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Lawyer-client confidentiality

Changing Model Rule 1.6 is long overdue

Richard Painter

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 the fraud.

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 of investors.

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.

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