Elaine J. Mittleman, Esq.
2040 Arch Drive
Falls Church, VA 22043
Telephone (703) 734-0482
Fax (703) 734-0482
Admitted in the District of Columbia; Not Admitted in Virginia
December 18, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-45-02
Proposed Rule: Implementation of Standards
of Professional Conduct for Attorneys
Dear Mr. Katz:
I am submitting comments on the proposed rules implementing Section 307 of the Sarbanes-Oxley Act. Attached to this letter are the statements that I submitted to the ABA Task Force on Corporate Responsibility. Those documents are in Word format. I am sending under separate cover some other documents, including newspaper articles, pertaining to my statement.
I am aware of the strong comments by the bar about the "noisy withdrawal" and reporting provisions of the proposed rules. The purpose of this letter is to focus on the dilemma facing the attorney who believes she has the need to go up the ladder or raise concerns about possible material violations or breaches of fiduciary duty by the client.
The Sarbanes-Oxley Act was designed to address the corporate scandals and to restore public confidence in corporate governance and the financial markets. Proposed Part 205 addresses the mandate by Congress that the Securities and Exchange Commission ("Commission") adopt an "up the ladder" reporting system. The proposed rules also provide for "noisy withdrawal" and reporting of material violations to the Commission.
The first step in restoring confidence in the role of attorneys must be a more precise analysis determining which acts or failures to act by attorneys contributed to the corporate scandals. It appears that the vast majority of attorneys have acted ethically and well within the bounds of the law, as have their clients. Moreover, it is not clear that having a requirement that lawyers go up the ladder to report material violations - and then make a noisy withdrawal - would necessarily have prevented or limited the recent scandals. I believe that the primary failure of attorneys was that they were not motivated or sufficiently knowledgeable to detect the material violations, thereby triggering the reporting requirement. If attorneys do not keep up their antennae for ethical violations, they may not see them and thus have the duty to report them.
I submit that the culture of the legal profession is at the heart of the problem. The often-lamented transformation of our profession into a business may have caused a lessening of attention to the strictest ethical obligations. If an attorney raises substantive objections to the client's activities, the attorney could anger the client, lose the client or even lose her job (if she is an in-house counsel). In addition, it may be considered to be smart lawyering to advise or assist clients in "doing deals" that result in larger short-term profits or tax avoidance. What may be missing is the attorney as counselor and cautioner. What may look slick and innovative in the next quarter may end up bankrupting the company in the longer term.
I believe that the proposed rules do not adequately address these basic problems that attorneys face in today's practice. If an attorney does not perceive an activity as presenting a possible breach of fiduciary duty, but if the attorney instead willingly participates in that activity, then the reporting requirements will not be triggered and will be essentially meaningless.
The bar and the Commission should undertake a much broader endeavor to raise awareness of the ethical duties of attorneys and the harm caused when attorneys are acting with expediency as their touchstone.
Proposed Rules 205.3(b), (d) and (e)
These proposed rules concern up the ladder reporting requirements [Rule 205.3(b)], mandatory "noisy withdrawal" [Rule 205.3(d)] and permissive "reporting out" [Rule 205.3(e)]. I believe that the Commission should devote additional attention to encouraging ethical behavior in attorneys. There must be a more explicit statement that ethics do pay. The requirements set out in the proposed rules should be supplemented by the carrot of showing how ethical behavior will enhance the public good.
There must be adequate protection for attorneys who
face retaliation for complying with the reporting requirements.
There is a need to protect from retaliation attorneys who do engage in these various forms of reporting. From my perspective, one of the problems in today's legal profession is inadequate exercise of independent professional judgment by attorneys. There seem to be many sources of this problem, including the emphasis on billable hours, the hierarchical structure of law firms and the segmentation of responsibilities, so that each attorney may see only a portion of a transaction. In any event, there must be incentives and a change in the culture to encourage attorneys to speak out (in the ethically-proscribed manner).
If these rules take effect and attorneys are faced with additional reporting requirements, there must also be protections for those attorneys. Otherwise, an attorney who makes a "noisy withdrawal" may suffer the equivalent of career suicide. An ethical attorney should not be forced to face the trade-off of complying with reporting requirements (and consequently losing her job) or violating the Commission's rules.
I am urging that there be protection for attorneys because of my own experience. In my first job after graduating from the University of Michigan Law School, I worked in 1980 at the U.S. Treasury on the Chrysler Loan Guarantee program. My job responsibilities included monitoring Chrysler's submission of reports required pursuant to the loan guarantee. As Chrysler's finances deteriorated, Chrysler failed to submit the reports because they would show that Chrysler was no longer in compliance with the operating plan. After I raised concerns about the failure to receive the reports, I was fired from my position by Assistant Treasury Secretary Roger C. Altman. Shortly after firing me, Altman returned to investment banking in New York and had Chrysler as a client.
The reporting requirements and my termination were discussed in the media. See Ann Crittenden, "Treasury's Ousted Chrysler Critic," The New York Times, March 6, 1981, at D1; Andy Pasztor, "Chrysler to Get Additional U.S. Support Though It Hasn't Fully Met Prior Terms," The Wall Street Journal, February 26, 1981, at 2. In the New York Times article, Altman stated that I was "preoccupied with obtaining all of a multitude of reporting forms from the auto company, which he conceded were often submitted `quite late'." In addition to being terminated, I was the subject of false rumors, including that I had been caught in Altman's office by a security guard, looking for cover-up documents. I was also falsely accused of leaking to the press.
The situation in which I found myself is instructive. The reporting requirements placed on Chrysler were "deliberately onerous." See Robert B. Reich and John D. Donahue, Legal Times: The Chrysler Revival and the American System (1985), at pp. 198-200. Reich and Donahue explained that the reporting requirements served the purpose of irritating Chrysler executives, in part as a deterrent to other firms who might consider requesting government aid. Because the reporting requirements were meant to serve as a deterrent, it is not difficult to appreciate that the Chrysler executives, with the assistance of Altman, tried to avoid complying with them. I put my position at risk by insisting that the reports be submitted.
