Am I My Brother's Keeper? Redefining the Attorney-client Relationship

• Jurisdiction: United States,Federal
• Citation: Vol. 32 No. 4 Pg. 11
• Pages: 11
• Publication year: 2003

32 Colo.Law. 11 Colorado Lawyer 2003.

2003, April, Pg. 11. Am I My Brother's Keeper? Redefining The Attorney-Client Relationship

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Vol. 32, No. 4, Pg. 11

The Colorado Lawyer
April 2003
Vol. 32, No. 4 [Page 11]

Articles

Am I My Brother's Keeper? Redefining The Attorney-Client Relationship
by Herrick K. Lidstone, Jr

Herrick K. Lidstone, Jr., Englewood, is a shareholder of Burns, Figa & Will, P.C. - (303) 796-2626. He also is a gubernatorial appointee to and past chairman of the Colorado State Securities Board of the Department of Regulatory Agencies

Section 307 of the Sarbanes-Oxley Act of 2002 imposes obligations on attorneys to protect the integrity of their corporate clients. The Securities and Exchange Commission recently has adopted rules implementing Section 307, which require attorneys to act in ways that may be inconsistent with their state ethical obligations. This article discusses Section 307, the new rules, and the problems they may create for Colorado attorneys "appearing and practicing before the Commission."

In 1994, the U.S. Supreme Court, in the case of Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.1 determined that accountants, attorneys, trustees, and others could not be held liable for aiding and abetting clients in violating securities laws. At that time, this author concluded2 that the case would

provide some relief to attorneys, accountants, and other professionals who advise persons engaged in securities transactions. The case will not be a panacea for professional negligence, however. Professionals must continue to perform their duties competently and in accordance with rules of professional practice. Nevertheless, Central Bank does make clear that such professional advisors do not guarantee their clients' honesty and business acumen.3

In July 2002, as a result of numerous corporate and accounting scandals that have plagued the public market commencing in the summer of 2001, Congress adopted the Sarbanes-Oxley Act4 ("Sarbanes-Oxley" or "the Act") in an effort to legislate morality and honesty in the financial markets.5 Although much of Sarbanes-Oxley imposes additional regulation on auditors, public companies and their directors and executive officers, and securities analysts, § 307 of the Act also requires the Securities and Exchange Commission ("Commission" or "SEC") to define "minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers." In § 307, Congress required that, not later than January 26, 2003, the Commission adopt a rule

1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); and

2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.

Senator John Edwards (D-NC), himself an attorney, offered § 307 by amendment on the Senate floor "to protect investors from unprofessional conduct by lawyers, conduct that violates the legal standards of the profession."6 Discussing the amendment on the Senate floor, co-sponsor Senator Michael Enzi (R-WY), an accountant, explained:

[P]robably in almost every transaction there was a lawyer who drew up the documents involved in that procedure. . . . [T]here ought to be some kind of an ethical standard put in place for the attorneys as well. . . . Maybe it could be called the "smell test." If something smells wrong, somebody who can do something to fix it ought to be told.7

In their remarks, Senators Edwards and Enzi assumed that violations of the securities laws, breaches of fiduciary duty, and other "similar violations" were easily identifiable. In practice, as corporate practitioners know, they are not. Such violations are more easily determined using 20/20 hindsight; even then, they are frequently identified in shades of gray.

This article discusses the rules the Commission adopted under § 307 ("§ 307 Rules") and their meaning to the attorney-client relationship. The article also discusses the conflicts between the § 307 Rules and the Colorado Rules of Professional Conduct ("Colorado Rules" or "Colo.RPC").

THE SEC's POSITION ON

ATTORNEY CONDUCT

In addition to being advocates for their clients, the Securities and Exchange Commission has, from time-to-time in the past, considered attorneys to be gatekeepers for corporate integrity. However, even the Commission considered these efforts to be inconsistent with the attorney-client relationship. These issues have been addressed in two seminal cases discussed below.

The SEC's Interpretation

In 1978, in Securities and Exchange Commission v. National Student Marketing Corp.,8 the Commission brought an action against attorneys for National Student Marketing Corp., who issued a legal opinion when they knew that the financial statements forming a basis for the transaction were "grossly inaccurate" and failed to show the true condition of the company. The court found that the attorneys' silence concerning the "obvious materiality" of the financial statements lent an "appearance of legitimacy" to the transaction that breached the attorneys' duty to address the erroneous financial statements with their client.9 The U.S. District Court did not accept the Commission's position that the attorneys' duty to disclose (or to withdraw in the face of the client's refusal to disclose) went beyond the corporate client.

The Commission further considered this issue in 1981 in In re Carter and Johnson.10 Carter and Johnson were attorneys for the National Telephone Company ("NTC"). The Commission took action against NTC under SEC Rule 102(e), the Commission's rule that permits it to sanction attorneys, accountants, and others who practice before it. In March 1979, an administrative law judge suspended Carter from practicing before the SEC for one year and Johnson, for nine months, because of their client's failure to disclose certain adverse facts in a press release and a report filed with the SEC. The administrative law judge concluded that the attorneys knew of the disclosure requirement but "failed to carry out their professional responsibilities with respect to [ensuring disclosure] to all concerned. . . ."11

On review, the Commission overturned the sanctions, holding that the record did not support a finding that the attorneys aided or abetted their client's violation. As a result, the Commission moved away from a negligence standard for Rule 102(e) proceedings:

We do hold, however, that a finding of willful aiding and abetting within the meaning of Rule [10]2(e)(iii) requires a showing that respondents were aware or knew that their role was part of an activity that was improper or illegal. . . . It is axiomatic that a lawyer will not be liable as an aider and abettor merely because his advice, followed by the client, is ultimately determined to be wrong. What is missing in this instance is a wrongful intent on the part of the lawyer.12

For the legal community, the most important part of Carter was found in dicta, interpreting Rule 102(e)(ii), which the SEC refused to apply retroactively:

The Commission is of the view that a lawyer engages in "unethical or improper professional conduct" under the following circumstances. When a lawyer with significant responsibilities in the effectuation of a company's compliance with the disclosure requirements . . . becomes aware that his client is engaged in a substantial and continuing failure to satisfy those disclosure requirements, his continued participation violates professional standards unless he takes prompt action to end the client's noncompliance.13

The Commission did not specify the steps that an attorney must take in these situations, but did suggest that a "direct approach to the board of directors or one or more individual directors or officers may be appropriate." All the Commission actually required, however, was that the attorney take "some prompt action that leads to the conclusion that the lawyer is engaged in efforts to correct the underlying problem rather than having capitulated to the desires of a strong-willed but misguided client."14

The Commission proposed a rule to adopt the Carter standard, but retreated in light of deep opposition from the legal community. Commentators were concerned about the attorney-client privilege, the attorney's obligation of confidentiality, and other ethical principles. In the end, Edward F. Greene, then the Commission's general counsel, advised the New York County Lawyers' Association that, unless there were exceptional circumstances, the Commission would not use administrative proceedings under Rule 102(e) to discipline an attorney for aiding and abetting his or her client in violating the securities laws. He also stated that the Commission would address these issues in federal court or by referral to state disciplinary bodies and that the Commission did not intend to adopt standards regulating the professional practice of attorneys.15

In the twenty years since Greene's statement, the SEC never instituted proceedings to discipline attorneys for failure to take an action to prevent a client's...