Sarbanes-Oxley: A Complication, Not a Contribution, in the Effort to Improve Corporate Lawyers' Professional Conduct

Georgetown Journal of Legal Ethics, The, Fall 2003 by Morgan, Thomas D

INTRODUCTION

It is always tempting to try to solve yesterday's problem with tomorrow's requirements. The sudden implosion of Enron Corporation' was a blow to the confidence of investors and regulators alike. At moments such as the Enron bankruptcy, finger-pointing becomes a favorite sport and retreaded ideas get asserted as new. So it was when the Enron bubble burst.

Regulatory solutions to problems thought to exist at Enron - and problems thought to have contributed to contemporaneous collapses of companies such as WorldCom and Global Crossing - are found in the Sarbanes-Oxley Act of 2002 (the "Act")2 and the Final Rules that the statute required the sec to promulgate. Lawyers' clients are affected by many of the Act's provisions covering a variety of issues of corporate governance and conduct.3 This symposium focuses on Sarbanes-Oxley direct regulation of lawyers themselves.4

To the extent the approach the Act and its implementing regulations impose on lawyers have been criticized by academics at all, it tends to have been for being insufficiently tough.5 This article takes a different approach. It argues that, while political responses to the Enron collapse were probably inevitable, and while discussion of Sarbanes-Oxley has provided a useful framework for thinking about the role of a corporate lawyer, the Act's text and regulations are more likely to complicate than improve lawyer conduct.

My concern is not one of protecting corporate lawyers from criticism. 1 agree with those who say that it is essential that lawyers follow the law and try to make sure their clients do the same. One should not - and I do not - apologize for those who depart from that standard. But charges of lawyer wrongdoing are easy to make and, in the current environment, easily believed. Such charges impose burdens on honest lawyers and corporations even when the charges are later proved baseless. In part, the costs are obvious and are associated with investigation of the charges. In part, the costs are to reputations of persons falsely accused but likely always to be associated with some imprecise scandal. Some such costs are probably inevitable in a system that takes wrongdoing seriously. The object of regulation, however, should be to identify reliable information about real matters of concern. By that measure, in my opinion, the Act and its associated regulations make the problem of improving the corporate lawyer's role in that process worse instead of better.

I. THE WORLD BEFORE SARBANES-UXLEY

Some critics of lawyer regulation assume - and others expressly assert6 - that before Sarbanes-Oxley, there was essentially no regulation of corporate lawyers. That is simply not true. The fact that existing regulation in any aspect of life fails to prevent a catastrophic event does not mean the regulation was nonexistent or insufficient. It means either that someone violated the existing regulation - as can occur no matter how strict the regulation may be - or that the event had causes largely unrelated to the regulated conduct.

The sources of professional regulation of corporate lawyers prior to Sarbanes-Oxley were primarily to be found where one finds the regulation of all lawyers in state rules governing the conduct of lawyers licensed to practice in those states. Most of the state rules, in turn, are based in large part on the ABA Model Rules of Professional Conduct ("Model Rules"). At least seven such rules, taken individually and together, define what state law has understood to be a corporate lawyer's duties in dealing with possible corporate crime or fraud.

First, Model Rule 1.2(d) says simply and clearly: "A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent. . . ."7 There was no dispute before Sarbanes-Oxley - and no more clarity today - about the fact that a lawyer's knowing involvement in, or giving advice that assists, a client's crime or fraud is no part of any lawyer's legitimate role.

Second, turning specifically to corporate lawyers, Model Rule 1.13(a) makes clear: "A lawyer employed or retained by an organization represents the organization . . . ."8 It would be hard to say more concisely or unmistakably that a lawyer represents the corporation itself, not its officers, directors or prominent shareholders.9

Third, Model Rule 1.4(b) establishes a duty to take information about the matter on which any lawyer is working to duly authorized constituents of the client "to the extent reasonably necessary to permit the client to make informed decisions regarding the representation."10 That is also unambiguous. No matter what the critics say, even before Sarbanes-Oxley, corporate lawyers had no right to keep information about corporate crime or fraud to themselves.

Fourth, if Model Rule 1.4(b) left any ambiguity about the lawyer's duty to keep the client informed, even before the Enron events Model Rule 1.13(b) reiterated that a lawyer had a duty to take steps to protect the corporation, saying: