December 16, 2002
Securities and Exchange Commission
Re: File No. 33-8150.wpDear SEC Officials:
This comment letter about Release 33-8150 (“Release”), 67 Fed. Reg. 71670, is intended principally to support the concept inherent in the rules proposed as 17 CFR Part 205 that lawyers are not merely hired guns, but they, “as guardians of the law, play a vital role in the preservation of society.” (Preamble to ABA’s 1969 Code of Professional Responsibility, “CPR.”) I specifically support Section 205.3(d) and (e) -- the proposed mandatory “noisy withdrawal” to signal future or past but ongoing illegality, the proposed permissive “noisy withdrawal” to signal past but not ongoing illegality, and the permissive disclosure of confidential client information to prevent illegality or to rectify the consequences of illegality that was furthered by the lawyer’s services. I assume that those proposed provisions will produce considerable opposition from lawyers who will claim, mistakenly, that those provisions violate traditional core values of the legal profession and sacrosanct attorney-client confidentiality doctrines. I intend here to refute such claims.
My observation, based on considerable research, is that the present hired gun culture of American lawyers was born shortly before, and was codified in, the ABA’s 1983 Model Rules of Professional Conduct (“Model Rules”). Prior to that time, American lawyers had recognized their duty in the public interest to prevent client crime and fraud and to rectify such if committed during their engagement, as exceptions to their general duty of confidentiality.
The Release, in the text linked to footnote 73, quotes passages from the ABA’s 1908 Canons of Professional Ethics, Canons 37 and 41, reflecting the public interest exceptions to confidentiality. And those public interest exceptions were continued in the CPR, at Disciplinary Rule (“DR”) 4-101(C)(3) (“A lawyer may reveal: (3) The intention of his client to commit a crime and the information necessary to prevent the crime.”) and in DR 7-102(B)(1), quoted below, requiring disclosures to rectify client fraud committed during the lawyer’s engagement. By mid-1973, 46 states had adopted the CPR, mostly without alterations.
In the early 1970’s, the SEC took some highly visible enforcement actions against prominent law firms and lawyers for failing to act consistent with applicable law and the public interest exceptions to confidentiality under the CPR. For background, see the penultimate paragraph of Frederick D. Lipman’s November 27, 2002, comment letter on the Release. In the interests of its members, the ABA’s Corporation, Banking and Business Law Section then assumed a leading role in analyzing, interpreting, and revising the profession’s ethics rules on client confidentiality. In 1973, that Section’s chairman, Donald J. Evans, formed a 35-member Committee on Counsel Responsibility and Liability (“Don Evans Committee”), which he himself chaired until 1981 when W. Loeber Landau became its chairman. During that time, committee rosters were published in the prefatory pages of the November issues of The Business Lawyer.
One of the first projects of the Don Evans Committee was obtaining the adoption by the ABA House of Delegates of a formal Statement of Policy regarding responsibilities and liabilities of lawyers in advising with respect to the compliance by clients with laws administered by the SEC. The House of Delegates did so on August 12, 1975. The recommended and adopted Statement of Policy included the following passage that still recognized the lawyer’s traditional duty to disclose future as well as past client crime and fraud committed during the representation:
“4. Lawyers have an obligation under the CPR to advise clients, to the best of their ability, concerning the need for or advisability of public disclosure of a broad range of events and circumstances, including the obligation of the client to make appropriate disclosures as required by various laws and regulations administered by the SEC. In appropriate circumstances, a lawyer may be permitted or required by the Disciplinary Rules under the CPR to resign his engagement if his advice concerning disclosures is disregarded by the client and, if the conduct of a client clearly established his prospective commission of a crime or the past or prospective perpetration of a fraud in the course of he lawyer’s representation, even to make the disclosures himself.” (emphasis added)The brief Report of the Don Evans Committee and the Council of the Corporation Section to the ABA House of Delegates supporting their recommended Statement of Policy included the following passage that recognized the lawyer’s duty, under certain circumstances, to report client illegality to third parties:
“This [attorney-client] relationship is undermined to the extent that client communications with lawyers are made with the risk that the lawyer will, if not satisfied with the client’s response to his advice or if concerned over his own potential personal liabilities, report possible deficiencies to third parties. Accordingly, it has long been recognized by the Code of Professional Responsibility (“CPR”) and its predecessor Canons of Ethics that only in the clearest cases of illegal or fraudulent activities by a client in the course of the lawyer’s representation should the lawyer be called upon or permitted to take such action.” (emphasis added)The Statement of Policy and the supporting Report are reprinted both at 31 Bus. Law. 543 (November 1975) and at 100 ABA Annual Reports 999 (1975).
