Sarbanes-Oxley Act and In-House Legal Counsel: Suggestions for Viable Compliance, The

Georgetown Journal of Legal Ethics, The, Summer 2005 by Noorishad, Kaveh

These rules compel an attorney to reveal to the sec any confidential information related to the attorney's representation of the corporation when the attorney reasonably believes it is necessary to make such a disclosure: (1) to prevent the corporation from committing a material violation likely to cause substantial financial injury to the corporation or its investors; (2) to prevent the corporation from committing an illegal act; or (3) to remedy the consequences of a material violation or illegal act in which the attorney's services have been used.27 All three of these exceptions seem quite analogous to those exceptions provided for by Model Rule 1.2.28

B. WHAT IS EXPECTED OF THE ATTORNEY?

The attorney has a duty to report evidence of a material violation by an officer of the corporation "up-the-ladder."29 A material violation is defined by Section 205.2(i) of the Act as a breach of fiduciary duty arising under the law.30 In order for a material violation to take effect, the Standards of Conduct require credible evidence "based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing, or is about to occur."31 This text can appear rather confusing because of the use of the double negative. The rule essentially means that "a lawyer who reasonably believes his client has committed a violation can remain silent, so long as it would not be unreasonable for someone else to conclude that he was right."32

The basic rules set forth by section 307 require an attorney to report credible evidence of a material violation of securities law "up-the-ladder" to the general counsel or the chief executive officer of the company.33 If the "chief legal counsel" (i.e., a corporation's general counsel) or the chief executive officer (or equivalent) does not respond to the evidence appropriately, the attorney must report the evidence to the corporation's board of directors, audit committee, or another committee of independent directors.34 The rules cover attorneys who provide legal services to the corporation and who have an attorney-client relationship with the company. By communicating the information to the corporation's board of directors, senior management, and/or in-house chief legal counsel, the attorney maintains the attorney-client privilege because the "client" is the corporation and all confidences are thereby preserved.35

The triggering factor that authorizes the attorney to circumvent the chief executive officer or chief legal counsel occurs when the parties do not provide an appropriate response to the above-mentioned material violation.36 An "appropriate response" is defined as (1) a reasonable belief that no material violation has occurred, is ongoing, or is about to occur; (2) where the corporation has adopted appropriate remedial measures in order to prevent, discontinue, or otherwise appropriately address the material violation that has already occurred and to minimize the possibility of its recurrence; or (3) where the attorney, in agreement with his or her professional obligations, asserts a colorable defense on behalf of the corporation in any investigation related to the material violation.37 Any one of these three responses would qualify as an "appropriate response" to a report alleging that a material violation has occurred.