Lawyers And Corporate Scandals

Legal Ethics, Volume 7, No.1

Lawyers and Corporate Scandals ELI WALD 1

I. Introduction A. Misguided scholarship, a lost opportunity and Bruce Ackerman A lot of ink has been spilled exploring various aspects of Enron and Enron-like corporate collapses,2 including the roles lawyers played in the debacles.3 The breadth and scope of the existing scholarship alone should give one pause before attempting to add to it. Indeed, merely attempting to synthesise and engage with current insights would be a massive undertaking,4 which I do not attempt here. Instead, I argue that recent corporate failures have resulted in a rare and important opportunity to revisit our core basic assumptions about, expectations of, and understandings of the roles corporate lawyers play and their duties to their organisational clients, the legal system and the general public, an opportunity the existing scholarship as a whole regrettably fails to take advantage of.5 Re-evaluation of corporate law practice, as well as the underlying justifications that explain and support it is long overdue.6 The opportunity to revisit the fundamentals of corporate law 1 Assistant Professor of Law, University of Denver College of Law. I would like to thank my colleagues Arthur Best, John Reece and Kris Miccio for invaluable comments on multiple versions of this manuscript. I wish to gratefully acknowledge Stephanie Izaguirre and Peter Waltz, my research assistants, and Diane Burkhardt, the University of Denver College of Law research librarian, for their work on this article. 2 Enron alone is the subject of over a one hundred law review articles and numerous symposia issues, hundreds of business articles and dozens of books. The literature spans issues of corporate law and corporate governance, securities and monitization, bankruptcy, banking law, finance, accounting and criminal law just to name a few. 3 See, eg, Roger C. Cramton, “Enron and the Corporate Lawyer: A Primer on Legal and Ethical Issues”, (2002) 58 Business Law 43; Lawrence A. Cunningham, “The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Just Might Work)”, (2003) 35 Connecticut Law Review 915; Susan P. Koniak, “When the Hurlyburly’s Done: The Bar’s Struggle with the SEC”, (2003) 103 Columbia Law Review 1236; Deborah L. Rhode & Paul D. Paton, “Lawyers, Ethics and Enron”, (2002) 8 Stanford Journal of Law, Business & Finance 9; Robert W. Gordon, “A New Role for Lawyers? The Corporate Counselor After Enron”, (2003) 35 Connecticut Law Review 1185; Susan P. Koniak, “Corporate Fraud: See, Lawyers”, (2003) 26 Harvard Journal of Law & Public Policy 195. 4 For secondary literature offering summaries and selected readings from the primary literature, see, eg, Nancy B. Rapoport & Bala G. Dharan eds., Enron: Corporate Fiascos and Their Implications (New York, Foundation Press, 2004). 5 But see, Gordon, supra n. 3, at 1207–1216 (proposing a separate professional role for a distinct type of corporate lawyer, the Independent Counselor, featuring public-centered role-morality). 6 Justice Brandeis’ call for a reform in our understanding of the roles played by corporate lawyers and his passionate appeal to attorneys to practice law as “peoples’ lawyers” remains as timely today as it was over a century ago. Louis D. Brandeis, “The Opportunity in the Law”, (1905) 39 American Law Review 555.

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practice, possibly leading to much needed reform in the regulation of the corporate bar should not have been missed. And yet, the opportunity is all but gone, and as the saying goes desperate times call for desperate, or unusual, measures. This plea for a radical change in the way we think about and discuss the roles corporate lawyers play and the roles they did, and should have played in Enron et al 7 thus begins not with a summary of the downfall of Enron,8 or with rehashing of traditional accounts of lawyers’ roles,9 but rather with a (brief) lesson from a leading constitutional law scholar. In his seminal body of work, We the People,10 Bruce Ackerman argues that “constitutional law is characterized by periods of relative equilibrium and continuity, which in rare constitutional moments are disrupted, resulting in upheaval and then a critical shift in our understanding of the Constitution.”11 Ackerman distinguishes between rare moments of constitutional politics, characterised by a mobilised mass of American citizens expressing their assent through extraordinary institutional norms in periods of heightened political consciousness; and ordinary normal politics, characterised by factions trying to manipulate the constitutional forms of political life to pursue their own narrow interests.12 Others have expanded Ackerman’s constitutional law analysis into a general theory of law development, looking more broadly to explore moments of upheaval across all areas of law.13 The image I would like to borrow from Ackerman is one of status quo as the ordinary state of legal doctrine affairs.14 Whereas in constitutional law allowing normal politics to dominate constitutional politics is necessary to achieve a workable democracy,15 in general law is characterised by periods of relative equilibrium, or sustained status quo. Critical shifts in our understanding of legal doctrines and of law are relatively rare.16 I argue that recent corporate collapses presented such an Ackermanian rare moment of heightened public interest in the regulation of the legal profession opening a window of opportunity for “mobilized Americans” to bring about much needed upheaval in our understanding of corporate lawyering. Unfortunately, the window is all but closed and the opportunity is all but lost.

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See, Gordon, supra n. 3, at 1204. See, eg, Rhode & Paton, supra n. 3, at 13–17 for a concise statement of the factual background; also Jeffrey D. Van Niel, “Enron—The Primer”, in Rapoport & Dharan (eds), supra n. 4, at 3–26. 9 See, Richard Wasserstrom, “Lawyers as Professionals: Some Moral Issues”, (1975) 5 Human Rights 1; Murray L. Schwartz, “The Zeal of the Civil Advocate” in D. Luban (ed), The Good Lawyer: Lawyers’ Roles and Lawyers’ Ethics (Totowa, NJ, Rowman & Allanheld, 1983) 150–171. 10 Bruce A. Ackerman, We The People: Foundations (Cambridge, MA, Harvard University Press, 1991); We The People: Transformations (Cambridge, MA, Harvard University Press, 1998). See also, Bruce A. Ackerman, “The Storrs Lectures: Discovering the Constitution”, (1984) 93 Yale Law Journal 1013. 11 Ackerman, Discovering the Constitution, id. at 1022–1023. 12 Id. 13 See, eg, Edward Lee, “The Public’s Domain: The Evolution of Legal Restraints on the Government’s Power to Control Public Access Through Secrecy of Intellectual Property”, (2003) 55 Hastings Law Journal 91, 171–175. 14 See also, Peter Margulies, “Progressive Lawyering and Lost Traditions”, (1995) 73 Texas Law Review 1139. 15 Indeed, allowing the former to dominate the latter is Ackerman’s proposed solution to the “problematics of successful revolution.” Ackerman, Discovering the Constitution, supra n. 10, at 1017–1031. 16 See, Russell G. Pearce, “The Professionalism Paradigm Shift: Why Discarding Professional Ideology will Improve the Conduct and Reputation of the Bar”, (1995) 70 New York University Law Review 1229. See also, more generally, Morton J. Horwitz, The Transformation of American Law 1780–1860 (Cambridge, MA, Harvard University Press, 1977). 8

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B. The self-regulation duty and normal legal profession politics While law generally embodies the status quo, certain features of law practice and the regulation of lawyers render moments of constitutional legal profession politics particularly unlikely. It is quite difficult for lay clients, even ex post, to evaluate the quality of legal services they receive because such services are the product of esoteric legal knowledge they usually do not possess. The public and the profession thus strike a social bargain whereby the public grants the profession a monopoly over the provision of legal services and the profession in turn promulgates and enforces rules of conduct.17 Thus self-regulation, even at its best, insulates and protects the profession from outside critiques. Even in rare Ackermanian moments of legal consciousness interested Americans seeking to challenge the regulation of lawyers will run against institutionalised self-regulation: at the promulgation level opposition by well-organised lawyer interest groups and reluctance of legislatures to disturb the longstanding tradition of self-regulation; and at the enforcement level state bar associations’ disciplinary committees and supreme courts’ regulatory offices featuring procedural screening mechanisms, administrative bureaucracy and a culture of chronic under-enforcement—all decreasing the probability of such “constitutional” moments.18 At the same time self-regulation protects the profession from outside critics, it imposes on it a heightened duty to monitor and study its own practices. Constant re-examination of the diverse roles different lawyers play across various practice arenas and of the rules of conduct that apply to them is essential to guarantee that the profession is living up to its side of the social bargain, to maintain public trust in the bar and to prevent the appearance of impropriety, especially given that outside scrutiny is improbable.19 Viewed in this light, allegations of lawyer wrongdoing ought to be embraced by the profession as opportunities to explore and improve law practice. Of course, the mere fact that clients and the public demand reform does not constitute a good reason for it. Doomsday accounts challenging law practice and announcing the death of the American legal profession