When that Statement of Policy was presented in the 1975 Annual Meeting of the ABA House of Delegates by the Corporation, Banking and Business Law Section, a motion was made on behalf of the Board of Governors to defer action on it until the 1976 Midyear Meeting, but that motion was defeated, after which the Statement was adopted as the Corporation Section had recommended it. The proceedings of that meeting, demonstrating the widespread support of the Statement, were recorded as follows:
“Donald J. Evans of Massachusetts, a former Chairman of the Section, informed the House that he had created a Section committee when he was Chairman to consider the matter and that the Committee had the benefit of advice of liaison representatives of other interested ABA sections, including the Sections of Local Government Law, Insurance, Negligence and Compensation Law, Public Contract Law, Antitrust Law, Public Utility Law, Administrative Law, Probate and Trust Law, and Taxation. In addition, the Standing Committee on Ethics and Professional Responsibility had maintained a liaison relationship with the Section committee. Copies of the recommendation had been sent to nearly every other section and committee of the Association. Mr. Evans indicated that the only replies which had been received were favorable. Therefore, he opposed the Board’s recommendation for deferral. Mr. Evans’ remarks were supported by former President Robert W. Meserve of Massachusetts [who later served on the Kutak Commission and became its Chair upon Robert Kutak’s death in January 1983], who spoke in opposition to deferral and in favor of adoption of the recommendation.100 ABA Annual Reports 665-68 (1975). The chair of the ABA Ethics Committee, Lewis H. Van Dusen, Jr., served on the Don Evans Committee from its formation in 1973 until at least 1982. He served on the eight-member ABA Ethics Committee from August 1969 through July 1978 and as its chair from August 1974 through July 1978. See ABA Annual Reports for those years, listing committee members.
Forty-nine days after the Statement of Policy was approved, the ABA Ethics Committee issued its highly controversial (as discussed below) Formal Opinion 341 (September 30, 1975), interpreting the “except clause” amendment to DR 7-102(B)(1) that the House of Delegates had approved 18 months earlier, at the February 1974 Midyear Meeting. That 1974 amendment had been recommended by the ABA Ethics Committee as one of eight “housekeeping” amendments presented without explanation and approved without debate. 99 ABA Annual Reports 166 (1974). As so amended in February 1974, DR 7-102(B)(1) read:
“A lawyer who receives information clearly establishing that: (1) His client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal, except when the information is protected as a privileged communication.” (the “except clause” emphasis is added)The Don Evans Committee’s full Report in the July 1975 issue of The Business Lawyer (Vol. 30, Pg. 1289, 1296) specifically analyzed the amended DR 7-102(B)(1) in the context of clients’ past or future violations of the securities law, stating:
“[A] clear violation of the securities laws, if known to the lawyer, would probably invoke the application of DR 7-102(B)(1), unless protected by the last clause thereof, which protects confidential communications. This clause was added in 1974, apparently to avoid conflicts with the applicable state law concerning the attorney-client privilege. . . . Thus, if the attorney-client privilege under state law does not prevent a lawyer from disclosing his client’s prospective crime or fraud or crime or fraud perpetrated during the course of representation, the addition of the 1974 exception clause would not have any effect in reducing the required disclosures because such information would not be protected by the attorney-client privilege.The Don Evans Committee’s 1975 interpretation of the 1974 “except clause” amendment to DR 7-102(B)(1) reflected input from Lewis Van Dusen, its liaison to the ABA Ethics Committee that had drafted that amendment and had caused its adoption by the ABA House of Delegates. On October 3, 1974, Mr. Van Dusen had participated in a panel discussion titled Responsibilities of Lawyers Advising Management moderated by Mr. Evans at the ABA National Institute titled Advisors to Management–Responsibilities and Liabilities of Lawyers and Accountants, the proceedings of which were published in 30 Bus. Law. Special Issue 13 (March 1975). During the panel discussion, in response to Mr. Evans’ request for background on the 1974 “except clause” amendment, Mr. Van Dusen stated (Special Issue at 20):