There is a much better appreciation now than at the time I was fired that employees may suffer retaliation if they speak up. It is also recognized that the employees may be targeted as troublemakers or worse. It must be appreciated that attorneys often find themselves in high-pressured situations when careers and large amounts of money are at stake. Therefore, the attorney who must make an ethical objection or block a desired transaction will face great pressure to be compliant.
I have been involved in litigation concerning my Treasury experience since 1986. There have been published opinions, including Mittleman v. United States, 997 F.Supp. 1 (D.D.C. 1998); Mittleman v. U.S. Department of Treasury, 919 F.Supp. 461 (D.D.C. 1995); and Mittleman v. United States Treasury, 773 F.Supp. 442 (D.D.C. 1991). I can assure the Commission that pursuing litigation after having been fired is not an effective way to redeem one's career.
At the hearing of the ABA Task Force on Corporate Responsibility held in New York City on October 25, 2002, Dean Stephen Gillers made the point that attorneys should be protected from retaliation and mentioned the wrongful discharge cause of action. However, I do not believe that the possibility of a retaliatory discharge lawsuit is suitable protection for attorneys. From my experience, facing litigation about termination is an extremely painful and burdensome undertaking. If attorneys are expected to report material violations or make a "noisy withdrawal," they should then not be forced to conduct onerous litigation in the hope of salvaging their career.
Proposed rule 205.3(d)(4) permits but does not require an attorney who reasonably believes he or she has been discharged for reporting evidence of a material violation to notify the Commission. This provision was added because of the experience of a Florida attorney who was fired after taking his concerns about his company's accounting practices to top executives. Section 806 of Sarbanes-Oxley sought to protect employees who are discharged by adding 18 U.S.C. § 1514A to provide for a civil action to obtain relief. It is not clear how effective this provision might be in protecting in-house attorneys and it presumably does not apply at all to lawyers in private practice and to government lawyers.
There must be an explicit representation by the Commission that an attorney who engages in reporting about ethical concerns, particularly when it is up the ladder reporting, should be valued for her professionalism. Attorneys should exercise their independent, professional judgment and clients should appreciate having attorneys who follow high ethical standards. If an attorney does suffer retaliation or career damage after reporting ethical concerns, there should be mechanisms to protect that attorney. In addition, a culture should be fostered in which such retaliation is strongly criticized. The individual attorney facing the ethical dilemma which results in retaliation should not have to face the consequences as a disgraced outsider from the legal community.
I believe that the Commission should also consider the role and duties of attorneys employed by the federal government. Presumably those attorneys also should have some ethical responsibilities involving reporting ethical concerns up the ladder. Similarly, government attorneys should be protected from retaliation. The proposed rules seem to be silent about the duties of government attorneys. See The McDade Act, 28 U.S.C. §530B ("an attorney for the Government shall be subject to State laws and rules, and local Federal court rules, governing attorneys in each state where such attorney engages in that attorney's duties, to the same extent and in the same manner as other attorneys in that State"). Even if Sarbanes-Oxley applies only to the private sector, the Commission may still consider commenting on the role and duties of government attorneys.
I would be pleased to assist the Commission and answer any questions or provide additional information. Thank you for the opportunity to comment on the proposed rules.
Elaine J. Mittleman
AMERICAN BAR ASSOCIATION
TASK FORCE ON CORPORATE RESPONSIBILITY
Supplemental Statement by Elaine J. Mittleman, Esquire
2040 Arch Drive
Falls Church, VA 22043
November 19, 2002
Mr. Chair, Members of the Commission.
I am presenting this statement as a supplement to my testimony presented at the hearing on October 25, 2002, in New York City.
I. The Final Report of the Task Force must include a section
addressing the need to protect lawyers who raise difficult
questions and face retaliation or termination.
The Task Force should address the very real dilemmas that lawyers face when raising difficult ethical issues. It is important that lawyers receive adequate protection. Several witnesses have made this point. At the New York hearing, Dean Stephen Gillers suggested that the plight of the employed lawyer who follows ethical requirements and then faces potential retaliation should be addressed. He noted that in-house lawyers are probably in a more difficult position than outside counsel, because their employment is at risk. For outside counsel, losing one client may not be threatening to the lawyer's very livelihood, but can still be an unfortunate outcome. In addition, Dean Gillers indicated that a wrongful discharge claim should be permitted to be a tort, rather than a contract, claim, because a tort claim has more teeth.
Professor Stephen McG. Bundy has also suggested that the Task Force should discuss protection for lawyers. In his statement, Professor Bundy explained:
The hard fact is that lawyers who report misconduct over the heads of
their business colleagues often risk their jobs and even their careers. The
risk is most grave for in house lawyers. Lawyers who comply with Model
Rule 1.13 or who reasonably believe that they are doing so need and
deserve more protection.
Statement of Professor Stephen McG. Bundy, dated November 1, 2002, at 3.
I believe that the Task Force should make a very strong statement that lawyers should receive protection. Moreover, the possibility of having to pursue a wrongful discharge lawsuit if a lawyer has suffered retaliation does not constitute adequate protection. A wrongful discharge lawsuit may provide protection as a last resort. However, the necessity of initiating burdensome litigation to attempt to restore one's career is itself a strong disincentive for any lawyer to take an ethical or difficult position.
I suggest that the Task Force work on fostering a culture that encourages lawyers to express their ethical concerns. The Task Force should also take the lead in establishing customs that show disapproval for actions of retaliation. I believe that a public education project would be very useful in showing the harm - to the client and to the public - in punishing lawyers who give their best independent professional judgment, no matter how unwelcome. The best protection that can be provided for lawyers is to make retaliation against them a professionally-condemned action.