17 See, Talcott Parsons, “The Professions and the Social Structure”, in Essays in Sociological Theory (Glencoe, IL, Free Press, 1954), 34–49; Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care”, (1963) 53 American Economic Review 941. See also, Magali S. Larson, The Rise of Professionalism (Berkeley, CA, University of California Press, 1977); Andrew Abbott, The Systems of Professions (Chicago, University of Chicago Press, 1988). 18 Other features making moments of upheaval less likely, which I do not explore here, include the bar’s relative immunity to market pressures. See, eg, Peter B. Pashigian, “The Market for Lawyers: The Determination of the Demand for and the Supply of Lawyers”, (1973) 20 Journal of Law & Economics 53; Sherwin Rosen, “The Market for Lawyers”, (1992) 35 Journal of Law & Economics 215; Ronald J. Gilson, “The Devolution of the Legal Profession: A Demand Side Perspective”, (1990) 49 Maryland Law Review 869. In fact, it seems that the profession has flourished despite a centuries-long love-hate relationship with the public, which seems to hold the profession in low esteem. Deborah L. Rhode, “The Professionalism Problem”, (1998) 39 William & Mary Law Review 283. 19 “The legal profession is self-governing . . . [Its] relative autonomy carries with it special responsibilities of self-government. The profession has a responsibility to assure that its regulations are conceived in the pubic interest . . . Every lawyer is responsible for observance of the Rules of Professional Conduct . . . Neglect of these responsibilities compromises the independence of the profession and the public interest which it serves.” American Bar Association, Model Rules of Professional Conduct, (Chicago, ABA, 2003) Preamble: A Lawyer’s Responsibilities, Comments 10, 12. See also, David B. Wilkins, “Who Should Regulate Lawyers?” (1992) 105 Harvard Law Review 799, 812–813 (discussing the bar’s insistence on self-regulation as “the only enforcement system compatible with the fact that lawyers are independent professionals”).

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have been constant throughout its history.20 The last decade alone featured the “accountants are coming, the accountants are coming” crisis claim predicting the overtaking of the provision of legal services by the “Big Five” accounting firms and multidisciplinary practices;21 the “lost lawyer” claim asserting that current practice realities render desirable professional ideals unattainable and finding the demise of such ideals to be “a catastrophe for lawyers” and a “disaster for the country as well”;22 and the “unhappy lawyers” claim mourning the rising levels of dissatisfaction and attrition among young attorneys and law students.23 Such accounts, or crisis claims, may be nothing more than the rehashing of longstanding unpersuasive complaints about the legal profession.24 Rather, faced with allegations of lawyer wrongdoing, the profession, consistent with its self-regulation duty, should employ a two-tier inquiry, one at the rules level the other at the roles level. First, did those lawyers accused of wrongdoing violate applicable rules of professional conduct? If lawyers did violate the rules the appropriate response may entail stricter enforcement of the existing rules. If wrongdoing is not the result of non-compliance with rules then a rule reform is appropriate if (a) the lawyers conduct caused or wrongfully exacerbated the harm; (b) if the rules were changed, the harm that occurred would have been prevented; and (c) the changes in the rules will do more good than harm, in other words, that in preventing the next Enron, we are not creating different mischief.25 To be sure, attorney conduct that is not in violation of applicable rules of conduct may nonetheless constitute wrongdoing if it caused or exacerbated harms to clients or third parties. Secondly, wrongdoing that is not the result of non-compliance with current rules may also indicate a need for examination at the roles level. Rules of conduct embody and implement a vision about the roles lawyers play in society, a vision that justifies and explains particular rules. Lawyer wrongdoing that is not inconsistent with rules of conduct indicates a failure at the roles level and suggests that the roles lawyers occupy may be harmful. A failure at the roles level explains how lawyers may be in compliance with applicable rules of conduct and still be responsible for wrongdoing. A reform at the roles level will lead to a reform at the rules level. Yet it is important to note that a failure at the roles level cannot be corrected for by a reform at the rules level because the failure in the latter is but a symptom of a failure in the former. Normal legal profession politics, like normal politics, is characterised by factions trying to manipulate the regulation of lawyers to pursue their own narrow interests. It is therefore not surprising that in times of normal legal profession politics the American Bar Association 20 Rhode, supra n. 18 at 283 (“Lawyers belong to a profession permanently in decline. Or so it appears from the chronic laments by critics within and outside the bar.”). 21 See, eg, Preserving the Core Values of the American Legal Profession, Report of the New York State Bar Association Special Committee on the Law Governing Firm Structure and Operation (2000). Interestingly, a less than obvious consequence of the recent corporate debacles and the collapse of Arthur Anderson has been the retreat of the remaining Final Four accounting firms from the legal services market. 22 See, Anthony T. Kronman, The Lost Lawyer (Cambridge, MA, Bellknap Press, 1993) at 3; Mary Anne Glendon, A Nation Under Lawyers (Cambridge, MA, Harvard University Press, 1993); Sol M. Linowitz, The Betrayed Profession: Lawyering at the End of the Twentieth Century (New York, Scribener, 1994). 23 Patrick J. Schiltz, “On Being A Happy, Healthy, and Ethical Member of an Unhappy, Unhealthy, and Unethical Profession”, (1999) 52 Vanderbilt Law Review 871; Sharon Dolovich, “Making Docile Lawyers: An Essay on the Pacification of Law Students”, (1998) 111 Harvard Law Review 2027. 24 Rhode, supra n. 18. 25 Lawrence J. Fox, “It Takes More Than Cheek to Lose Our Way”, (2003) 77 St. John’s Law Review 277, 282–83.

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(“ABA”) and other lawyer interest groups pursuing the self-interest of the bar have traditionally embraced the regulatory status quo and opposed reform efforts.26 In times of normal politics, secured in the shield afforded to it by self-regulation, the profession usually fails to live up to the self-regulation duty. Thus, when allegations of attorney wrongdoing become known, they often go unexplored and unaddressed.27 The sheer scope and magnitude of Enron et al resulted in unusual public legal consciousness creating an opportunity for a rare moment of constitutional legal profession politics, an opportunity to study allegations of lawyer wrongdoing and comprehensively examine corporate law practice at both the rules level and the roles level. An opportunity, moreover, that is important because of the dominance of normal legal profession politics over “constitutional” politics, and because of the chronic failure of the bar to discharge its self-regulatory mandate.28 I argue that the opportunity to experience a “constitutional” legal profession moment is all but lost because lawyer interest groups have launched a successful campaign to derail public discourse and prevent a serious study of the actual role of lawyers and the need for reform. Specifically, the interest groups have successfully employed what I call the We did nothing wrong tactic of evasion to frustrate attempts to explore the actual role lawyers played in recent corporate failures. Part II identifies the tactic used by such groups to avoid responding to serious allegations of lawyer wrongdoing, explains its operation and suggests possible reasons for its success. Part III establishes the success of lawyer interest groups in derailing the “constitutional” moment by demonstrating that the reform that followed the corporate debacles built on the premise that lawyers did nothing wrong. Studying allegations of lawyer wrongdoing in connection with recent corporate failures, Part IV identifies distinct patterns of attorney misconduct, patterns that due to the successful lawyer campaign were not studied or addressed by the current reform. These patterns not only expose the shortcomings of current reform efforts at the rules level, but also raise serious doubts about the desirability of the roles corporate attorneys play.