“MR. VAN DUSEN: The Committee on Ethics and Professional Responsibility suggested this change, which has been very controversial. The SEC people are unhappy about it, and perhaps it was suggested without full consideration. But the thought was that the privilege with respect to confidential communications and secrets was so fundamental that we ought not to put a lawyer in the position of being required by the Code to divulge confidential communications if the state law provided that he couldn’t do so.Of more significance in explaining future actions of the ABA Ethics Committee were Mr. Van Dusen’s remarks from the panel discussion on the interpretative approach to be followed by the ABA Ethics Committee under his then commencing chairmanship (Special Issue at 29):
“MR. VAN DUSEN: It seems to me that it is very important for the Bar as a whole, for the Corporation Section as a group, to make known their views, if they have got a view that they can express as a unit, to the Bar Association as a whole, because it will assist the Committee on Ethics in interpreting the Canons. We don’t wish to go interpreting the Canons in a fashion that is totally different from that put forth by the experts -- and you are the experts! ” (emphasis added)To the astonishment of many, and contrary to Mr. Van Dusen’s prior statements, on September 30, 1975, the ABA Ethics Committee issued its Formal Opinion 341 interpreting the except clause of DR 7-102(B)(1) as barring disclosure of not only confidences protected by a state’s law of attorney-client privilege, but also as barring disclosure of secrets – information unprotected by a state’s law but likely detrimental to a client if disclosed. DR 4-101(A). The effect of Formal Opinion 341, according to commentators, was to render DR 7-102(B)(1) a nullity, to effectively repeal it. E.g., Charles W. Wolfram, Client Perjury, 50 S. Cal. L. Rev. 809, 820 (1977). ABA Formal Opinion 341 may have marked the first instance of what scholars commenting critically on the Model Rules later called “defensive ethics,” meaning “ethics” rules interpreted or written by the organized bar principally for the purposed of shielding its members from liability to governmental agencies and to third parties.
In the Release, you invite interested persons to comment on whether the SEC should leave certain matters of public interest to the ABA and state bar associations to address. Any public official contemplating such deference should first read law professor Ted Schneyer’s extensively researched article titled, Professionalism as Bar Politics: The Making of the Model Rules of Professional Conduct, 14 Law & Social Inquiry (formerly Journal of the Am. Bar Found.) 677 (1989)(hereafter “Bar Politics”). In researching and writing the article, Professor Schneyer indicated, at 679:
“One of my aims is to advance an ongoing policy debate on the extent to which courts and administrative agencies should defer to the ABA when they adopt rules to govern the lawyers practicing in their jurisdictions.”Bar Politics details the overwhelming extent to which special interests and self-interests -- as opposed to public interests -- shape the product, like the Model Rules, when there is a de facto delegation of public lawmaking to private groups such as the organized bar groups. Illustrative of the disregard for public interests, the president of the American Trial Lawyers Association, one of the private groups that actively and successfully opposed the Kutak Commission’s proposed confidentiality provisions wrote, “We have rejected one concept that the Kutak Commission apparently espouses, that lawyers have a general duty to do good for society that often overrides their specific duty to serve their clients.” Theodore I. Koskoff, Preface to The American Lawyer's Code of Conduct (1982).
Several attempts since 1983 have been made to restore the traditional public interest exceptions to a lawyer’s duty of confidentiality (including the Ethics 2000 Commission’s attempt noted in footnote 68 of the Release), but at the ABA House of Delegates those attempts have been defeated based upon organized campaigns asserting that lawyers owe no duty to the public and that lawyers would face increased liability exposure to victims if their ethics rules restored the public interest exceptions to confidentiality.