II. The Final Report of the Task Force must include a section
addressing the need to encourage lawyers to take a more
active and independent role in addressing ethical concerns.
The Task Force should address the need to encourage lawyers to take a more active and independent role by raising ethical and other substantive concerns. Although the Task Force has not explicitly addressed specific ethical failures in the recent corporate governance scandals, there has been some recognition that lawyers did not, in some cases, take as active a role as would be desired. The Bar Association of San Francisco made this point, as follows:
The recent failures of corporate responsibility do not appear to be the
result of inadequacies in the ethics rules, but rather of the failure of
lawyers properly to conform their professional conduct to already
existing rules. ... The existence of these rules, which contain many
of the provisions recommended by the Task Force, did not deter
the stunning collapse of Enron.
Statement of the Bar Association of San Francisco, November 11, 2002, at 10.
We share the Task Force's concern that too many lawyers engage
in conscious avoidance and fail to report violations by corporate
clients of its legal obligations or violations of law which are likely
to result in substantial injury to the organization or to the public
at large. We do not believe, however, that Model Rule 1.13
currently permits a lawyer to turn a "blind eye" to violations of
the securities laws or other serious misconduct. At most, a
comment should be added to the Rule, or an ethics opinion on
the subject should make clear, that lawyers for the corporation
cannot remain deliberately ignorant of known misconduct, but
rather that they must respond appropriately in the best interests
of the organization.
Statement of the Bar Association of San Francisco, November 11, 2002, at 16.
In his statement, Professor Eli Wald emphasized that the allegations in the present cases involving corporate governance suggest an industry-wide corporate law failure, rather than the presence of simply a few bad apples. Statement of Professor Eli Wald, November 11, 2002, at 6.
I believe that the Task Force should specifically address the need for lawyers to be more active in raising ethical concerns. The culture of the practice of law must include a much more explicit focus on lawyers exercising their independent professional judgment. The Task Force should also provide suggestions and guidelines by which the need for more active questioning by lawyers can be encouraged and even rewarded. The particular problems facing in-house lawyers and junior lawyers in a hierarchical organization should be noted.
Further, it would be useful for the Task Force to make specific recommendations, including the creation in large organizations of an ombudsman to which lawyers can report their concerns without fear of retaliation. The ombudsman may be able to advise lawyers about possible avenues for expressing their ethical concerns in a way that can minimize retaliation. The ombudsman may have some investigative authority that would permit review of the validity of the lawyers' concerns. The organization thereby would benefit from an independent perspective on matters that may be quite sensitive. The recent scandals show convincingly that the failure to address serious ethical violations can be destructive to the organization, so it is in the long-run interest of all participants that the professional judgment of lawyers be fully exercised.
I would be pleased to provide further assistance to the Task Force and I very much appreciate the efforts of its members.
AMERICAN BAR ASSOCIATION
TASK FORCE ON CORPORATE RESPONSIBILITY
Testimony by Elaine J. Mittleman, Esquire
2040 Arch Drive
Falls Church, VA 22043
Friday, October 25, 2002
New York, New York
Mr. Chair, Members of the Commission.
I am very honored to appear before you today. I hope that my personal experience in confronting a serious ethical issue will be instructive to this Task Force. However, I have given a great deal of thought to the purpose of this Task Force and I hope that my comments will be supportive of a broad perspective of the issues facing our profession.
I have studied and evaluated the statements by the witnesses from the Public Hearing in Chicago and those statements are also reflected in my testimony. I fully agree that the urging of Alfred P. Carlton, Jr., President of the American Bar Association, that this Task Force should make broad policy recommendations for the ABA House of Delegates. As Mr. Carlton emphasized, a mere tweaking of the Model Rules is not sufficient to address the crisis of our profession today. I will, therefore, attempt to make some public policy arguments, rather than focusing primarily on the language of the Model Rules.
I think it must be appreciated that the status quo ante is not sufficient. The recent events have shown conclusively that our profession needs to do a reality check on its ethical underpinnings. The lawyers working on complex transactions and advising corporations must operate on a higher ethical plane that simply avoiding illegal acts and taking measures to prevent personal liability in the event of a shareholder lawsuit.
Again, as Mr. Carlton noted, the members of this Task Force are recognized leaders in the bar. I hope that the message of the final report reflects the wisdom of each member and, in essence, comes to life. I believe that a report which primarily describes proposed changes to the Model Rules will not carry the moral heft needed at this time. A recent New York Times article emphasized that corporations should demonstrate that they recognize the rationale for the public's anger, should acknowledge what has gone wrong and then lead the effort for reform. See Kurt Eichenwald, "Even if Heads Roll, Mistrust Will Live On,' The New York Times, October 6, 2002 (attached hereto as Exhibit 1). The bar should also participate in this process. Attorney Leslie Jacobs, a partner at Thompson Hine in Cleveland, was recently quoted as saying that the ABA should act aggressively to combat the impression that the profession is indifferent to corporate wrongdoing. See Douglas McCollam, "Road Kill," The American Lawyer, October 10, 2002 (attached hereto as Exhibit 2).
Finally, the Task Force should endeavor to provide an ethical support base for those lawyers who are facing a difficult ethical choice. It is too much to expect each attorney to bear the brunt of retaliation if that attorney's ethical acts subject the attorney to serious career damage and retribution. The bar should attempt to stand united in urging and supporting the highest possible ethical goals. This effort is absolutely necessary to reassure the public that the legal profession will serve its clients ethically and will not assist in cutting corners or trying to mislead investors. Our profession must have a much higher concern than simply avoidance of personal liability in a lawsuit from shareholders or others who feel that the legal profession has not done its job.
I. My experience when facing an ethical dilemma at the United States
Department of the Treasury.
I am recounting my experience at the United States Department of the Treasury because it provides the basis for my statement. I have included sufficient details to demonstrate the impact that facing an ethical dilemma can have on a legal career. My background leading up to employment at the Treasury is as follows: I attended Indiana University and then earned a B.A. in Mathematics in 1970 from the University of Evansville. I worked as a computer programmer at Whirlpool Corporation for two years and then attended the Graduate School of Industrial Administration at Carnegie-Mellon University, earning an M.S.I.A. (the equivalent of an M.B.A.) in 1974. I moved to Michigan and worked at Ford Motor Company, including positions on Finance Staff, from 1974-1977. I then attended the University of Michigan Law School, earning a J.D. in December 1979.
In my first job after law school, I sought the opportunity to work at the United States Department of the Treasury on the Chrysler Loan Guarantee program. I believed that working on the Chrysler bailout would provide me an ideal opportunity to combine my law and business training with my interest in the auto industry.
The situation in which I found myself is instructive for the purposes of the Task Force. The reporting requirements placed on Chrysler were "deliberately onerous." See Robert B. Reich and John D. Donahue, Legal Times: The Chrysler Revival and the American System (1985), at pp. 198-200 (attached hereto as Exhibit 3). Reich and Donahue explained that the reporting requirements served the purpose of irritating Chrysler executives, in part as a deterrent to other firms who might consider requesting government aid. It must be appreciated that attorneys often find themselves in high-pressured situations when careers and large amounts of money are at stake. Therefore, the attorney who must make an ethical objection or block a desired transaction will face great pressure to be compliant.
I asked Luke D. Lynch, Jr., General Counsel of the Chrysler Loan Guarantee Board, if the reports were needed. He replied that I had to get them. When I did not succeed in getting the reports after making a trip to Chrysler headquarters in Detroit, Lynch called Chrysler's general counsel and said that the reports had to be submitted within two days or Lynch would tell Congress. Frederick W. Zuckerman, a Chrysler executive, told me that he knew that I was the instigator of the deadline for the reports, that I had "messed" up and that I was going to cause Chrysler to go bankrupt. Zuckerman was very angry at me.
On December 8, 1980, the day that Chrysler Chairman Lee Iacocca came to the Treasury for a meeting with the Chrysler Loan Guarantee Board to request additional funds, I was ordered terminated by Assistant Treasury Secretary Roger C. Altman. I subsequently went to the Treasury Inspector General and the I.G. conducted an investigation. Shortly after ordering my termination, Altman (who is not an attorney) left the Treasury and returned to his investment banking career, in which he had Chrysler as a client. I believe that Altman was more concerned with gaining favor with the Chrysler executives, which would be useful to him when he returned to the private sector, than he was in carrying out the responsibilities at Treasury of monitoring Chrysler's financial condition.
Chrysler's compliance with the loan guarantee reporting requirements and my termination were discussed in several articles (attached hereto as Exhibit 4). In a New York Times article, Altman stated that I was "preoccupied with obtaining all of a multitude of reporting forms from the auto company, which he conceded were often submitted `quite late'." See Ann Crittenden, "Treasury's Ousted Chrysler Critic," The New York Times, March 6, 1981, at D1.
In addition to ordering my termination from the Treasury, Altman and others spread false and derogatory rumors about me. It is not necessary to describe these allegations in detail. The allegations generally were that I was caught by a security guard, going through papers in Altman's office, and that I was leaking to the press. The allegations cannot be analyzed too closely, because there are different versions of them. The hysteria about my actions increased and, apparently, it was thought that I might steal documents to leak to the press.
The incident that was transformed into the allegation that I was caught by a security guard in Altman's office actually involved my seeking the assistance of the security guard. In the early evening of November 3, 1980, I had a very upsetting telephone conversation with Chrysler executive Zuckerman and determined that I had to talk to Altman at once. I was walking down the hallway at Main Treasury, crying, when I saw the security guard (a member of the Uniformed Division of the Secret Service). I implored him to help me find Altman. We went to Altman's office, but Altman was not there. We called the Treasury operator, looking for Altman. The description of this incident are included in statements (attached hereto as Exhibit 5) in the Treasury I.G. report, including the statements of Altman and the guard, Lt. Robert Anderson. The rumor that I had been caught in Altman's office took hold and resulted in a false and backdated Secret Service memorandum being created, which purported to describe that incident.
I was also accused of leaking to The New York Times. This is another wholly false allegation and I have obtained a number of statements (attached hereto as Exhibit 6) that refute that charge. However, Altman said in his statement to the Treasury Inspector General that he ordered my termination in part because I "presented a potential risk for damaging news leaks." Altman also said that I "adversely affected Treasury's relationship with Chrysler due to her insistence that Chrysler was not submitting certain reports required by the Agreement."
Even though the allegations were not proven and are generally absurd, they were effective in discrediting me and making me look like a troublemaker. I was even called a "security risk." The existence of these allegations, which are included in government documents, still causes me great pain. I have worked persistently to have these allegations retracted, but have been wholly unsuccessful.
The Task Force should discuss in the final report the reality that lawyers who face a difficult ethical dilemma or who insist that unwilling clients follow the law may suffer such retaliation and damage to their careers.
II. The problems in our profession have been acknowledged for a long time, but
effective solutions have not been implemented.
The problem facing lawyers who make difficult ethical decisions and thereby alienate their superiors or their clients has been fully recognized. However, there apparently has been limited guidance on solutions for lawyers caught in this awkward position. The easy answer would be to avoid getting in this situation - perhaps by ignoring obvious ethical concerns.
In my experience, I sought guidance and solace, but found little support. I wrote to noted professor Geoffrey C. Hazard, Jr., concerning the problem of an effort to act ethically causing damage to a career. Professor Hazard was considerate in his reply to me. He responded that "I do not know of any solution, except to try to find jobs in honest environments." See correspondence with Professor Hazard (attached hereto as Exhibit 7).
