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

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

The second area in which the Sarbanes-Oxley Act allows disclosure to the SEC is where the attorney reasonably believes disclosure, even without the client corporation's consent, would prevent the client corporation from committing an illegal act.53 Instances where such disclosure may be necessary include:

(1) To prevent the issuer from committing a material violation that is likely to cause substantial injury to the financial interest or property of the issuer or investors;

(2) To prevent the issuer, in a Commission investigation or administrative proceeding from committing perjury ... ; suborning perjury ...; or committing any act... that is likely to perpetrate a fraud upon the Commission; or

(3) To rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury to the financial interest or property of the issuer or investors in the furtherance of which the attorney's services were used.54

C. SANCTIONS

A violation of any of the rules provided for by the Sarbanes-Oxley Act "may result in an attorney being censured or being temporarily or permanently denied the privilege of appearing or practicing before the SEC."55 However, an attorney who acts in good faith with the provisions set forth by the Sarbanes-Oxley Act will not be subject to any disciplinary measures imposed by inconsistent state or federal laws where the attorney is admitted or practices.56

The rules neither impose a fiduciary duty upon an attorney to the corporation's shareholders nor create a private right of action against any attorney, law firm, or corporation. In addition, the authority to enforce conformity with the rules set forth by the Sarbanes-Oxley Act is vested exclusively in the SEC.

V. EFFECTS OF THE SARBANES-OXLEY ACT

The Sarbanes-Oxley Act raises difficult questions about the extent to which an attorney must disclose information and breach the sacrosanct attorney-client privilege. It requires the attorney to keep an eye on client activities and to essentially become a watchdog of client misconduct. To comply with the "up-the-ladder" rules, "corporate law firms are instituting their own internal compliance programs to actively monitor their corporate clients' behavior."57 A disclosure requirement might lead corporate executives to deny lawyers access to confidential information, which will prove to be a detriment to its investors. Furthermore, the Sarbanes-Oxley Act creates an innate conflict between the duty of confidentiality and the lawyer's personal interest in avoiding discipline or indictment.58

To add further uncertainty to the effects of the Sarbanes-Oxley Act on the attorney-client privilege, there are ambiguities in the provisions of the Act. For example, what is deemed "credible evidence?"59 Would information that an in-house attorney overhears at the water cooler be deemed hearsay or credible evidence which the attorney should have reported up? Let us assume that the attorney deems the information as "credible evidence" of a material violation. How soon must that attorney report the evidence of wrongdoing "up-the-ladder"? Accordingly, after reporting the wrongdoing, how long must the attorney wait for there to be appropriate responses? If the SEC is determined to mandate attorney disclosure of confidential information, the Commission must provide unambiguous language as to what constitutes "credible evidence" and a practical timetable to which attorneys can adhere.60