Commentary: The SEC's Plan Shouldn't Make Lawyers Squawk

By Mike France

Say a corporate attorney learns that his client is embezzling money to buy a Renoir or planning to boost earnings by selling the company's own oil refineries back to itself for a big profit. Under the law in 46 states, the lawyer has no obligation to reveal the wrongdoing.

Why? Sacred professional rules--notably attorney-client privilege--forbid lawyers from disclosing their customers' secrets. These restrictions are intended to assure people that they can be completely candid with their advocates. No other advisers--neither accountants, bankers, nor shrinks--can give clients such assurance. And no other country protects attorney-client privilege as vigorously as the U.S. does.

Revelations that lawyers behaved less than honorably in the recent corporate crime wave, however, have convinced the Securities & Exchange Commission that the rules must change. It has proposed requiring attorneys for public companies to quit if they believe their clients are committing a "material violation" of the law--and then inform the agency of their resignation. The new regulations must be voted on by Jan. 26.

This "noisy withdrawal" provision has produced near- apoplectic panic in the profession. While lawyers would not be asked to give the SEC any details about what their clients might be doing wrong, bar associations are warning that the attorney-client privilege will erode, and execs will lose trust in their counselors. "If somebody thinks you are going to expose them, they won't talk to you," says American Bar Assn. President Alfred P. Carlton Jr., who is lobbying against the new rules.

The lawyers' fears should not be taken lightly. Anyone who has ever been in a tight spot knows how reassuring it is to have a loyal defender in one's corner. But while it is important for lawyers to protect their clients, that is not their only obligation. They are also officers of the court who vow to uphold the law in a grandiose ceremony on the day they're admitted to the bar. The oath they utter with their arms raised isn't meaningless. At a certain point, attorneys have a social duty to prevent criminal CEOs from ripping off innocent investors.

The recent wave of scandals shows that the balance between client and social duty is way out of whack. Lawyers can now help managers find creative ways to ignore the law with almost no risk of punishment. At big firms, "the role of considerations of right and wrong has diminished," says Philip K. Howard, a litigator in the New York office of Covington & Burling. "Pressure is great to come up with the answer the client wants based on a technicality."

The SEC's proposed change will make lawyers think twice before blessing dubious tax shelters or trading strategies. And despite the ABA's hysteria, it won't subvert the legal system by making businesspeople too frightened to confide in their attorneys. The fact is, execs can't draft legal documents. They often have no choice but to talk to lawyers. In the four states where attorneys are already required to blow the whistle on wrongdoing--Florida, New Jersey, Virginia, and Wisconsin--there's no evidence that corporate officers shun attorneys. "The notion that the information flow to lawyers is going to dry up is a myth," says New York University School of Law professor Stephen Gillers.

A second critique of the noisy-withdrawal rule is that the SEC will be bombarded with resignation announcements. Every time a law firm disagrees with a client about a securities regulation, the argument goes, the feds will be notified, and investors will panic. That's unlikely. A lawyer is obligated to resign only after making, at minimum, a five-step determination that a (1) continuing (2) material violation is (3) probable, and that (4) the general counsel and (5) the board are ignoring it.

This thorough process will winnow out most conflicts between law firms and their clients and help ensure that aggressive managers don't go overboard. On the few occasions when officers disagree with outside attorneys--say, about the legitimacy of a tax shelter--they can be expected to have a solid legal rationale for their actions. And in that case, they should have nothing to fear from the SEC.

France used to work in a large corporate law firm.

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