This ethical dilemma also was apparently considered by the Commission on Evaluation of Professional Standards (known as the Kutak Commission). In a letter dated May 24, 1982 (attached hereto as Exhibit 8), Robert J. Kutak explained that my comment on the proposed Model Rule 1.13 and the so-called whistleblowing problem had been received by the Commission and was available to the Commission in its review of the proposed Model Rules. Mr. Kutak noted that I had raised "hard questions" and he appreciated my contribution.
The intractability of the problem I faced after expressing my ethical concerns at Treasury is illustrated in the 1991 correspondence (attached hereto as Exhibit 9) between my father, attorney Edward P. Elsner, Jr., and the congressman from my home district in Indiana, Representative Lee H. Hamilton. My father plainly stated my situation to Rep. Hamilton. In his response, Rep. Hamilton stated, "I am greatly distressed by [Elaine's] experience at Treasury and the effect it has had on her life and her career. I admire her courage in moving ahead with her own legal practice in the face of such adversity."
I am requesting this Task Force to include in the final report a section about the problems facing a lawyer caught in an ethical dilemma. The bar should appreciate that requiring lawyers to comply with high ethical standards could be costly in terms of relationship with the client or even with employers. The Task Force should emphasize that retaliation against a lawyer who is exercising her professional judgment and complying with ethical duties must not be tolerated. Perhaps the sting of public or professional disapproval could provide some protection to lawyers.
Unfortunately, my experience has been that expressing ethical concerns or urging compliance with requirements that may be unpleasant simply is asking for career suicide. It is impossible to express the degree of isolation that one suffers after being fired for expressing her ethical concerns. There was literally no safety net or mentor to assist in getting my career back on track.
III. There must be incentives to act ethically.
The message seems to be that "ethics doesn't pay." There must be incentives to act ethically. These incentives should include professional standards, peer support and encouragement and, hopefully, some financial security, as well. If law is a business and an attorney is attempting to maximize her profitability or to work her way up the law firm ladder, the incentive will be to do deals and cut corners, not to act ethically.
The Task Force should describe and give examples of why maintaining ethical standards saved the client. There must be an appreciation that cutting ethical corners to do a deal or make a short-term profit may well cost more in the end. In other words, there must be an appreciation that corporations can help their bottom line by encouraging and promoting ethical attorneys. Surely one of the most important duty of attorneys is to give advice and keep clients from taking possibly illegal acts. The attorney who exerts his own independent perspective should be much more appreciated than a craftsman who determines how to do a deal that may not withstand scrutiny if it is examined by others, such as the SEC.
There must be a message - not that ethics don't pay or that ethics are a nuisance. The client and the public must appreciate that having an ethical attorney does pay. Clients must be educated to take the long-term point of view. What may seem like a great scheme in this quarter may cost the company in later losses or liability.
The auto industry long relied upon the motto that "safety doesn't sell" in marketing its cars. That is a marketing strategy that surely has been abandoned. Our profession should not operate on the premise that "ethics don't sell." We must articulate why clients should want to pay top dollar for ethical attorneys and why clients will get a full return on the investment in having advice from an attorney who speaks her mind with full awareness of her ethical duties.
IV. The role of the Model Rules.
It is not clear to what extent the Model Rules have functioned effectively to encourage ethical behavior or to provide protection for those who act ethically in a difficult environment. Based on comments from the September hearing, the Model Rules essentially are used as a sword against lawyers in litigation. Thus, it appears that there is an incentive to leave the Model Rules vague so they will not provide concrete guides by which a lawyer can be found liable in court. If this is the primary purpose of the Model Rules, then they are certainly not useful in encouraging ethical behavior.
It is useful to note that lawyers do not daily recite the Model Rules in their practice. Similarly, the case law for attorney ethics (such as it is) does not seem to be necessarily driven by the Model Rules. The Task Force should appreciate that lawyers make ethical decisions based on a variety of concerns, rather than by simply referring to the Model Rules.
The Preliminary Report cites no cases concerning attorney ethics and gives no explanation as to how the Model Rules in practice translate into encouraging ethical acts by attorneys. For example, to what extent has the opportunity for lawyers to consult with clients ultimately prevented the fraudulent or other troubling actions that have created the present crisis? Moreover, it would be useful for the Task Force to describe the issues presented and resolved by the Kutak Commission and the Ethics 2000 Commission, with an analysis as to what findings need to be revised from the conclusions of those Commissions.
The proposals to change the Model Rules are useful. However, I believe that the Task Force should use this time of reflection in the legal profession to construct broader solutions to the problems identified. In a sense, addressing this fundamental challenge to the ethical standing of our profession by tinkering with rules evokes a sense of legalism, rather than professionalism.
The emphasis on ethics needs to be raised to a much higher level. How many ordinary attorneys have participated in this Task Force process? How many have read the Preliminary Report, asked to submit a statement or even expressed an interest in improving our profession in light of this crisis? There should be a heartfelt statement of goals for our profession, which set out the aspirations as to what we contribute to our local, national and international communities.
In addition, the ethical duties of attorneys include more responsibilities than the possibility of reporting wrongdoing of the client. Perhaps the focus in the Model Rules on reporting is misguided or, at least, overemphasized in importance. If the attorneys vigorously carry out their ethical duties and give clear and strong advice to their clients, the potential wrongdoing by the clients will hopefully be avoided or the impact of the wrongdoing minimized.
Further, it must be appreciated that many of the corporate practices that have proven so troubling may not be fraudulent or illegal. In other words, those practices may not be those which an attorney is supposed to report to higher authorities. Thus, this Task Force should address more than just the practices that may be fraudulent or illegal. Once again, the ethical duty of attorneys is much broader than simply having a duty under the Model Rules to report illegal actions.
V. There needs to be a more detailed analysis concerning what practices
of lawyers have contributed to the problems of corporate governance
and its lack of credibility.