II: “We did nothing wrong” In the late 1990s corporate America experienced significant turmoil as numerous companies collapsed amid allegations of misconduct. The corporate scandals featured a few patterns of misbehaviour: accounting meltdowns (eg Enron, Global Crossing, WorldCom Inc., Qwest Communications International Inc., Rite Aid Corp., Xerox Corp.), looting and improper corporate loans to executives (eg Adelphia Communications Corp., Tyco International Ltd.) and insider trading (eg ImClone Systems Inc.).29

26 See, eg, William H. Simon, “The Kaye Scholer Affair: The Lawyer’s Duty of Candor and the Bar’s Temptations of Evasion and Apology”, (1998) 23 Law & Social Inquiry 243. 27 Id. See also, Cramton, supra n. 3, at 143. 28 See, eg, William D. Langford, Jr., “Criminalizing Attorney-Client Sexual Relations: Toward Substantive Enforcement”, (1995) 73 Texas Law Review 1223, 1230. 29 Cunningham, supra n. 3, at 923–28.

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The collapses caused billions of dollars in damages and led to public outcry and a reported loss of trust in the financial markets.30 The debacles also led to critiques of the legal profession: “where were the lawyers?” and “how could the legal profession let this happen?”31 The bar’s usual normal politics of refusal to explore allegations of wrongdoing and opposition to reform proposals seemed impossible given the magnitude of the losses and the extent of the public rage.32 Consistent with its duty of self-regulation the profession could have launched a comprehensive study of allegations of lawyer wrongdoing and, if appropriate, explore possible reforms at the rules and possibly roles level. A rare opportunity for a critical assessment of corporate law practice presented itself. Lawyer interest groups chose instead to launch a campaign aimed at achieving three related goals: first, appease the angry public, restore public trust in the profession and frustrate the possibility of a “constitutional” moment that could result in a threat to selfregulation; secondly, prevent a study of actual lawyer conduct that can conceivably expose lawyer wrongdoing and might lead to imposition of liability on culprits and an informed call for reform; and finally, defeat reform at both the rules and roles levels and maintain the status quo. A. The tactic of evasion—We did nothing wrong “There is nothing that I am aware of that we would change. We never saw anything at Enron that we considered illegal.”

Joseph C. Dilg, managing partner of Vinson & Elkins LLP.33 “We know all our work for Enron was of the highest caliber and consistent with all of our professional obligations.”

Howard Ayers, managing partner of Andrews & Kurth LLP.34 [T]here has been a hasty and unsupported judgment by the general public and prominent people in law and academia that lawyers violated ethical obligations and broke the law with their representation of Enron. . . . The author takes particular issue with suggestions . . . that ethical and legal violations of lawyers abounded in the representation of Enron. The author first argues that [critics] have falsely overstated that lawyers have been “found” legally responsible for numerous financial scandals over the past half-century. He then argues that the [critics]’ entire premise is based on the unsupported conclusion that where there is financial fraud, the company’s lawyers played some part. The author counters that the performance of individual law firms representing Enron has not revealed to this point any unethical or illegal behavior. Finally, the Enron investigation has uncovered no evidence of an epidemic of misconduct among lawyers, as others have suggested. What is happening here? No sooner does the media hysteria begin over the Enron affair than calls for a change in the lawyers’ rules of professional conduct ring throughout the land. 30 Report of the American Bar Association Task Force on Corporate Responsibility, (2003), 1–10 (“Task Force”), available at http://www.abanet.org/buslaw/corporateresponsibility/final_report.pdf. 31 Following a House hearing exploring the conduct of Enron attorneys, one commentator noted that “no one could remember a hearing specifically focusing on the lawyer’s role.” Otis Bilodeau, “Vinson Partner Defends His Firm, His Integrity”, Recorder, 21 March, 2002, at 3, cited by Jill E. Fisch & Kenneth M. Rosen, “Is there a Role for Lawyers in Preventing Future Enrons?”, (2003) 48 Villenova Law Review 1097, 1098 fn. 3. 32 Simon, supra n. 26, at 282. 33 Mike France, What About the Lawyers? Business Week, 23 December, 2003 at 58. 34 Id.

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Lawrence F. Fox.35 “[M]ost members of the securities bar . . . have always performed their duties in a proactive, ethical and impartial manner . . . the Sarbanes-Oxley Act does little or nothing meaningful with regard to lawyers’ conduct.”

Lawrence A. Cunningham.36 The first element of the tactic—We—refers not to lawyers actually implicated in allegations of wrongdoing but rather to the legal profession as a whole. “We” operates to obscure the nature of the inquiry by ignoring context and the important differences between different types of lawyers. The Enron et al allegations do not implicate all lawyers, rather, they specifically involve the corporate segment of the bar. By defining the parameters of the investigation to include all lawyers the tactic deflects attention from the subject-matter that should be studied—the conduct of corporate lawyers—and redefines it to be the conduct of all lawyers. Further, redefining the subject-matter of the inquiry allows proponents of the tactic to benefit from an inference of “bad apples” or de minimis. Once the reference group is defined to be the entire bar, interest groups can assert—possibly correctly—that an overwhelming majority of all lawyers (to be sure, including non-corporate lawyers who are not implicated in allegations of corporate wrongdoing) comply with applicable rules of conduct and have done nothing wrong, suggesting that no reform is necessary and no inquiry is needed: of course, bad apples exist everywhere and the legal profession is no exception. But the exception proves the rule and since “We”—the profession as a whole and the majority of the bar— “did nothing wrong” no reform is warranted. In a meaningful way the second element of the tactic—Did nothing wrong—rings true. It is factually accurate in that instances of adjudication resulting in final judicial findings of lawyer wrongdoing are quite rare. Furthermore, the “We did nothing wrong” argument fits with the well-acknowledged problem of the lack of sufficient empirical research of lawyers and law practice,37 making the lack of hard evidence with regard to lawyer wrongdoing seem to be but a symptom of a larger problem. Persuasive as it may seem, “We did nothing wrong” is an evasion tactic designed to allow the profession to escape scrutiny. Judicial findings of wrongdoing after final adjudication are an accepted standard for purposes of determining attorney criminal and civil liability. It is also a plausible one for purposes of determining the need for reform given that courts are charged with regulating the conduct of the bar, but it is by no means a self-explanatory standard. Despite its rhetoric appeal, “We did nothing wrong,” invoked in the sense of few instances of judicial findings of attorney wrongdoing does not mean that lawyers did nothing wrong. Instead, it means that plaintiffs are unable to prove in court that lawyers are guilty of 35 Lawrence J. Fox, “The Fallout from Enron: Media Frenzy and Misguided Notions of Public Relations Are No Reason to Abandon Our Commitment to Our Clients”, (2003) University of Illinois Law Review 1243, 1243–1244. 36 Cunningham, supra n. 3, at 966–67 (Citing David J. Sorin et al., “Sarbanes-Oxley Act: Politics or Reform? Statute’s Effects Are Not as Profound as Legislators Would Have Us Believe”, New Jersey Law Journal, 2 Sept., 2002, at 3.) 37 See, eg, Leslie C. Levin, “The Emperor’s Clothes and other Tales About the Standards for Imposing Lawyer Discipline Sanctions”, (1998) 48 American University Law Review 1, 6–7 (observing insufficient empirical research of lawyers’ conduct and law practice).

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wrongdoing. And while a judicial standard may allow lawyers to escape liability, it should not be enough to allow the bar to escape responsibility, let alone be used as an excuse to avoid investigation and possible reform. Specifically, the judicial standard is ill-suited for evaluating the need for reform at the rules and roles levels for three reasons: it favours the profession by setting a very high standard for finding lawyer-wrongdoing, it imposes the burden of proof on critics, and it implies a forum that may favour the profession. Irrespective of actual lawyer conduct, a standard that requires final adjudication yields a small sample size because of the selection of cases for litigation problem:38 some potential cases against lawyers are never pursued. A plaintiff may choose not to sue if the attorney is judgment-proof or does not carry liability insurance; if the costs of litigation are too high; or due to pro-attorney liability rules which either do not give rise to a cause of action39 or impose on the plaintiff a high burden of proof. Cases that are filed are often settled by attorneys wishing to avoid a negative judicial finding before adjudication is exhausted.40 Thus, by producing a small sample size irrespective of actual lawyer conduct, a standard requiring judicial adjudication lends credibility to the “We did nothing wrong” excuse. But the small sample size does not mean that there are few instances of lawyer wrongdoing. Rather, it means that plaintiffs are unable to establish attorney liability in court. “We did nothing wrong” collapses and equates the claim “critics failed to establish that ‘we’ did something wrong” with “we did nothing wrong.” Logically, the former simply does not support the conclusion that no lawyer wrongdoing actually took place and that an inquiry is not called for, let alone that no reform is warranted. The tactic of evasion cleverly shifts the burden of proof from the legal profession to its critics.41 Self-regulation, however, suggests that the burden of accounting for lawyer conduct, justifying rules of conduct and examining the desirability of roles occupied by lawyers should rest on the profession, not its critics. The bar’s tactic of evasion is essentially a demurrer—a motion to dismiss the scrutinising “proceedings” based on the failure of critics to state a claim upon which relief (that is, reform) can be granted.42 Finally, invoking “We did nothing wrong” in the sense of no final judicial findings of wrongdoing implies, but fails to convincingly argue, that the appropriate forum for discussing and deciding appropriate rules of conduct and appropriate roles for the corporate bar should be a courtroom. The tactic suggests that court proceedings (on liability issues) should be dispositive (on regulation of the bar and reform issues) and lead to a conclusion that no inquiry into lawyer wrongdoing is warranted. And yet the appropriate forum for assessing the bar’s compliance with the terms of the social bargain between the public and the profession should be the court of public opinion, not a courtroom. 38 See, eg, George Priest & Benjamin Klein, “The Selection of Disputes for Litigation”, (1984) 13 Journal of Legal Studies 1. See also, Marc Galanter, “Why the ‘Haves’ Come Out Ahead: Speculations on the Limits of Legal Change”, (1974) 9 Law & Society Review 95. 39 See, eg, Central Bank of Denver, N.A. v First Int’l Bank of Denver, 114 S.Ct. 1439 (1994) (no private cause of action under the federal securities statutes against lawyers for aiding and abetting violations of securities law). 40 Simon, supra n. 26. To be sure, a settlement does not necessarily mean that the settling attorney is guilty of wrongdoing but it does mean that the case is not litigated and irrespective of the lawyer guilt or innocence there is no judicial finding regarding lawyer misconduct. 41 For example, Larry Fox, after identifying what needs to be demonstrated before rule changes should be implemented, clearly places the burden of persuasion on reform proponents stating. See, Fox, supra n. 25, at 283. 42 See, Federal Rules of Civil Procedure, 12(b)(6).

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Overall, “We did nothing wrong” is a tactic of evasion because it refuses to engage with allegations of wrongdoing on the merits and aims to avoid investigation into the role of lawyers in recent corporate collapses. It attempts to disengage interested Americans and decrease the possibility of a “constitutional” legal profession moment, prevent a comprehensive study of actual lawyer conduct and defeat reform. Nevertheless, by confusing and redefining the subject-matter of inquiry, invoking the intuitive notion of “bad apples,” relying on pro-lawyer standards of evaluation, shifting the burden of proof on to critics, and invoking the metaphor of a trial by “filing” a demurrer, the “We did nothing wrong” tactic has proven to be an effective tactic of evasion. Invoking the common sense idiom “if it ain’t broke, don’t fix it,” the tactic cleverly disguises its real bite: “if you do not know whether it’s broken, don’t find out.” The tactic of evasion, however, is a two-edged sword. As so far as it is successful in preventing inquiries into actual lawyer misconduct, preventing analyses of the applicable rules of conduct and the roles that justify them, and defeating reform efforts, the tactic is a powerful weapon in the hands of lawyer interest groups. However, if reform is implemented despite the tactic, the reform is bound to be analytically inapt. Not based on an informed understanding of actual problems and not supported by policy analysis, reform efforts suspended in mid legal air are likely to, at best, amount to nothing more than tinkering with the existing regulatory apparatus. At worse, such reforms could harm the profession and the public by compromising desirable rules of conduct and undermining desirable lawyers’ roles. Regrettably, the reform that followed the recent corporate collapses, implemented in the shadow of an effective evasion campaign, does little more than tinker with existing rules leaving unexplored and unaddressed deficiencies in rules of conduct and disturbing aspects of roles occupied by corporate attorneys.

III: The reform efforts Lawyer interest groups have achieved two of their three desired goals. First, the public’s anger with the profession seems to have been defused and the opportunity for a “constitutional” legal profession moment is all but gone. Currently, the discourse over lawyer wrongdoing and the reform that followed seems to be limited to the legal academia and courtrooms. Secondly, to date, there has been no systematic and comprehensive study of allegations of attorney misconduct. Nonetheless, the tactic has been unable to prevent reform efforts. A. The reform 1. Sarbanes-Oxley Section 307 and Securities and Exchange Commission (“Commission”) Part 205 Moving swiftly following the corporate collapses Congress adopted the Sarbanes-Oxley Act of 2002, which President George W. Bush described as “the most far reaching reform of American business practices since the time of Franklin Delano Roosevelt.”43 43 President George W. Bush, The East Room, The White House, President Signs Corporate Corruption Bill, at www.whitehouse.gov/news/releases/2002/07/print/20020730.html (30 July, 2002).

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Section 307 of the Sarbanes-Oxley Act of 200244 requires the Commission to prescribe minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers. The Commission’s Part 20545 imposes an up-the-ladder reporting requirement when attorneys appearing and practicing before the Commission become aware of evidence of a material violation by the issuer or any officer, director, employee, or agent of the issuer. An attorney must report such evidence to the issuer’s Chief Legal Officer (“CLO”) or to both the CLO and Chief Executive Officer (“CEO”).46 If the CLO, after investigation, determines that there is no violation, he or she must so advise the reporting attorney. Unless the CLO reasonably believes that there is no violation, he or she must take reasonable steps to cause the issuer to adopt an appropriate response to stop, prevent or rectify any violation. The CLO must also report on the remedial measures or sanctions to the reporting attorney.47 The rules also require attorneys to take certain steps if the CLO or CEO does not provide an appropriate response to a report of evidence of a violation. These steps include reporting the evidence up-the-ladder to the audit committee, another committee consisting solely of independent directors if there is no audit committee, or to the board of directors if there is no such committee. If the attorney believes that the issuer has not made an appropriate response to the report, the attorney must explain the reasons for his or her belief to the CEO, CLO or directors to whom the report was made.48 Alternatively, an attorney other than the CLO may report the evidence to the issuer’s Qualified Legal Compliance Committee (“QLCC”). In such a case he or she need take no further action under the rules. The QLCC must have written procedures for the receipt, retention and consideration of reports of material violations, and must be authorised and responsible to notify the CLO and CEO of the report, determine whether an investigation is necessary and, if so, to notify the audit committee or the board of directors. The QLCC may also initiate an investigation to be conducted by the CLO or outside attorneys, and retain any necessary expert personnel. At the conclusion of the investigation, the QLCC may recommend that the issuer adopt appropriate remedial measures and/or impose sanctions, and notify the CLO, CEO, and board of directors of the results of the inquiry and appropriate remedial measures to be adopted. Where the QLCC decides, by a majority vote, that the 44 15 USC 7245. Section 307 mandates that 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. 45 Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Part 205, Release Nos. 33-8185; 34–47276; IC–25919; File No. S7–45-02, RIN 3235-AI72 (“Release”). 46 A subordinate attorney complies with the rule if he or she reports evidence of a material violation to his or her supervisory attorney (who is then responsible for complying with the rule’s requirements). A subordinate attorney may also take the other steps described in the rule if the supervisor fails to comply. 47 Id. 48 Id.

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issuer has failed to take any remedial measure that the QLCC has directed the issuer to take, the QLCC has the authority to notify the Commission. A CLO may also refer a report of evidence of a material violation to a QLCC, which then would have responsibility for taking the steps required by the rule.49 2. ABA Model Rules of Professional Conduct 1.13 and 1.6 In August 2003 the ABA House of Delegates approved the recommendations of the Task Force and revised Model Rules 1.13 and 1.6.50 The ABA reform addresses two principal subjects: the role of lawyers in facilitating the flow of information within the organisational clients they represent (Rules 1.13(a),(b),(d)–(g)); and the ability of lawyers to disclose to third parties information concerning criminal or fraudulent conduct by the client (Rules 1.6(b)(2),(3) and 1.13(c)).51 In its report, the Task Force stresses the importance of establishing more effective lines of communications and analysis within organisational clients, including communications between General Counsels and independent directors and between outside counsel and General Counsels.52 Attempting to reinforce the obligation of corporate attorneys to communicate with higher corporate authorities, the ABA approved two substantive revisions to Rule 1.13. Whereas the former 1.13(b) stated quite ambiguously that the lawyer had to take appropriate action in the best interest of the client-organisation, the new Rule refines the definition of the circumstances that trigger the lawyer’s duty to take action within the organisation; and clarifies the circumstances under which the lawyer is required to communicate with a higher authority within the organisation.53 The Task Force grounds its analysis of confidentiality in the notion of trust as the cornerstone of the attorney-client relationship: “A client must feel free to seek legal assistance and to communicate fully and frankly with the client’s lawyer. Without such full and frank communication the lawyer will be unable to represent the client effectively.”54 Recognising, however, competing policy considerations, such as the protection of the client or third 49

Id. Task Force, supra n. 30. 51 Id. at 34. 52 Id. at 36–40. 53 Rule 1.13: Organization as Client, reads in part: (a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. (b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization as determined by applicable law. ... (e) A lawyer who reasonably believes that he or she has been discharged because of the lawyer’s actions taken pursuant to Paragraphs (b) or (c), or who withdraws in circumstances that require or permit the lawyer to take action under either of those Paragraphs, shall proceed as the lawyer reasonably believes necessary to assure that the organization’s highest authority is informed of the lawyer’s discharge or withdrawal. See, Task Force, supra n. 30 at 42. 54 Id. at 48. 50

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parties and the protection of the professional integrity of the lawyer, the Task Force recommended three additional exceptions to the doctrine of confidentiality. First, new Rule 1.13(c) permits, but does not require, the lawyer for the organisation to communicate with persons outside of the organisation in order prevent substantial injury to the client-organisation.55 Secondly, new Rule 1.6(b)(2) permits, but does not require, the attorney to reveal information relating to the representation of a client to prevent the client from committing a crime or fraud reasonably certain to result in substantial injury to the financial interests of a third party;56 and finally, new Rule 1.6(b)(3) permits, but does not require, the attorney to reveal information relating to the representation of a client to prevent, mitigate or rectify substantial injury to the financial interests of a third party caused by the client.57 B. Understanding the reform: the consequences of (an unsuccessful) “We did nothing wrong” campaign 1. Understanding Part 205 Part 205 identifies lack of appropriate communications within the client-organisation as the locus of attorney wrongdoing. The Commission’s release states that: “Part 205 is designed to protect investors and increase their confidence in public companies by . . . helping to prevent instances of significant corporate misconduct and fraud.”58 How so?

55

Rule 1.13(c), d reads: Except as provided in Paragraph (d), if (1) despite the lawyer’s efforts in accordance with Paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate fashion action, or a refusal to act, that is clearly a violation of law, and (2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization, then the lawyer may reveal information relating to the representation whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization. (d) Paragraph (c) shall not apply with respect to information relating to a lawyer’s engagement by an organization to investigate an alleged violation of law, or to defend the organization or an officer, employee or other person associated with the organization against a claim arising out of an alleged violation of law. 56 Rule 1.6: Confidentiality of Information, reads in part: (a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b). (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary: ... (2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services; 57 Rule 1.6(b)(3) states: (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary: ... (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services; 58 Release, supra n. 45.

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Moreover, “Corporate wrongdoers at the lower or middle levels of the corporate hierarchy will be aware that an attorney who becomes aware of their misconduct is obligated under the rule to report it up-theladder to the highest levels of the corporation. In the event that wrongdoing or fraud exists at the highest levels of a corporation, those committing the misconduct will similarly know that the corporation’s attorneys are obligated to report any misconduct of which they become aware up-theladder to the corporation’s board and its independent directors.”60

The Commission concludes that “By mandating up-the-ladder reporting of violations, the rule helps to ensure that evidence of material violations will be addressed and remedied within the corporation, rather than misdirected or ‘swept under the rug’.”61

Nothing in the Commission’s explanation of Part 205 suggests or even contemplates direct wrongdoing by lawyers. If at all, attorneys are responsible for not effectively communicating with, and facilitating communications within their organisational clients. Part 205 instead accepts the unsupported assertion that corporate lawyers “did nothing wrong”. The Commission, called upon by Congress to promulgate “in the public interest and for the protection of investors, minimum standards of professional conduct for attorneys,”62 simply assumed lawyers did nothing wrong and promulgated a rule that builds on the role of corporate lawyers as information and communications facilitators within the organisational structure of their clients. Such a rule not only fails to question lawyers’ current practices, but in fact reinforces them. In its proposed version, the Commission’s rule,63 did implicitly question lawyers’ conduct and incorporated several elements that suggested lawyers’ wrongdoing. First, in addition to an up-the-ladder reporting requirement, the proposed rule contemplated a so-called “noisy withdrawal” provision, permitting or requiring attorneys under certain circumstances, to notify the Commission that they have withdrawn from the representation of the issuer, and permitted attorneys to report evidence of material violations to the Commission. Such a rule implied that corporate lawyers knew about their clients’ wrongdoing and suggested a gate-keeping role for the corporate bar that is radically different from the current one lawyers occupy. The final rule did not incorporate such a provision and the

59

Id. Id. 61 Id. 62 15 USC 7245, supra n. 44. 63 Standards of Professional Conduct for Attorneys Appearing and Practicing before the Commission in the Representation of an Issuer, Proposed Part 2005, 21 November, 2002. 60

