Forcing lawyers to blow whistle can't come too soon

…lurking behind every scandal is a lawyer, or a clutch of them, who get away scot-free. That's why reforms must deal with sleazy or unethical lawyers and that is the issue the U.S. Securities and Exchange Commission hopes to attack with its so-called "noisy withdrawal" rule…The legal profession's alleged self-regulation mechanisms have failed as badly as have those in the brokerage and accounting professions.

National Post
May 1, 2003

Forcing lawyers to blow whistle can’t come too soon
SEC's latest reforms must broaden the 'noisy withdrawal' provisions
Diane Francis

This week's US$1.4-billion settlement with Wall Street investment banks attacked only part of the problem.

Plenty of brokers, accountants and chief executives may be on their way to jail or financial ruination. But lurking behind every scandal is a lawyer, or a clutch of them, who get away scot-free.

That's why reforms must deal with sleazy or unethical lawyers and that is the issue the U.S. Securities and Exchange Commission hopes to attack with its so-called "noisy withdrawal" rule.

This SEC rule would compel both in-house attorneys and outside counsel, who discover misdeeds, to resign and report. If passed, it will mean lawyers can no longer turn a blind eye to misconduct within a company and hide behind ethical constraints involving client confidentiality and the like. Instead, they must alert senior management, and ultimately the company's board, to evidence of securities law violations.

"Noisy withdrawal" rules were part of the governance reforms contained in last year's sweeping Sarbanes-Oxley Act.

On Jan. 23, the SEC voted in favour of a watered-down version and required lawyers to report securities law violations "up the ladder" to top officers or the boards of their corporate clients. That was an important departure from past practice, in which lawyers were essentially allowed to sit on their hands.

But it also represented a weakened version of an earlier "noisy withdrawal" proposal, which required lawyers to take another step and resign and report the violations to the SEC if the executives or board failed to take corrective action.

So the SEC modified the proposal after lawyers in the United States reacted negatively. Attorneys claimed it was an intrusion into the confidential relationships between them and their clients.

But the point is that it's an intrusion only between attorneys and crooked clients who are not acting in the best interests of shareholders or society.

That's why the U.S. securities regulator is correct in reconsidering the measures.

After all, auditors are required to tell the world, and regulators, about concerns they may have with a corporation or bank's financials.

These are called "qualified statements" and, in Canada, following two scandalous bank failures in the 1980s, auditors must send letters to authorities and board members to tip them off about concerns.

Lawyers, on the other hand, are exempt from such obligations.

The fight going on between the SEC and the legal profession probably has little to do with the merit of the proposed reform and more to do with the fact that lawmakers are lawyers too and have a conflict of interest when it comes to curbing their own kind.

The legal profession's alleged self-regulation mechanisms have failed as badly as have those in the brokerage and accounting professions.

Like those other professions, they too should not self-regulate but have outside supervision, as accountants now do in Canada. There is no justification for lawyers not having to submit to the same reforms as other investment and business professionals.

This is also a matter of practicality.

If lawyers are exempt from whistleblowing, then scoundrels can conspire to steal money in some clever way in future and "buy" any number of legal opinions justifying their actions.

Once under investigation, they can escape scrutiny because any conversations or correspondence leading up to such a "papering" (as its called on the street) would be "privileged."

What's interesting is that the pressure by the legal fraternity is so powerful.

"Bowing to pressure, the SEC voted against adopting the provision in January," wrote U.S. legal magazine Corporate Counsel in its April issue.

"But commissioners didn't abandon the proposal entirely, instead offering it up for another 60 days of comment," Corporate Counsel continued. "They also added a new proposal, which includes several alternative forms of noisy withdrawal. Under one variation, an outside attorney could still be required to stop representing a lawbreaking company under certain circumstances. But the client, not the attorney, would be required to notify the SEC of the withdrawal. That duty would likely fall to in-house lawyers, because they typically oversee filings with the agency."

By shifting the reporting responsibility from outside legal counsel to inside counsel, the SEC allows lawyers to circumvent some ethical constraints in certain states and foreign countries, such as tax havens that have strict secrecy laws.

Furthermore, the SEC has proposed an alternative requiring the corporate client, rather than the attorney, to disclose publicly the attorney's withdrawal or to provide written notice that the attorney did not receive an appropriate response to a report of a material violation.

That would get around the confidentiality constraint.

Whatever form the changes take soon, they are long overdue.

And they should be adopted in Canada immediately.

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© Copyright 2003 National Post


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