To the extent that attorneys have contributed to the present crisis of confidence in corporate governance, that contribution may be because the attorneys failed to act in a strong and ethical manner. Those attorneys may have emphasized doing the deal, cutting the corner and pleasing the client. The attorneys who behaved in that manner presumably were not faced with an ethical dilemma as to whether to report potential wrongdoing by the client. To the contrary, those attorneys apparently were willing or even pleased to go along with the schemes of the client. Those attorneys likely thought that going along would increase their profits or avoid making the client mad. Neither of these objectives should take precedence over the ethical duties of attorneys.
The revisions to the Model Rules recommended in the Preliminary Report concern the requirement that attorneys report on the wrongdoing of others, such as corporate officers. However, a more fundamental issue should be the conduct of the attorneys themselves. Judge Stanley Sporkin, who has a resume that plainly shows he has the experience to speak with authority, starkly framed the issue during the savings and loan crisis. In a widely-quoted opinion, Judge Sporkin wrote:
There are other unanswered questions presented by this case. Keating testified
that he was so bent on doing the "right thing" that he surrounded himself with
literally scores of accountants and lawyers to make sure all of the transactions
were legal. The questions that must be asked are:
Where were these professionals, a number of whom are now asserting
their rights under the Fifth Amendment, when these clearly improper
transactions were being consummated?
Why didn't any of them speak up or disassociate themselves from the
Where also were the outside accountants and attorneys when these
transactions were effectuated?
What is difficult to understand is that with all the professional talent involved
(both accounting and legal), why at least one professional would not have
blown the whistle to stop the overreaching that took place in this case.
Lincoln Sav. and Loan Ass;n v. Wall, 743 F.Supp. 901, 919-920 (D.D.C. 1990).
Judge Sporkin's profound questions have not been answered and the recent corporate scandals have caused them to be raised with greater urgency. In the final report, the Task Force should undertake to give some measure of an answer to Judge Sporkin's questions.
The Preliminary Report noted recent criticism of legal advisers by citing the Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corporation. That Report stated at pages 25-26 that:
Vinson & Elkins, as Enron's long-standing outside counsel, provided advice
and prepared documentation in connection with many of the transactions
discussed in the Report. It also assisted Enron with the preparation of
its disclosures of related-party transactions in the proxy statements and
the footnotes to the financial statements in Enron's periodic SEC filings.
(Footnote omitted). Management and the Board relied heavily on the
perceived approval by Vinson & Elkins of the structure and disclosure
of the transactions. Enron's Audit and Compliance Committee, as well
as in-house counsel, looked to it for assurance that Enron's public
disclosures were legally sufficient. It would be inappropriate to fault
Vinson & Elkins for accounting matters, which are not within its
expertise. However, Vinson & Elkins should have brought a stronger,
more objective and more critical voice to the disclosure process.
Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. by William C. Powers, Jr., Chair, dated February 1, 2002, at 25-26.
In an additional example of questions about the involvement of lawyers in transactions now under scrutiny, a Legal Times article explained that another law firm's actions have been questioned in the Enron matter. This law firm furnished true sale opinions needed for securitization transactions. However, a recent report by the court-appointed Enron examiner questioned whether the transactions were actually loans, rather than sales. See Otis Bilodeau, "New Questions Over Lawyering In Enron," Legal Times, October 2, 2002 (attached hereto as Exhibit 10).
Attorney Gregory Shaw, head of the securitization practice at Cravath, Swaine & Moore, was quoted in the article. He noted, "How does the legal profession police itself in this area or in similar areas?" Concluding that, as a practical matter, the legal profession probably can't police itself, Shaw explained, "I just don't think policing in areas of professional judgment in complex, highly fact-sensitive issues is feasible except in the most egregious cases."
These examples from the Enron case show that the actions of lawyers themselves are part of the problem. The lawyers who participated or facilitated questionable transactions were presumably talented and well-paid. They may have honestly believed that the transactions were appropriate or they may have willingly gone along with questionable deals. Perhaps more troubling is the possibility that the lawyers gave no thought to whether the transactions were proper, in addition to being profitable. I believe that the final report of the Task Force should describe in more detail the types of activities of attorneys that may have contributed to the crisis of confidence. If the problem is not fully described, then actions needed to solve the problem may not be taken. The Task Force should state more strongly that the legal profession - or at least some of its members - are part of the problem.
The proposed revisions of the Model Rules concern the duty of attorneys to report the wrongdoing of corporations or others. A fundamental concern is the duty of attorneys to act ethically in their own actions. Specifically, attorneys must take a proactive role in questioning the fundamentals of the transactions in which they participate or the litigation positions that they put before the court. There can be no doubt that lawyers owe a duty of candor to the court. See United States v. Shaffer Equipment, 11 F.3d 450, 457-59 (4th Cir. 1993).
The regulation of our profession must come at an earlier stage and a more effective forum than when attorneys are defendants in shareholder or legal malpractice lawsuits.
VI. The provisions of Sarbanes-Oxley may change the ethical
enforcement provisions for attorneys.
The Sarbanes-Oxley Act became effective on July 30, 2002. Several provisions are pertinent to the work of this Task Force. Those provisions are:
Section 307. Rules of Professional Responsibility for Attorneys
Not later than 180 days after the date of enactment of this Act, the Commission
shall issue rules, in the public interest and for the protection of investors, setting
forth minimum standards of professional conduct for attorneys appearing and
practicing before the Commission in any way in the representation of issuers,
including 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.
Section 806. Protection for Employees of Publicly Traded Companies
Who Provide Evidence of Fraud.
