Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.
Tel Aviv, December 18, 2002
- Via international courier -
Securities and Exchange Commission
Re: File No. S7-45-02
Mr. Chairman and Honorable Commissioners:
This letter is submitted in response to the request of the Securities and Exchange Commission ("Commission") appearing in Release No. 33-8150 regarding Implementation of Standards of Professional Conduct for Attorneys, in which the Commission has sought comment on the application of proposed Part 205 to Title 17, Chapter II of the U.S. Code of Federal Regulations ("Part 205") to foreign law firms and foreign lawyers.
Our law firm is located in Tel Aviv, Israel. The partners and attorneys in this firm are all members of the Israel Bar and are licensed to practice law in the State of Israel. In addition, several of the partners and attorneys in the firm are also members of the bars of several states in the United States, including New York and New Jersey, and a recently hired attorney who is awaiting admission to the Israel Bar is a member of the bars of Illinois and California. These dual licensed attorneys advise corporate clients in matters relating to U.S. securities laws matters, including, with respect to registration statements, proxy statements, representation before the Commission and national stock exchanges, as well as in connection with private placements of securities not requiring registration. We currently represent more than 10 issuers who are subject to the Commission's reporting requirements.
We wish to bring to the Commission's attention the legal framework governing the practice of law by members of the bar in Israel, and the ways in which there may be irreconcilable conflict with the proposed Part 205 for Israeli law firms, Israeli attorneys and attorneys licensed to practice both in Israel and in another jurisdiction in the United States.1
1. Applicable Law
1.1 The Israel Bar Association Law - 1961. The Israel Bar Association Law - 1961 (the "Bar Law") in section 90 thereof entitled "Professional Confidence" provides:
Section 53 of the Bar Law, entitled "Protection of the Dignity of the Profession", provides:
Section 54 of the Bar Law, entitled "Duty Toward the Client and Court", provides:
1.2 The Bar Association Rules (Professional Ethics) - 1986. The Bar Association Rules (Professional Ethics) - 1986 (the "Ethics Rules") promulgated pursuant to the Bar Law, in section 19 thereof, entitled "Maintenance of Confidentiality" provides:
Section 14 of the Ethics Rules, entitled "Conflict of Interest" provides in subsection (a) thereof:
Section 16 of the Ethics Rules, entitled "Prohibition on Handling a Matter Against a Client", provides in subsection (a)(2) thereof:
1.3 The Evidence Ordinance (New Version) - 1971. The Evidence Ordinance (New Version - 1971 (the "Evidence Ordinance"), in section 48 thereof entitled "Attorney Testimony" provides:
1.4 Basic Law: Human Respect and Freedom. Basic Law: Human Dignity and Liberty (the "Human Dignity Basic Law"), in section 7 thereof entitled "Privacy" provides:
1.5 The Privacy Protection Law - 1981. The Privacy Protection Law - 1981 (the "Privacy Law") provides that a person shall not harm the privacy of another without such person's consent. Harm to privacy includes, according to section 2(8) of the Privacy Law, "breach of confidentiality regarding the personal matters of a person2, determined in an express or implied agreement." Violation of this law gives rise to both civil and criminal penalty.
2. Applicable Case Law
The Israeli courts have reviewed the above-noted applicable statutes. It should be noted that the courts have even distinguished the provisions of Section 90 of the Bar Law and Section 48 of Evidence Ordinance from similar provisions in U.S. statutes. In particular, the courts have consistently held that the unlike U.S. law where attorney-client privilege is limited and dependent upon the expectations of the client in the particular context of the subject matter of the consultation, in Israel, the attorney-client privilege is absolute insofar as it is within the parameters of Section 90 of the Bar Law and Section 48 of the Evidence Ordinance.3
The La Nacional v. Securities Authority case4 is most on point since it directly addresses the issue of confidentiality and attorney-client privilege in the context of securities laws, and the preparation of a prospectus. In that case, the court found that the prohibition against an attorney giving evidence under Section 48 of the Evidence Ordinance applies equally to investigative proceedings by a government authority, such as the Securities Authority. The privilege under Section 90 of the Bar Law and Section 19 of the Ethics Rules may only be waived by the client. The privilege derives from Section 7(d) of the Human Dignity Basic Law and is one of the expressions of the right to privacy under the Privacy Law.
The La Nacional case recognized the public interest for the government authority to investigate and uncover wrongdoing; however, the court held that the attorney-client privilege is absolute, and bars an attorney from revealing information in his or her possession even though the Securities Law - 1968 grants to the Securities Authority the power to demand from any person information relating to the business of an entity under investigation. This privilege applies equally to information passed between an issuer and the attorney in connection with preparation for publication of a prospectus. The fact that the attorney gave a legal opinion included in the prospectus does not derogate from the privilege. The factual bases upon which the opinion was given may be examined by the Securities Authority, since the facts are not ordinarily part of the professional service given by the attorney to the client. The publication of the prospectus does not constitute a waiver of the privilege by the client, except as relates to the matters revealed therein as to which the client is deemed to have consented.
The court emphasized that maintenance of the attorney-client privilege ensures that the client will reveal to the attorney all the information and that the lawyer will be the one to consider what material should be revealed in order to fulfill the requirements of the law. The experienced securities law attorney protects the public by identifying the relevant information required to be disclosed to the public. The court stated that removal of the privilege would harm the ability to achieve the purposes of disclosure in securities law. The attorney is obliged to warn the client and prevent the client from making a misleading statement or omitting a statement which by its omission makes the disclosure misleading. Material not published contrary to the opinion of the attorney is not subject to privilege.