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Commission is still considering the “noisy withdrawal” provisions of its original proposal under section 307.64 Secondly, the proposed rule also included a documentation requirement, which would have required attorneys to keep a record of their actions in conjunction with attempting to insure compliance with Part 205.65 The Commission cited comments by opposing lawyer interest groups arguing that such a requirement could be an impediment to open and candid discussions between attorneys and their issuer clients because if the client knew the lawyer was documenting discussions regarding a potential material violation, managers would be less likely to be honest and forthcoming. Furthermore, opponents of the documentation requirement argued that it may create a conflict of interest between the lawyer and his or her client. The documentation would “occur at exactly the time when there was disagreement between an attorney and the client. At the very least, requiring the attorney to produce such product by virtue of his or her separate obligation to the Commission is bound to present potential for conflict of interest.”66 Again, this proposed rule implied possible wrongdoing by corporate lawyers and invoked a role very much different from the one opponents of the requirement assert. The documentation requirement was not adopted by the Commission. Thirdly, the Commission clarified and made explicit in Section 205.7 that no private right of action exists based on compliance or non-compliance with the rule.67 In addition, the Commission has made it clear in Section 205.6(c) that an attorney who complies in good faith with the rule will not be subject to discipline or otherwise liable under an inconsistent state standard. This “safe harbor” provision has been added to protect attorneys, law firms, issuers and officers and directors of issuers.68 Part 205 thus implicitly accepts that lawyers “did nothing wrong” by adopting rules of conduct that sustain the corporate law practice status quo and implement no meaningful reform at either the rules or roles levels; and rejecting proposed provisions that implied possible attorney wrongdoing or contemplated revision of the roles played by the corporate bar. Notably, Part 205 does authorise a covered attorney to reveal to the Commission confidences or secrets relating to the attorney’s representation of an issuer before the Commission to the extent the attorney reasonably believes it necessary to: (i) prevent the issuer from committing a material violation likely to cause substantial harm to the financial interest or property of the issuer or investors; (ii) prevent the issuer from perpetrating a fraud upon the Commission; or (iii) rectify the consequences of the issuer’s illegal act that the attorney’s

64 In its Release, the Commission proposes an alternative procedure to the “noisy withdrawal” provisions. Under this proposed alternative, in the event that an attorney withdraws from representation of an issuer after failing to receive an appropriate response to reported evidence of a material violation, the issuer would be required to disclose its counsel’s withdrawal to the Commission as a material event. 65 Section 205.3(b)(2) of the proposed rule read: The attorney reporting evidence of a material violation shall take steps reasonable under the circumstances to document the report and the response thereto and shall retain such documentation for a reasonable time. Supra n. 64. 66 Supra n. 45. 67 Id. 68 Id.

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services had furthered.69 And yet, placing a discretionary provision that is arguably inconsistent with the spirit and roles of corporate attorneys otherwise endorsed by Part 205 seems like little more than an empty rhetorical gesture to appease public opinion. 2. Understanding the revised Rules of Conduct The ABA Task Force report contemplates at times the possibility of lawyer wrongdoing. For example, the report acknowledges that: “The competition to acquire and keep client business, or the desire to advance within the corporate executive structure, may induce lawyers to seek to please the corporate officials with whom they deal rather than to focus on the longterm interest of their client, the corporation.”70 It further states: “lawyers for the public corporation must bear in mind that their responsibility is to the corporation, and not to the corporate directors, officers or other corporate agents with whom they necessarily communicate . . . there are times, moreover, when the corporate lawyer must recognize that his or her own independence may be compromised by relationships with senior executives officers.”71 The Report, however, fails to meaningfully investigate or address these concerns. Rather, it identifies corporate governance failure as the locus of wrongdoing and, following in the footsteps of Part 205, implicitly accepts as a premise that lawyers did nothing wrong. Nowhere does it discuss or explore allegations of lawyer wrongdoing, study the causes of it or offer remedial measures. Instead, revised Model Rule 1.13 clarifies the role of corporate lawyers as information and communications facilitators within the organisational structure. By electing to tinker with its existing Model Rules, the ABA implicitly suggest that lawyers did nothing wrong and that therefore no significant reform is needed. Furthermore, the revisions to Model Rules 1.6(b)(2),(3) and 1.13(c) are somewhat puzzling. If lawyers did nothing wrong, why allow greater disclosure and add new exceptions to the fundamental doctrine of confidentiality? Infusing the Model Rules with duties to protect, in some circumstances, the financial interests of third parties, duties that are inconsistent with both the letter and the spirit of the otherwise client-centred Model Rules make little sense without a comprehensive analysis of the role corporate lawyers play and the underlying basic assumptions that justify that role. The ABA Task Force failed to investigate the allegations of wrongdoing against lawyers, elected instead to assume that by-and-large lawyers did nothing wrong and suggested revisions to the Model Rules that are based neither on an informed understanding of failure in actual corporate practice nor on an a persuasive policy of analysis. 69 205.3(d)(2) entitled “Disclosure to the SEC without issuer’s consent” provides: An attorney appearing and practicing before the Commission in the representation of an issuer may reveal to the Commission, without the issuer’s consent, confidential information related to the representation to the extent the attorney reasonably believes necessary: (i) 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; (ii) To prevent the issuer, in a Commission investigation or administrative proceeding from committing perjury, proscribed in 18 USC 1621; suborning perjury, proscribed in 18 USC 1622; or committing any act proscribed in 18 USC 1001 that is likely to perpetrate a fraud upon the Commission; or (iii) 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. 70 Task Force, supra n. 30 at 14–15. 71 Id. at 23, 24.

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3. The federalisation of legal ethics Prior to passage of the Sarbanes-Oxley Act, attorneys appearing and practicing before the Commission were regulated primarily by their home states.72 Part 205 sets forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in the representation of an issuer. These standards supplement applicable standards of any jurisdiction where an attorney is admitted or practices and are not intended to limit the ability of any jurisdiction to impose additional obligations on an attorney not inconsistent with the application of this part. However, where the standards of a state or other United States jurisdiction where an attorney is admitted or practices conflict with Part 205, Part 205 governs.73 While the Commission clarified that Part 205 does not preempt ethical rules in United States jurisdictions that establish more rigorous obligations than imposed by it, it reaffirmed that its rules shall prevail over any conflicting or inconsistent laws of a state or other United States jurisdiction in which an attorney is admitted or practices.74 For example, addressing concerns that granting covered lawyers the discretion to reveal confidences without the client-issuer’s consent75 would preempt state law ethics rules that do not permit disclosure of information concerning such acts, the Commission made clear that in such a case Part 205 would preempt state law. Similarly, the Commission stated that it intends: “that the issue whether an attorney-client relationship exists for purposes of this part will be a federal question and, in general, will turn on the expectations and understandings between the attorney and the issuer. Thus, whether the provision of legal services under particular circumstances would or would not establish an attorney-client relationship under the state laws or ethics codes of the state where the attorney practices or is admitted may be relevant to, but will not be controlling on, the issue under this part.”76

Section 307 and Part 205 thus represent a first step toward the federalisation of legal ethics, a move from state regulation of the bar to regulation by a federal agency and a move from selfregulation to administrative regulation. All represent significant changes in the regulation of the corporate bar and the profession as a whole, changes that merit great attention. And yet, as a result of the “We did nothing wrong” campaign, these changes were passed without such due consideration. Furthermore, analysis of available evidence of the roles played by attorneys in recent corporate collapses reveals disturbing patterns of attorney misconduct, that illustrate the shortcomings of the reform efforts and provide insights regarding much needed reform.

72 But see, SEC v Nat’l Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978); In re Carter and Johnson, 1981 Fed. Sec. L. Rep. para 82,847 (SEC 1981). 73 Release, supra n. 45. See also, Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Parts 205, 240 and 249, Release Nos. 33-8186; 34–47282; IC–25920; File No. S7–45-02, RIN 3235–AI72 (“Second Release”). 74 Id. 75 Section 205.3(d)(2), supra n. 69. 76 Id, Supra n. 45.

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IV: Patterns of lawyer wrongdoing The collapses of Enron et al led to unprecedented allegations of attorney wrongdoing. Lawyer interest groups have responded by asserting “We did nothing wrong.” Analysis of existing evidence disproves this tactic of evasion. It reveals distinct patterns of attorney misconduct that implicate numerous lawyers and law firms and question attorney conduct that is common in the representation of organisational clients. Some of these patterns violate current rules of conduct suggesting insufficient enforcement of existing rules. Other patterns of misconduct are consistent with current rules suggesting the need to revisit the rules and the underlying justifications that support them at the roles level. The evidence lends no support to recent reform efforts that assume no attorney wrongdoing and embrace the regulatory status quo. A. Wrongdoing by outside counsel: design and participation in fraudulent transactions; facilitation of fraud; and participation in non-disclosure 1. Allegations against outside counsel—Vinson & Elkins LLP, Andrews & Kurth LLP, and Kirkland & Ellis LLP. In the mid-1990s, Enron began to transform its strategic focus from transportation of natural gas to energy trading and ventured away from traditional business and accounting approaches in order to generate higher financial returns.77 As financial problems arose in operations outside it core traditional energy business, Enron orchestrated “an enormous Ponzi scheme involving illusory profits generated by phony, non-arm’s-length transactions with Enron-controlled entities and improper accounting tricks in order to inflate Enron’s earnings and conceal its growing debts.”78 Vinson & Elkins LLP (“Vinson & Elkins”) is a large Houston, Texas-based law firm with approximately 800 lawyers in ten offices world-wide.79 While at its hey-day Enron had a large in-house legal department with over 250 attorneys and employed “hundreds of outside law firms,” Vinson & Elkins was the company’s main outside counsel in terms of the number and variety of matters handled and legal fees paid.80 Indeed, Enron was Vinson & Elkins’ largest client, accounting for more than 7 per cent of the law firm’s revenues in 2001. Over the years more than 20 Vinson & Elkins lawyers have left the firm and joined Enron’s in-house legal department.81 Allegations of lawyer wrongdoing against Vinson & Elkins first surfaced in the Powers Report commissioned by Enron’s special investigative committee of the company’s board of directors. The Powers Report concluded that: 77 Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp. (“Powers Report”), at *15. 78 In re Enron Corp. Sec. Derivative & ERISA Litig., 235 F. Supp. 2d 549, 613 (S.D. Tex. 2002). 79 See http://www.vinson-elkins.com/firm_overview/firm_overview.cfm 80 See, In re: Enron Corp., et al., Debtors, Appendix C (Role of Enron’s Attorneys) to Final Report of Neal Batson, Court-Appointed Examiner, Case No. 01–16034 (AJG) (“Batson Report”) at *10. Between 1997 and 2001 Enron paid Vinson & Elkins fees in excess of $160 million. 81 In re Enron, supra n. 78 at 656.

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“Vinson & Elkins, as Enron’s longstanding 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. 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.”82

The complaint in the Enron class action identifies four categories of attorney wrongdoing, alleging that Vinson & Elkins designed and participated in fraudulent transactions; facilitated fraud by issuing necessary legal opinions; orchestrated Enron’s non-disclosure by means of technically accurate yet misleading disclosure; and conducted a cover-up investigation despite of conflict-of-interest concerns. First, the complaint alleges that Vinson & Elkins participated in the negotiations for, prepared the transactions for, participated in the structuring of, and approved numerous illicit partnerships and special purpose entities (“SPEs”) with knowledge that they were manipulative devices designed to move debt off Enron’s books, inflate its earnings, and falsify Enron’s reported financial results and financial condition.83 Secondly, the complaint alleges that the law firm, from 1997 through 2001,84 provided “true sale”85 opinions and other legal documents that were false and were indispensable for the sham deals to close and the fraudulent scheme to continue, and, over time, continually issued false opinions about the illegitimate business transactions, such as that they were “true sales.”86 Vinson & Elkins’ willingness to provide Enron with these legal opinions was, as a practical matter, crucial to the company’s ability to complete the transactions.87 Thirdly, the complaint alleges that Vinson & Elkins drafted and approved the adequacy of Enron’s SEC filings, including annual reports on Forms 10K, registration statements, shareholder reports and press releases that the law firm knew were false and misleading. Vinson & Elkins also drafted disclosure statements about related party transactions, which it also knew were false and misleading because they concealed material facts.88 Finally, the complaint alleges that the law firm conducted a cover-up investigation in order to assist Enron executives conceal the wrongdoing.89

82

Powers Report, supra n. 77 at *15. In re Enron, supra n. 78 at 614–15. 84 “Enron continued to use the SPEs in non-arm’s length transactions to generate false profits and conceal Enron’s actual indebtedness from 1997 through 2001 in transactions that Vinson & Elkins participated in structuring and provided false ‘true sale’ opinions to effectuate.” Id. at 626–27. For example, in September of 2001, when Enron’s stock value was dipping to precarious ‘trigger’ levels and threatening the possibility of large asset write downs, Vinson & Elkins allegedly effected a fictitious swap asset transaction between Enron and Qwest intended to limit the write-offs and conceal Enron’s financial situation by creating an appearance of healthy operating earnings. Id. 85 “[T]rue sales opinions are letters that law firms write vouching for the fact that the business transactions meet particular legal requirements.” Id. 86 Id. at 657. 87 Batson Report, supra n. 80 at *11. 88 In re Enron, supra n. 78 at 657. 89 See infra, IV.B.1. pages 75–76. 83

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Rejecting the firm’s motion to dismiss, Judge Harmon refused to accept the firm’s “We did nothing wrong” assertion. The Judge found that “Vinson & Elkins was necessarily privy to its client’s confidences and intimately involved in and familiar with the creation and structure of its numerous businesses, and thus, as a law firm highly sophisticated in commercial matters, had to know of the alleged ongoing illicit and fraudulent conduct.”90 Responding to the law firm’s argument that it only fulfilled its role as a zealous advocate on behalf of Enron, the Judge ruled: “contrary to Vinson & Elkins’ contention, the situation alleged in the complaint is not one in which Vinson & Elkins merely represented and kept confidential the interests of its client, which has ‘the final authority to control the contents of the registration statement, other filing, or prospectus.’ Instead, the complaint alleges that the two were in league, with others, participating in a plan, with each participant making material misrepresentations or omissions or employing a device, scheme or artifice to defraud, or engaging in an act, practice or course of business that operated as a fraud, in order to establish and perpetuate a Ponzi scheme that was making them all very rich.”91

Judge Harmon’s ruling illustrates the effectiveness of the “We did nothing wrong” tactic of evasion and the problematic nature of relying on judicial findings as the standard for evaluating lawyer misconduct for purposes of assessing reform. After making her factual findings, the Judge states: “Nevertheless, had Vinson & Elkins remained silent publicly, the attorney-client relationship and the traditional rule of privity for suit against lawyers might protect Vinson & Elkins from liability to non-clients for such alleged actions on its client’s (and its own) behalf.”92 In other words, Vinson & Elkins’ actual wrongdoing identified above may nonetheless result in no judicial findings of wrongdoing because pro-lawyer liability rules demand that plaintiffs identify a duty owed to it by the attorney, a burden plaintiffs may not be able to meet.93 Thus, despite possible actual lawyer wrongdoing that is very much relevant for purposes of evaluating the need for reform, the judicial proceeding may result in a legal finding of no liability. The most detailed allegations of wrongdoing against Vinson & Elkins to date were made in conjunction with the Enron bankruptcy proceedings.94 On April 8, 2002, Judge Gonzales ordered the appointment of an Examiner to inquire into, inter alia, all transactions involving SPEs, including a mandate to identify all parties involved and assess their involvement in the transactions. The Examiner studied the role Vinson & Elkins played in certain of Enron’s SPE transactions and in Enron’s disclosures concerning these transactions. The Examiner concluded that there was sufficient evidence from which a fact-finder could conclude that Vinson & Elkins attorneys involved in Enron’s SPE transactions (i) committed legal malpractice based on Texas Rule 1.12, (ii) committed legal malpractice based on negligence and (iii) aided and abetted the Enron officers’ breaches of fiduciary duty.95 The Examiner further 90

