BEHAVIORAL LEGAL ETHICS LESSONS FOR CORPORATE COUNSEL.

• Author: Schaefer, Paula
• Position: 2018 Leet Business Law Symposium: Fiduciary Duty, Corporate Goals, and Shareholder Activism

CONTENTS INTRODUCTION I. CONSCIOUSLY HELD CONCEPTIONS AND MISCONCEPTIONS OF A LAWYER'S DUTY WHEN ADVISING A CORPORATE CLIENT ABOUT ITS (POSSIBLY) FRAUDULENT OR CRIMINAL PLANS II. BEHAVIORAL LEGAL ETHICS EXPLANATIONS FOR WHY ATTORNEYS MAY NOT ADVISE AGAINST CORPORATE CLIENT CRIME AND FRAUD A. The Role of Attorney Self-Interest B. Obedience Pressure C. Conformity Pressure D. Partisan Bias III. INFLUENCING BETTER CORPORATE LEGAL ADVICE THROUGH THE LESSONS OF BEHAVIORAL LEGAL ETHICS A. Interventions to Combat a Corporate Attorney's Wrongful Obedience and Conformity B. Priming Corporate Advisors to Protect the Corporation from Liability C. Educating Lawyers About Debiasing Techniques D. Serious Consequences for Attorneys Who Fail to Protect Corporate Clients from Crime and Fraud Liability CONCLUSION INTRODUCTION

Attorney Timothy Muir served as inside general counsel, and later outside counsel, for Scott Tucker's payday loan business. (1) Tucker's payday loan enterprise, which did business under various names, (2) charged customers illegal interest rates of 600 percent and higher. (3) Loans were set up to automatically renew--a fact that was misrepresented in the required Truth in Lending Act (TILA) forms. (4) The loan payment plans resulted in a $300 loan costing a consumer $975, though the TILA forms represented it would cost $390. (5)

In an effort to escape prosecution and consumer class actions, Muir and Tucker entered transactions with Indian tribes to create the appearance that the tribes owned and operated the payday loan business. (6) The government described Muir as "the architect" of these transactions. (7) The goal was that the payday loan business would avoid liability because the tribes, as sovereigns, would not be subject to state civil and criminal usury laws. (8) In reality, the tribes would play no actual ownership role; they were well-paid for entering the "ownership" agreement and keeping a company computer on the reservation. (9)

Tucker and Muir misrepresented the tribes' interest in the business both in court filings and in interactions with customers. (10) To keep up the charade that the tribes actually owned and operated the business, Tucker and Muir went to elaborate lengths to create a fake record. (11) For example, payday loan employees working in company offices in Overland Park, Kansas were told to lie about where the company was located and were even given weather reports for the places where the tribes were located in case the weather came up during small talk on the phone with customers. (12)

Ultimately, their plan was unsuccessful. The Federal Trade Commission obtained its largest civil court judgment to date--$1.3 billion--against Scott Tucker and AMG Services, Inc. (13) Tucker and attorney Timothy Muir were charged with and convicted of conspiracy to collect unlawful debts, collection of unlawful debts, wire fraud, money laundering, and Truth in Lending Act (TILA) violations--all related to collection of usurious interest on payday loans. (14) Attorney Timothy Muir was sentenced to seven years in prison, (15) while Scott Tucker was sentenced to sixteen years and eight months. (16) As this Article goes to press in 2019, both Muir and Tucker have appealed their convictions. Their cases are pending before the Second Circuit. (17)

The field of behavioral legal ethics can provide insight into the thinking behind the advice that corporate attorneys like Muir provide or fail to provide their corporate clients. (18) Traditionally, legal ethics education has focused on the law governing lawyers. (19) Professional responsibility courses and required attorney ethics continuing legal education classes deal primarily with professional conduct rules and the law of professional liability. (20) The thinking behind this educational approach is that if lawyers know the law, they will act consistent with their ethical and legal obligations. (21)

Behavioral legal ethics adds the perspective of behavioral science to the study of legal ethics. (22) Behavioral science research explains that biases, heuristics, and situational factors can have a powerful influence on ethical decision-making that operates outside of a person's conscious awareness. (23) Thus, behavioral legal ethics provides a new lens through which to view and understand attorney decision-making.