The court noted that the privilege under Israeli law does not protect against disclosure by an attorney of information relating to a future criminal offense or tortious fraudulent act. Generally, the privilege is not applicable if the purpose of the consultation with the attorney was to obtain advice with respect to the carrying out of such offense or act. The La Nacional case further elaborated on this point by noting that the privilege does not apply if the purpose of the consultation was to obtain advice with respect to the carrying out of such an offense or act even if the attorney was not aware that this was the purpose of the consultation. This is not in conflict with the principles of the Sarbanes - Oxley Act and Section 307, which imposes a duty on an attorney, after `reporting up the ladder' and not receiving an `appropriate response' to reveal information that the issuer is about to commit fraud by filing a false report with the Commission.
In the La Nacional case, the court allowed the attorney to inform the Securities Authority as to the identity of the person who gave to the attorney on behalf of the client the information which is allegedly misleading. The court held that the attorney's documents (including notes, graphs, charts, drafts of agreements, drafts of the prospectus, etc.) are confidential and privileged.
3. Conflict between the Israeli Law and Part 205
The exceptions in U.S. law to the general rule of confidentiality of information relating to the representation of a client appearing in the American Bar Association Model Rules of Professional Conduct (2002 edition) Rule 1.6, such as the provision in part (b) thereof which provides, "a lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary (1) to prevent reasonably certain death or substantial bodily harm; ... (4) to comply with other law or a court order"; have no direct parallel in Israeli law. As discussed above, the privilege in Israel is absolute. However, Israeli case law has created certain exceptions that, to some extent, parallel the above-noted exceptions in U.S. law. In particular, the attorney-client privilege does not apply when an attorney is consulted in order to obtain advice with respect to the carrying out of a future criminal offense or tortious fraudulent act5. In addition, an attorney may be relieved of the obligation to maintain confidentiality of information, in the absence of client consent, by an order of an Israeli court; however, as the La Nacional case indicates, the court order in that case severely limited the scope of the information to be revealed to only the name of the person who provided the information to the attorney.
The provisions of Section 205.3(d)(1) of Part 205 would impose upon an Israeli attorney representing an issuer who reasonably believes an issuer's directors have either made no response (within a reasonable time) to (a) withdraw from representing the issuer, indicating that the withdrawal is based on professional considerations; (b) give written notice to the Commission of the withdrawal and that it is based on professional considerations; and (c) promptly disaffirm to the Commission any opinion, document, affirmation, representation, characterization or the like in a document filed with or submitted to the Commission, or incorporated into such a document that the attorney prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading.
We do not believe the obligation to withdraw from representing the issuer, indicating that the withdrawal is based on professional considerations is in conflict with Israeli law. It is, in fact, in line with the La Nacional case which obliges an attorney to warn and act to prevent a client against making misleading statements.
We believe that, while the obligation to give written notice to the Commission of the withdrawal and that it is based on professional considerations is not in direct conflict with the statutes and case law in Israel, it is, as intended by the Commission, a `red flag' indicating to the Commission that there has been, in the opinion of the resigning attorney, a material violation of the securities law by the issuer/client. It is, therefore, unclear whether an Israeli court would find that an attorney who complied with this obligation has breached a fiduciary duty toward his or her client. In the absence of clear guidance from the Israeli courts or the Israel Bar Association, it would be advisable for Israeli attorneys to first request an opinion of the Ethics Committee of the Israel Bar Association prior to giving notice to the Commission of withdrawal.
However, we believe the obligation to promptly disaffirm to the Commission any opinion, document, affirmation, representation, characterization or the like in a document filed with or submitted to the Commission, or incorporated into such a document that the attorney prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading, is in conflict with Israeli law. Such action would cause the attorney to reveal to the Commission information given to him or her in the course of the professional services provided to the client, without the consent of the client.
4. Exposure to Israeli Law Firms and Lawyers - Conclusions
An Israeli attorney who complies with Part 205.3(d) would be exposing himself or herself to civil liability toward the client, a professional negligence or tort action, as well as sanctions by the bar association for breach of fiduciary duty toward a client, which can include fines, suspension or disbarment.
An attorney in Israel who is licensed in one or more of states of the United States is in the added jeopardy of failing to comply with one jurisdiction's ethics rules at cost of complying with Part 205. Israeli lawyers cannot resort to the courts of one jurisdiction or the other to resolve any conflict of law in the hope of reconciliation under the federal system, as is the case in the United States. Thus, these multi-jurisdiction lawyers may have civil liability and improper professional conduct in more than one jurisdiction.
Israeli law firms that engage in U.S. securities law matters may have difficulty obtaining appropriate professional liability insurance in light of the above conflicts.
We respectfully request that the Commission remove the provisions of Part 205 that would require an attorney to report his or her client to the Commission, and thereby potentially violate the laws of the State of Israel and ethical rules applicable to members of the Israel Bar. In the alternative, we would request that members of the bar of non-U.S. jurisdictions be exempt from such provisions, even if those attorneys are also licensed to practice in a U.S. state.
cc: Alex Hertman, Adv. - Chair, Ethics Committee,
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