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New law turns lawyers into informants

Diane Karpman

Lawyers are losing the power of self-regulation. Ethics rules are becoming federalized. The Sarbanes-Oxley Act of 2002 (aka - the accountants reform bill) is a monumental shift in the paradigm of entity representation.

The act subjects attorneys representing companies and accounting firms to new federal ethical standards that may conflict with existing rules issued by states. Section 307 requires the Securities and Exchange Commission to adopt new federal rules requiring that lawyers report management misconduct to the company's board of directors, and also requires it to draft new "minimum professional standards" for lawyers practicing before the agency.

This stealth legislation, initially intended for accountants, at the last minute gratuitously included lawyers in its ambit. It mandates that lawyers must report "evidence of a material violation."

Maybe the Rosetta Stone defines a "material violation," because uncertainty will cause some to err and report everything. Do we have to affirmatively ferret out WorldCom, ImClone, or Enron-ish activity, or become targets of non-client shareholder lawsuits?

Parts of the act are faintly reminiscent of our Rule of Professional Conduct 3-600 (Organization as Client). However, Rule 3-600 (B) requires that lawyers reconcile entity representation with the duty of confidentiality.

If corporate counsel "knows" some corporate agent intends to act to the detriment of the entity, the lawyer may attempt to dissuade the agent or to urge reconsideration of the conduct. This new legislation transforms lawyers into informants and assumes that they have not been urging reconsideration of corporate misconduct all along.

Thousands of corporate lawyers have gone to the mat and successfully dissuaded corporate misconduct. It is in their own interests for the entities to remain viable business enterprises. Remember, like other lawyers, corporate counsel are adverse to change. Fraudulent accounting practices cause bankruptcy, which results in lawyer unemployment.

How many corporations have had abrupt in-house counsel "transitions" or other unexplained departures? How many corporate lawyers live on Maalox or Tums, drugs designed to dissuade their gastrointestinal juices as they go up the ladder?

Obligations of full public disclosure were historically vested in accountants, whereas lawyers kept secrets. This is the reason attorneys could act as the voices of reason. Remember way back in the 20th century, there was an idea known as "multidisciplinary practice," where lawyers and accountants would form alliances?

It seems as if everyone has forgotten that the ABA and most lawyers rejected that concept. Yet, this sudden legislation takes lawyers to task and makes us the "whipping boys" of economic follies over which we have little if any control. The act is draconian because it presumes unethical activity. "Rather, the court should start with the presumption that, unless proven otherwise, law-yers will behave in an ethical manner." (DCH Health Services Corp. v. Waite (2002) 95 Cal. App. 4th 829, 834.)

Now, rogue managers and directors simply won't ask for legal advice, because the act transforms advisors and counselors into watchdogs.

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