigations, then prosecutors won't have to spend as much money probing white-collar wrongdoers.
Defense lawyers complain that Justice requests for waivers of attorney-client privilege are becoming more routine. That means that executives who cooperate with internal investigations may be putting themselves at risk -- a development that is likely to undermine future corporate probes. "The witness understands that he's basically speaking to the government," says former U.S. Deputy Attorney General Eric H. Holder Jr. "You're no longer the lawyer for the corporation. You are, in the view of the witness, an agent for the government."
Hoping to fend off further assault against the attorney-client privilege, the ABA has made a preemptive strike. After heated debate, the bar's delegates voted to rewrite their code of professional conduct. The new guidelines allow -- but do not require -- attorneys to break confidence with a client and report possible corporate fraud to law-enforcement officials. The move is in part an effort to show that the profession can police itself and that the SEC and the Justice Dept. need not attack the privilege. SEC Commissioner Harvey J. Goldschmid calls the ABA vote "constructive." Nevertheless, he asks, "should lawyers have less responsibility than corporate auditors and independent directors?" Both groups are required to report cases of securities fraud or embezzlement.
That's a good question. Attorney-client privilege -- like property rights, free speech, and due process -- has never been an absolute. It is an important value that must be weighed against other values. As the corporate crime wave illustrates, privilege has plenty of potential for abuse. Now it is being scaled back a bit. But unless you have really pushed the boundaries of the law, you can still trust your attorney.
By Lorraine Woellert
With Paula Dwyer in Washington