Changing Model Rule 1.6 is long overdue
By Richard W. Painter
A corporate client, let's say Enron, retains a lawyer to represent it in selling
securities to investors. The lawyer, after consulting with senior officers of
the client, drafts the necessary documents and files them with the Securities
and Exchange Commission (SEC). Then, shortly before the transaction is going
to close, the lawyer discovers that the client has made material misrepresentations
in documents filed with the SEC and distributed to investors. The client's senior
officers insist that the lawyer's duty to the client requires the lawyer to
stay silent and allow the client to close the transaction. The lawyer, they
say, may withhold further assistance, but may not disclose the fraud to the
SEC or to investors. Does the lawyer have a choice in this matter, or is the
lawyer forbidden to disclose what the lawyer believes is necessary to disclose
in order to prevent the client's fraud?
There is, for the most part, broad consensus on the answer to this question.
The Model Code of Professional Responsibility, which was endorsed by the ABA
from 1969 to 1983 as a model for state ethics rules, says that yes, the lawyer
may disclose. Ethics rules currently in force in more than 40 states provide
that the lawyer may disclose. Under SEC rules, promulgated pursuant to a 2002
Congressional mandate, the lawyer may disclose. Many senior partners of securities
law firms would also insist that yes, a lawyer should be allowed to disclose
information necessary to prevent a client from committing a crime or fraud (particularly
a fraud likely to expose their law firm to liability). The common law governing
the attorney-client evidentiary privilege also is clear on this point: disclosures
made by a client to a lawyer for the purpose of facilitating a crime or fraud
are not privileged and may be disclosed. There is apparently widespread agreement
on the view that, while the lawyer is not required to disclose, the lawyer is
allowed both to threaten the client with disclosure if the client will not desist
with the fraud, and, if necessary, to disclose information required to prevent
Since 1983, however, the ABA's House of Delegates has refused to go along with
this common sense consensus approach to a difficult problem. Rule 1.6 of the
ABA Model Rules of Professional Conduct prohibits a lawyer from disclosing client
confidences with very few exceptions. Client consent is one of them (consent
is obviously hard to get from a client bent on fraud). Another exception is
disclosure of information necessary to prevent death or serious bodily harm.
Model Rule 1.6 also allows a lawyer to disclose a client's confidences if necessary
to defend the lawyer's position in a dispute between the lawyer and client,
for example if the client refuses to pay the lawyer's fee. The client's intent
to commit a financial fraud, or an ongoing financial fraud by the client, however,
is not among the exceptions in Model Rule 1.6. The lawyer may not disclose.
It is no secret why the ABA changed its position on this issue in 1983. The
SEC had in several high profile cases in the early 1980s made known its displeasure
with lawyers who assist clients with securities fraud. The ABA House of Delegates
apparently believed that the way to deal with this problem was to provide securities
lawyers with "cover" in Rule 1.6 by prohibiting them from disclosing a client's
intent to commit a financial crime.
Whenever the SEC claimed that a lawyer could have done more to prevent a client
from defrauding investors, the lawyer could argue that ethics rules tied his
hands. Lawyers thus can collect large fees for representing clients in financial
transactions regardless of whether those clients violate securities laws, and
then insist that ethics rules prioritize preservation of client confidences
over protecting investors (but not over the financial interests of the lawyer
if the client refuses to pay a fee or sues for malpractice).
Although this rule is obviously self-serving, the ABA perhaps expected the
states to go along. With rare exceptions the states did not (California is one
of the very few states to prohibit disclosure of client confidences in order
to prevent a financial crime or fraud, and even California's rule is not modeled
on the ABA's Model Rule 1.6). New York, Illinois and many other states with
large financial centers have remained steadfast in allowing the lawyer to disclose.
A few states such as New Jersey and Florida actually require the lawyer to disclose
if necessary to prevent a financial crime. The ABA has thus opened itself to
ridicule by insisting on an extreme position that prioritizes the financial
interests of corrupt clients, and of lawyers in their fees, over the interests
Fortunately, two special committees appointed by the ABA the ABA's Ethics
2000 Commission and an ABA committee on corporate responsibility that issued
its report in 2003 have recommended bringing Model Rule 1.6 into line with
the majority consensus that a lawyer may, but is not required to, disclose information
necessary to prevent a client from committing a criminal act such as securities
fraud. It only remains for the ABA's House of Delegates to approve these revisions
this month and thus restore credibility to the Model Rules. Al-though the House
rejected similar proposed changes in 2001, many leading members of the bar are
now calling upon the delegates to approve the proposed amendments.
This change of heart will come too late to prevent federal pre-emption of state
ethics rules. Congress, after Enron and other scandals, lacked confidence in
existing rules' ability to prevent lawyer complicity in client fraud. Under
the Sarbanes-Oxley Act of 2002, securities lawyers representing issuers must
comply with detailed federal regulation telling them what they must, may and
must not do about client fraud. In at least some situations, however, states'
ethics rules still determine lawyers' professional obligations, for example
if a lawyer represents a party other than the issuer of securities or if the
issuer is not a public company.
For those of us who would prefer not to see further federal pre-emption of
state ethics rules, it is important that the ABA endorse a new Model Rule 1.6
that allows a lawyer to balance the interests of a corrupt client in confidentiality
against the interests of investors in not being defrauded. We can only hope
that the ABA House of Delegates, and after that the minority of states that
have followed Model Rule 1.6, will now do the right thing.
Richard W. Painter is the Guy Raymond and Mildred Van Voorhis Jones
Professor of Law at the University of Illinois College of Law.