(a) IN GENERAL - Chapter 73 of title 18, United States Code, is amended
by inserting after section 1514 the following:
`Sec. 1514A. Civil action to protect against retaliation in fraud cases
`(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY
TRADED COMPANIES - No company with a class of securities registered
under section 12 of the Securities Exchange Act of 1934 .... or any officer,
employee, contractor, subcontractor, or agent of such company, may discharge,
demote, suspend, threaten, harass, or in any other manner discriminate against
an employee in the terms and conditions of employment because of any lawful
act done by the employee--
`(1) to provide information, cause information to be provided, or
otherwise assist in an investigation regarding any conduct which the
employee reasonably believes constitutes a violation of section 1341,
1343, 1344, or 1348, any rule or regulation of the Securities and
Exchange Commission, or any provision of Federal law relating to
fraud against shareholders, when the information or assistance is provided
to or the investigation is conducted by --
`(A) a Federal regulatory or law enforcement agency;
`(B) any Member of Congress or any committee of
`(C) a person with supervisory authority over the employee
(or such other person working for the employer who has the
authority to investigate, discover, or terminate misconduct); or
`(2) to file, cause to be filed, testify, participate in, or otherwise assist
in a proceeding filed or about to be filed (with any knowledge of the
employer) relating to an alleged violation of section 1341, 1343, 1344,
or 1348, any rule or regulation of the Securities and Exchange Com-
mission, or any provision of Federal law relating to fraud against
`(b) ENFORCEMENT ACTION -
`(1) IN GENERAL - A person who alleges discharge or other
discrimination by any person in violation of subsection (a) may seek
relief under subsection (c), by --
`(A) filing a complaint with the Secretary of Labor; or
`(B) if the Secretary has not issued a final decision within
180 days of the filing of the complaint and there is no showing
that such delay is due to the bad faith of the claimant, bringing
an action at law or equity for de novo review in the appropriate
district court of the United States, which shall have jurisdiction
over such an action without regard to the amount in controversy.
`(2) PROCEDURE -
`(D) STATUTE OF LIMITATIONS - An action under
paragraph (1) shall be commenced not later than 90 days
after the date on which the violation occurs.
`(c) REMEDIES -
`(1) IN GENERAL - An employee prevailing in any action under
subsection (b)(1) shall be entitled to all relief necessary to make
the employee whole.
`(2) COMPENSATORY DAMAGES - Relief for any action under
paragraph (1) shall include --
`(A) reinstatement with the same seniority status that the
employee would have had, but for the discrimination;
`(B) the amount of back pay, with interest; and
`(C) compensation for any special damages sustained as
a result of the discrimination, including litigation costs,
expert witness fees, and reasonable attorney fees.
`(d) RIGHTS RETAINED BY EMPLOYEE - Nothing in this section shall
be deemed to diminish the rights, privileges, or remedies of any employee under
any Federal or State law, or under any collective bargaining agreement.'.
(b) CLERICAL AMENDMENT ...
Section 1107. Retaliation against Informants.
(a) IN GENERAL - Section 1513 of title 18, United States Code, is amended
by adding at the end of the following:
`(e) Whoever knowingly, with the intent to retaliate, takes any action harmful
to any person, including interference with the lawful employment or livelihood
of any person, for providing to a law enforcement officer any truthful information
relating to the commission or possible commission of any Federal offense, shall
be fined under this title or imprisoned not more than 10 years, or both.'.
It is important to appreciate that Section 307 of Sarbanes-Oxley now provides that the Securities and Exchange Commission ("SEC") will be issuing rules for the professional conduct of attorneys appearing before the Commission. There is concern that the SEC rules will usurp the traditional role of the state courts in setting ethical standards. Moreover, it is not clear what will happen if the SEC rules conflict with the existing state rules or the rule changes proposed by this Task Force. See George W. Jones, Jr., "from the president: Federal Regulation of the Practice of Law: Unthinkable?" The Washington Lawyer, October 2002, at 6 (attached hereto as Exhibit 11); ABA Fact Sheet Federal Regulation of Corporate Attorneys (attached hereto as Exhibit 12). .
The Task Force should address the relationship between the Model Rules and the rules to be promulgated by the SEC. Surely it would be useful for the ABA to provide leadership in the SEC rule promulgation process. Moreover, there may be a real problem if the SEC rules contradict the Model Rules or place a stricter duty to report on attorneys. In the article titled, "Road Kill," attorney Leslie Jacobs was quoted as saying that he hopes that "Sarbanes-Oxley is a floor, not a ceiling, on ethics."
Similarly, Section 806 (Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud) and Section 1107 (Retaliation against Informants) presumably should apply to attorneys, even though those sections refer to employees of publicly traded companies and to "any person."
The final report of the Task Force should address the relationship between the Model Rules, Sarbanes-Oxley and the broader ethical concerns for lawyers.
VII. The Task Force should consider whistleblower protections for lawyers.
The Task Force should include a discussion in the final report about possible whistleblower protection for lawyers. It appears that Section 806 of Sarbanes-Oxley may provide some protection for lawyers who are employees of publicly traded companies. However, there apparently is no protection for lawyers who work for law firms.
A.P. Carlton emphasized in his testimony at the September hearing that there will be developing common law to improve the level of corporate responsibility. There may well be growing common law as to the duties of attorneys and remedies to protect attorneys who suffer retaliation. In addition, the federal and state whistleblower statutes may become more comprehensive and possibly be designed specifically to address the situations in which professionals, such as lawyers and accountants, confront ethical dilemmas. However, at this time, the protections for lawyers who suffer retaliation after expressing ethical concerns appear wholly inadequate. A 1997 Wall Street Journal article described the unfortunate plight facing lawyers who do report wrongdoing. See Paul M. Barrett, "When Lawyers See Fraud at a Company, What Must They Do?" The Wall Street Journal, August 22, 1997, at A1 (attached hereto as Exhibit 13). Although it is generally believed that there is whistleblower protection for federal employees, I received no protection under the federal whistleblower statutes, because I was in the excepted service rather than a civil service employee.
