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Posted on 09/17/2002 5:59:34 AM PDT by Libloather
SEC plans new rules for lawyers
Tue Sep 17, 7:43 AM ET
Greg Farrell USA TODAY
Up or out: That's the question.
A battle is brewing between the Securities and Exchange Commission and the corporate law community over the simple but significant difference between those two words.
Right now, lawyers who uncover evidence of financial fraud at companies they work with are obligated to report that fraud up the ladder to management. But if management ignores their warnings or worse, is participating in the fraud, corporate attorneys are not supposed to report their findings out to government regulators like the SEC.
The SEC, empowered by the recently passed Sarbanes-Oxley Act, plans to change that.
Newly appointed SEC Commissioner Harvey Goldschmid said earlier this month that ''this absolute emphasis on confidentiality where ongoing fraud is involved is incomprehensibly out of balance.''
The Sarbanes-Oxley Act requires the SEC to adopt by February rules regarding what lawyers should do. The old rules governing lawyers' obligations to report fraud were originally approved in 1983 by the American Bar Association.
Industry rejected changes before
Efforts to change the ABA's policy -- to allow lawyers to report misdeeds to outside regulators -- were voted down in summer 2001 over concerns that such a policy would breach the sacred confidentiality of the lawyer-client relationship.
''I think the ABA action was a mistake, and I said so at the time,'' says E. Norman Veasey, chief justice of the Delaware Supreme Court, who proposed the rule change. But since the ABA shot down that ''reporting out'' change to its rules last year, a lot has happened:
* Enron, the energy-trading giant, imploded after revelations that it hid hundreds of millions of dollars in off-balance-sheet entities approved by auditors at Arthur Andersen and blessed by attorneys at the law firm Vinson & Elkins.
Andersen was found guilty of obstruction of justice after a June trial in Houston, but the government has not charged Vinson & Elkins with any crimes.
However, a class-action lawsuit filed by Enron shareholders accuses Vinson & Elkins and another law firm, Kirkland & Ellis, of being complicit in Enron's schemes. Both firms have denied those accusations.
* Deceptive accounting practices at WorldCom, Global Crossing and Qwest inspired Congress to pass the Sarbanes-Oxley bill, creating an oversight board with jurisdiction over the accounting industry. During debate over the bill, some senators said that lawyers should also be held accountable when they don't force clients to face up to fraudulent activity.
* Manhattan District Attorney Robert Morgenthau charged Mark Belnick, former chief corporate counsel at conglomerate Tyco International, with falsifying business records to conceal $14 million in loans that he made to himself. Belnick pleaded not guilty on Thursday.
''The criminal charges against Belnick may be as significant as any charges brought to date arising out of Enron, WorldCom and other big cases,'' says Jacob Frenkel of Smith Gambrell & Russell.
''Regulators recognize that the most important gatekeepers are the lawyers and accountants,'' Frenkel says. ''The Andersen indictment and conviction shattered the glass for auditors. The charges against Belnick bring the lawyers into focus.''
If the ABA doesn't act, the SEC will
In response to some of these developments, the ABA is now considering changing its rules to allow lawyers to report wrongdoing to outside regulators.
''Post-9/11 and post-Enron, we may be looking at a different construct,'' says Alfred Carlton Jr., ABA president. ''The standards of social and moral conduct may be changing to the point where there's a need for expanded disclosure.'' An ABA task force is currently hearing testimony on the matter.
SEC Chairman Harvey Pitt also raised the specter of forced disclosure in a speech to the ABA in August. But Goldschmid's comments, made in a speech to a corporate governance convention in Madison, Wis., appeared to turn up the heat on the ABA. According to a source at the SEC, Goldschmid has said that he wants the ABA to act on its own, but if it doesn't, the SEC will propose rules governing lawyers' behavior.
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