This Article draws on legal ethics and behavioral science to explain what the corporate advisor should do, as well as what we have reason to believe he may do, when faced with a corporate client's misguided-but potentially lucrative--scheme. Part I starts with the corporate lawyer's consciously held conceptions and misconceptions about duty owed to her corporate client when company executives propose a plan that will create substantial liability for the company--when and if it is caught. This Part focuses on the legal ethics piece, without the behavioral science perspective, and discusses not only what the lawyer should know but what many falsely believe about their duty.

Then, Part II turns to behavioral science and highlights some of the key factors that corporate attorneys are unconsciously influenced by as they try to decide how (or if) to address client conduct that may amount to a crime or fraud. This discussion moves from attorney self-interest, to obedience and conformity pressure, and concludes with partisan bias. While numerous other biases, heuristics, and situational factors can subtly impact any person's decision-making, (24) these are some of the most salient influences for the corporate advisor. Both the consciously held beliefs and unrecognized influences can combine to lead a well-meaning corporate attorney astray. Research reveals that many will fail to advise against corporate misconduct, and some will even become enthusiastic participants in that misconduct.

It is against this backdrop that Part III considers which interventions could lessen the risk of corporate attorneys providing poor advice to company agents on the brink of liability-creating conduct. Again, drawing on legal ethics and behavioral science, this discussion suggests the pressure points--from priming to education--that are most likely to result in positive changes in attorney advice. The Article concludes with thoughts on what corporate attorneys can learn from the Muir case and behavioral legal ethics in order to provide better advice to their corporate clients.

1. CONSCIOUSLY HELD CONCEPTIONS AND MISCONCEPTIONS OF A LAWYER'S DUTY WHEN ADVISING A CORPORATE CLIENT ABOUT ITS (POSSIBLY) FRAUDULENT OR CRIMINAL PLANS

   An attorney advising a client about planned future conduct has the legal obligation to help a client understand the prospect of legal liability arising from that conduct. As a fiduciary, an attorney's duty of care obligates the attorney to provide the advice that a competent lawyer would provide under the circumstances. (25) The lawyer's legal duties as an advisor are also embodied in professional conduct rules. These rules remind attorneys of the obligation to provide candid advice and to exercise independent professional judgment. (26) The rules further explain that it is the lawyer's obligation to advise against conduct that is criminal or fraudulent. (27) The attorney's role is to help the client understand the civil and criminal liability that will be incurred if and when the conduct is detected--the lawyer should not weigh the possibility of non-detection or profitability of misconduct. (28)

   Providing a client with information about the risk of liability allows the client to make an informed decision about future conduct. (29) Conventional wisdom is that, in most cases, the client will follow the lawyer's advice and thereby avoid liability. (30) But regardless of how the client decides to proceed, the lawyer is legally and ethically prohibited from facilitating a client's criminal or fraudulent conduct. The law of attorney liability provides that an attorney can be held criminally liable for participation in a client crime (31) and civilly liable for participating in client fraud and client breach of fiduciary duty. (32) Moreover, attorney professional conduct rules require that an attorney withdraw from a representation rather than participate in a crime or fraud, (33) inform the client that the lawyer cannot participate in criminal and fraudulent conduct, (34) and take steps to ensure that the lawyer's services are not used to facilitate a fraud. (35)

   When the client is an organization (rather than a natural person), the lawyer-advisor is obligated to protect the client from itself (i.e., take steps to thwart the client's plan to engage in conduct that will create liability for the client). While a lawyer should try to dissuade a natural person from liability-creating conduct (and has tools at her disposal that may help convince the client), (36) the client is free to make a bad choice. (37) That is not the case for a lawyer's corporate (or other organizational) client. (38) The lawyer's duties of competence and loyalty are owed to the corporation and not to the agents who speak on its behalf. (39) Thus, when those agents plan to engage in criminal or fraudulent conduct that will create liability for or to the organization, the lawyer should not defer to those agents and should instead take steps to protect the corporation from liability. (40) Those steps include taking the matter to higher authorities in the organization (41) and even going outside of the organization when doing so will protect the corporation from liability. (42)

   A common misconception of the corporate advisor's role is that he should be a zealous advocate of any plan that is arguably within the bounds of the law. (43) This is the attorney advisor's "zealous advocacy misconception." The origin of this misconception undoubtedly is the ubiquitous description of lawyer as zealous advocate that can be found in pop culture, (44) the writings of legal ethics...