While the ABA’s Cheek Task Force on Corporate Responsibility’s July 2002 Preliminary Report (noted in the Release linked to footnotes 7, 40, and 72) affords some hope for the full restoration of the public interest exceptions to lawyer confidentiality, a possibly more promising sign came from the Conference of Chief Justices <http://ccj.ncsc.dni.us/> adopting, on August 1, 2002, Resolution 35 In Support of Rule 1.6(b)(2) and 1.6(b)(3) of Ethics 2000. It reads as follows:
WHEREAS, there is national concern for the need to incorporate integrity, public trust and responsibility in the conduct of agents and advisors of corporations and other organizations in the light of the unexpected and traumatic failures in recent months of several large American corporations; and
WHEREAS, the adoption by state courts and by the American Bar Association (ABA) of clear and firm ethical principles and Model Rules of Professional Conduct governing the role of lawyers as advisors to corporations will strengthen the public’s confidence in corporate integrity;
NOW, THEREFORE, BE IT RESOLVED that the Conference of Chief Justices expresses its support of the recommendation of the ABA Commission on Evaluation of the Model Rules of Professional Conduct (Ethics 2000) in its Report 401 submitted to the ABA House of Delegates with respect to Rule 1.6(b)(2) rejected by the ABA House in August 2001, that would permit the lawyer to reveal “information relating to the representation of a client to the extent the lawyer reasonably believes necessary to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyers services;” and
BE IT FURTHER RESOLVED that the Conference likewise supports the recommendation of Ethics 2000 in its proposed Rule 1.6(b)(3) that would similarly permit the lawyer to “reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary . . . to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services.”We can hope that the respective Chief Justices of the highest court of each state and other U.S. jurisdiction, with their judicial colleagues, will adopt for their own jurisdiction’s lawyers confidentiality rules implementing the Ethics 2000 recommended public interest exceptions without awaiting prior adoption (which may never happen) by the ABA and their own jurisdiction’s organized bar, but such leadership cannot be assured. In 1985, the supreme court of my own state of Washington adopted a version of the Model Rules that, as modified and recommended by my state’s bar association, did not include any of the Model Rule’s official comments (such as those supporting a “noisy withdrawal” as noted in footnote 62 of the Release), did not include Model Rule 1.13 (Organization as client), and did include the American College of Trial Counsel’s version of Model Rule 3.3 (elevating duty of confidentiality over duty to rectify fraud on a tribunal) that the ABA House of Delegates even had rejected (Bar Politics at 722).
I note that the Release is proposing conduct standards for lawyers that resemble those proposed in 1978 by the Institute for Public Interest Representation, then affiliated with Georgetown University Law Center, as described in Harvey L. Pitt, The Georgetown Proposals, 36 Bus. Law. 1831 (1981) (“Georgetown”). In 1979 and 1980, the SEC rejected those two proposals due in part to deference to the ABA’s then pending Model Rules project. Georgetown at 1835 and 1837; Bar Politics at 699 and 706.
I also note that the ABA House of Delegates’ rejection in February 1983 of the Kutak Commission’s public interest confidentiality exceptions and adoption of nearly absolute confidentiality rules led former prosecutor Senator Arlen Specter, fearing the new Model Rules would create “a haven for white-collar criminals,” to introduce in Congress a bill that would have turned the Kutak Commission’s disclosure provisions into lawyers’ duties under federal criminal law. Bar Politics at 713. Lawyer’s Duty of Disclosure Act. S.485, 98th Cong., 1st Session (1983). History has shown Senator Specter’s concerns to have been well-founded.
Given the history of the last 25 years, I believe it would be irresponsible for the SEC (and Congress) to defer to the ABA and the state bars and supreme courts on important standards of professional conduct for attorneys, such as the prevention and rectification of illegality that is likely to substantially harm investors, including pension plan beneficiaries. That history shows lawyers as having too great a willingness to serve as hired guns rather than as guardians of the law and protectors of society. See, e.g., William H. Simon, The Kaye Scholer Affair: The Lawyer’s Duty of Candor and the Bar’s Temptations of Evasion and Apology, 23 Law & Soc. Inquiry 243 (Spring, 1998).
Thank you for considering these comments.
Douglas A. Schafer