If a lawyer loses her job after raising questions about the ethics of a transaction or after disclosing information in a manner consistent with the Model Rules or Sarbanes-Oxley, what recourse does she have? Even if there is a possible cause of action that may be alleged in a lawsuit, the lawyer will be facing a very difficult battle against a company or organization that may well have deep pockets and that wishes to utilize scorched-earth litigation tactics. That lawyer is very susceptible to being characterized as a troublemaker, an incompetent or even worse. In any lawsuit based on the claim of wrongful termination, the judge will not hand out gold stars to the lawyer who was fired simply because the lawyer alleges that she was motivated by her ethical concerns or duties. If the Model Rules serve as a basis for suing lawyers, do they also serve as a standard by which the lawyer could sue for wrongful discharge? It should be noted that the Third Circuit permitted a claim of retaliatory discharge under Title VII by a senior in-house counsel to proceed. See Kachmar v. Sungard Data Systems, Inc., 109 F.3d 173, 179-80 and n. 1 (3rd Cir. 1997)(noting the dynamics of an attorney serving as a corporate employee and having a significant advisory and compliance role in a regulated environment).
Moreover, a lawyer looking for another job after having been fired will face additional obstacles. What does the lawyer say when she is asked why she left her last job? Does she say she was fired after she expressed concerns based on her ethical duties as a lawyer? What law firm or in-house counsel will jump at the chance to hire such a lawyer?
An overriding concern of the bar is to avoid liability in lawsuits. The prominent reaction to the Preliminary Report expressed at the September hearings was that a revision in the Model Rules would provide additional avenues for suing lawyers. See ABAJournal eReport, September 27, 2002 (attached hereto as Exhibit 14). To the extent the profession is concerned about not being sued, it should also be concerned with helping attorneys who do find themselves in difficulty after facing an ethical dilemma. Particularly if the SEC rules or the revised Model Rules make the duty to disclose mandatory, there may be a number of attorneys who find themselves in an awkward career position after complying with that ethical duty to disclose. The Task Force could contribute greatly if it sets out guidelines that assist and support attorneys who do have to follow their ethical duty and then suffer retaliation.
The Task Force may find that the term, "whistleblowers," is not helpful to the debate. Perhaps it would be instructive if the final report gave concrete examples (hypothetical, if necessary) of attorneys who complied with the duty to disclose and the options then available to provide protection for those attorneys. The Task Force should provide a description of an ethical attorney that avoids what may be the pejorative term, "whistleblower." The attorney who is labeled a whistleblower may, in fact, be an attorney who is carrying out her ethical duty to bring concerns to those in positions of authority. That action of reporting (or counseling clients against possible unethical or illegal activity) may be a central part of the attorney's job responsibility, rather than an unauthorized disclosure by a free-lancing attorney.
The Task Force should address the protections needed for attorneys who may be called "whistleblowers," or for those who make a disclosure based on ethical requirements and suffer career damage as a result.
VIII. Proposed Actions
There must be exhortations in the final report that it is the utmost duty of attorneys to act ethically. The Model Rules should not be used solely as a standard to determine liability in lawsuits. Moreover, the elements that make our line of work a profession, rather than a money-making enterprise, must be explained to the public. It is paramount to emphasize that each attorney must exercise her professional judgment based on her training and experience.
There is no doubt that the heritage of the legal profession is something that must be nurtured. I believe that much of my love and respect for the profession is inherited. My father, Edward P. Elsner, Jr., is senior partner at Montgomery, Elsner & Pardieck in Seymour, Indiana. He was privileged to practice with his father, Edward P. Elsner, in the firm of Elsner & Elsner until my grandfather died in 1951, only a month after finishing a jury trial. In his testimony at the September hearing, Linscott R. Hanson made a similar point. He stated that he was fortunate to have been born into a family of lawyers and to have joined a firm of competent and caring partners to whom he could speak with candor. Mr. Hanson also proposed study groups and a hotline to support attorneys seeking ethical guidance. These are useful suggestions.
The role of legal education must be emphasized. All practicing lawyers reminisce about what they learned in law school. The Task Force could communicate to the law schools the importance of ensuring that lawyers have ethical grounding from the beginning of their practice. I would like to acknowledge the strong guidance and support of two of my professors, Thomas M. Kerr at Carnegie-Mellon University and Douglas A. Kahn at the University of Michigan. The emphasis on ethical behavior incorporated by Professor Kerr in his teaching (no matter what course he was teaching) is illustrated in the affidavit (attached hereto as Exhibit 15) that he generously provided to me.
I also believe that it would be useful for the bar to take a higher profile with the public in emphasizing the ethical obligations of lawyers. A statement describing the role of lawyers and the duty of lawyers to counsel clients against undertaking fraudulent activities may increase confidence in corporate governance. The final report should make it clear that lawyers are concerned about a lot more than simply avoiding personal liability for wrongdoing.
It would be useful if this Task Force could be a leader in assuring the public about the role of attorneys in our society. It is necessary to put a face on the bar. ABA President Alfred P. Carlton, Jr., and President-elect Dennis W. Archer are both impressive speakers and should be advocates for enhancing trust in the legal system. However, I believe that corporate lawyers and other leaders in the bar also should spread a message about the ethical role of lawyers and the efforts of our profession to restore confidence in corporate governance. Even if no lawyers are accursed of criminal wrongdoing in these scandals, the general public may get the impression that lawyers were involved behind-the-scenes, giving assistance to the wrongdoers. This impression must be overcome with a positive message from the bar leadership and from individual lawyers.
We need to educate and reassure the bar, the corporate and investment banking community and the public in general that our profession will be a strong leader in restoring confidence and fostering strong ethical behavior. Just as the country-doctor image has faded, so has the belief in the lawyer as someone who can help the ordinary person or is a servant for the good of the public. The bar must do more in responding to this crisis than simply tweak the Model Rules or express concern that lawyers may be subjected to more lawsuits if the Model Rules are revised. Because Sarbanes-Oxley has become law, it is without doubt that the ethical duties of lawyers will be subject to greater scrutiny. The bar should be a leader in promoting ethical behavior, not simply responding reflexively in an effort to deflect scrutiny.
Thank you for providing me the opportunity to present my thoughts. I would be pleased to assist the Task Force in any manner in this important undertaking.