With all the financial and corporate scandals in the past weeks, it should come as no
surprise that our representatives have taken action. But as usual the means is
controversial. I won't agree that this administration is just producing bad legislation
since 9/11, because after all it's not the executive that legislates but the legislature,
the people we elect to Congress. Moreover, maybe there is a tendancy to just legislate
badly in an election year especially when the country is evenly divided.
The new law, known as the "The Corporate Responsibility Law" or "The
Sarbanes-Oxley Act of 2002," was signed by President Bush on Tuesday. Ok, the end
result of the law is good. It is meant to stomp out corporate wrongdoing. However, the law
requires in-house and outside lawyers to report evidence of corporate wrongdoing to
their client companies’ boards of directors. This will greatly impact the Rules of
Profesional Conduct already governing lawyers. One of the pillar of our democracy is our
legal sysytem, and one of the cornerstones of our legal system is the Attorney-Client
privilege/the confidentiality of client information.
The new law requires attorneys to report evidence of a material violation of securities
law or breach of fiduciary duty to the company’s general counsel or chief executive
officer. If the general counsel or CEO does not appropriately respond to the evidence, the
lawyer must report the incident to the company’s board of directors or audit board.
The rule will be administered by the Securities and Exchange Commission, and the law
mandates that the agency establish new professional standards for lawyers.
Currently, lawyers are not permitted under the Rules of Professional Conduct to
reveal information relating to the representation of their client unless the client
consents after consultation, except for disclosures that are impliedly authorized in order
to carry out the representation, and except as stated in paragrapg (b). Paragraph (b)
gives two general categories when the information may be revealed. 1) To
prevent the client from committing a criminal act that the lawyer believes is likely to
result in imminient death or substantial bodily harm; or 2) to establish a claim of
defense on behalf of the lawyer in a controversy between the lawyer and
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the client, to
establish a defense in a criminal charge or civil claim against the lawyer based upon
conduct in which the client was involved, or to respond to allegations in any proceeding
concerning the lawyer's representation of the client. ABA Model Rule 1.6
But lawyers are split on the effects of the new statute. Some fear a chilling effect on
client communications, but others applaud the legislation.
Some think the law will prevent employees and executives from seeking information from
counsel. Some worry that lower-level management will respond to the law by not seeking
advice because the expectation they will have is that the lawyer will immediately turn
around and tell the CEO or general counsel.
What will happen when a lawyer is working on due diligence or a transaction, the
success of which may have a material impact on the financial condition of the company,
when he/she is not dealing with the CEO on a day-to-day basis? When he/she is dealing with
someone below that? Well many think a chilling of communications.
On the other hand, many are not so worried. They believe we need a system where
officers, directors, employees and companies feel very comfortable seeking in-house legal
advice and that it would be a terrible mistake to ever cut that off. Like Michael
Roster, a past chair of the American Corporate Counsel Association, they believe based on
what they understand about the legislation, that it does not change much of that at all.
The new law was mostly written by Sen. Paul Sarbanes, D-Md.,. The bill passed in
the House on July 26, with a 423-3 vote. A few hours later, the Senate approved it 99-0.
In the end this is what we have a law responding to the recent corporate bankruptcies and
stock market fall-offs. A law designed to make it harder for executives to mislead
investors about company performance. All this is EXCELLENT. And before you run off
thinking I am too protective of the profession I am about to enter, I just want to
say that I think there are drafting issues with the law. Then again this is nothing new,
there is usually drafting issues with any legislation. With time, as the court
interprets this new legislation we will have a better picture of when a lawyer should
report alleged wrongdoing and how much evidence is enough. Yes, lawyers will argue that
the new law is vague and not quite what the legislature intended.
In the meantime there will just be more jobs for lawyers as
lawyers will also need other lawyers to defend them. OK, OK!!!! Let me not by too
cynical because the law also creates an oversight board for the accounting industry,
quadruples penalties for accounting fraud and sets up a restitution fund for wronged
shareholders. In addition, it advances the statute of limitations for investor lawsuits
from three to five years after the fraud occurs, and from one to two years after the fraud
is discovered. |