In re Enron, supra n. 78 at 704–05. Id. 92 Id. 93 Judge Harmon found that despite their inability to meet the privity requirement the plaintiffs may still be able to establish a duty owed to them by Vinson & Elkins. The judge held that when lawyers (and other professionals) take the affirmative step of speaking out, whether individually or as essentially an author or co-author in a statement or report, whether identified or not, about their client’s financial condition, they have a duty to third parties not in privity not to knowingly or with recklessness issue materially misleading statements on which they intend or have reason to expect that those third parties will rely. Id. 94 Batson Report, supra n. 80. 95 Id. at *64–69. 91

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found that while there was little or no direct evidence of particular Vinson & Elkins attorneys’ knowledge of wrongful conduct by an Enron officer, and the law firm’s attorneys affirmatively denied having any such knowledge, in some instances there was circumstantial evidence that would be sufficient for a fact-finder to infer that Vinson & Elkins’ attorneys did possess actual knowledge of wrongful conduct by Enron’s officers.96 Andrews & Kurth is another Houston, Texas-based law firm97 that handled the vast majority of Enron’s controversial SPE transactions. Andrews & Kurth’s conduct was not questioned in the Powers Report, and the firm was not named as a defendant in the class action lawsuit. However, investigating allegations that Andrews & Kurth designed, participated, and facilitated fraudulent transactions and drafted misleading disclosure statements, the bankruptcy Examiner concluded that: “there is sufficient evidence from which a fact finder could determine that Andrews & Kurth committed malpractice, aided and abetted a breach of fiduciary duty or committed malpractice based on negligence in connection with [fraudulent SPE] transactions. A fact finder could determine that Andrews & Kurth knew that Enron had no intention to relinquish control over, or the risks and rewards of, the assets transferred in certain of the [SPE] transactions and therefore was engaging in the [SPE] transactions to produce materially misleading financial statements.”98

Kirkland & Ellis is a large full-service law firm with more than 1000 lawyers in office locations throughout the United States and other countries.99 The class action complaint alleges that Kirkland & Ellis actively engaged in Enron’s Ponzi scheme to defraud the company’s investors, asserting that the law firm was hand-picked by Enron to provide “independent” representation to the SPEs.100 In addition, Kirkland & Ellis allegedly participated in Enron’s misleading disclosures, reviewed SEC filings by Enron and knew that related party transactions were unfair to Enron contrary to the company’s false assertion that the transactions were on terms similar to those it could have obtained with independent third parties.101 Judge Harmon dismissed the action against Kirkland & Ellis, finding that: “All the assertions against the firm are conclusory and general.”102 It is important to note, however, that the ruling clearly rejected the “We did nothing wrong” assertion: While the allegations against Kirkland & Ellis may indicate that it acted with significant conflicts of interests and breached professional ethical standard, unlike its claims against Vinson & Elkins, Lead Plaintiff has not alleged that Kirkland & Ellis made any material misrepresentations or omissions to investors or the public generally that might make it liable to non-clients under s. 10(b).”103 (emphasis added).

96 The Examiner did point out that a fact-finder may draw alternative or contrary inferences from the same evidence, and clearly noted that Vinson & Elkins has viable defenses to such claims that would be presented to the fact-finder including lack of any knowledge of wrongdoing, absence of any duty, under the circumstances, to take “remedial actions,” and that such claims are barred or reduced by the wrongful conduct of Enron’s officers under rules of comparative fault. Id. 97 See, http://www.akllp.com/FirmOverview/MnAbout.html 98 See Batson Report, supra n. 80 at sp*5, 69–70. 99 http://www.kirkland.com/firm/firm.asp In 2002, Kirkland & Ellis was named one of the top two firms most mentioned as primary outside counsel by corporate America’s in-house attorneys. 100 In re Enron, supra n. 78 at 669. 101 Id. at 672–73. 102 Id. at 706. 103 Id.

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In other words, while the judge indicates possible actual lawyer wrongdoing (ie, conflict of interests and breach of ethical standards), she nonetheless finds that the plaintiffs were unable to establish a duty owed by Kirkland & Ellis to them and meet the legal standard of malpractice, and thus finds no legal lawyer wrongdoing. 2. Wrongdoing “below the radar screen” In August 2002 the Enron Examiner petitioned the bankruptcy Court arguing that it was necessary to begin the review of documents in the possession of third parties,104 including some 50 law firms “that are or have been involved in various transactions with the Debtors or the SPEs.”105 In supporting his motion the Examiner argued that such discovery was appropriate because the Examiner was “attempting to determine the scope of the matters concerning the Debtors’ SPEs . . . and most importantly, who was involved in such transactions and to what extent” (emphasis added).106 Judge Gonzales granted the motion, sparking speculation that the Examiner was looking to pin some of the blame for Enron’s collapse on the company’s attorneys.107 In February 2003 the Examiner filed another discovery motion with the Court, asserting that: “After reviewing certain documents produced the Examiner has concluded that oral examinations are necessary and appropriate to obtain further evidentiary background for the Examiner’s reports.”108 The Motion targeted 24 law firms previously subpoenaed and identified, three additional law firms not previously subpoenaed by the Examiner: Weil, Gotshal & Manges (“Weil”); Skadden, Arps, Slate, Meagher & Flom (“Skadden”); and Milbank, Tweed, Headly & McCloy (“Milbank”). The targeting of these three prominent law firms drew significant attention due to the key roles played by the firms in the bankruptcy proceedings: Weil is Enron’s lead bankruptcy counsel. In May 2002 Weil disclosed that in 2000 the firm represented Deutsche Bank in an Enron deal called “Project Valhalla.” The Examiner served Weil with a subpoena requesting documents related to that deal. Skadden is Enron’s primary corporate counsel and has also represented the company in connection with government probes. Milbank is lead counsel to the committee of Enron’s unsecured creditors.109 Fifteen law firms filed objections with the court, asserting, inter alia, that the Examiner’s requests were burdensome and violated attorney-client privilege. Despite those objections, in a rare move—law firms are rarely compelled to turn over documents, let alone be subjected to depositions—Judge Gonzales once again granted the Examiner’s Motion.110

104 Motion of Neal Batson, The Examiner, Pursuant to Federal Rule of Bankruptcy Procedure 2004 for an Order Directing the Production of Documents, Case No. 01-16304 (AJG) (United States Bankruptcy Court S. D. N. Y., 1 August, 2002), para. 7. 105 Id. at para. 9b. 106 Id. at para. 15. 107 See, eg, Gary Young, “50 Law Firms Subpoenaed in Enron Bankruptcy”, (2003) 26 The National Law Journal 29. 108 Third Motion of Neal Batson, The Examiner, Pursuant to Federal Rule of Bankruptcy Procedure 2004 for an Order Directing Production of Documents and Oral Examinations, Case No. 01–16304 (AJG) (United States Bankruptcy Court S. D. N. Y., 5 February, 2003), Preliminary Statement, paras. 7–8. 109 See, Otis Bilodeau, “Enron Investigation Focuses on N.Y. Firms”, (2003) 26 Legal Times 6. 110 But see, Fisher v US, 425 US 391 (1976) (allowing the IRS to issue search warrants against attorneys in possession of client tax information).

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In his Final Report filed on 4 November, 2003, the Examiner fails to mention any of the law firms that he subpoenaed and deposed. Rather, the Report merely states that “Enron’s outside law firms discussed in this report are: Vinson & Elkins and Andrews & Kurth.”111 While the Report does not explicitly justify the Examiner’s failure to make any findings whatsoever with regard to the law firms he subpoenaed and deposed, in the context of his mandate, the Examiner’s failure to assess the roles played by additional outside counsel may be understandable. The Examiner was operating in the shadow of a statute of limitations and was focusing on identifying deep pockets for the benefit of the bankrupt estate, rather than scrutinising the conduct of lawyers per se. Nonetheless, the Examiner’s Motions and scope of investigation raise serious questions with regard to the role and responsibility of numerous law firms in conjunction with Enron’s downfall. The picture painted by the Powers and Batson investigations, and by Judge Harmon’s and Judge Gonzales’ preliminary findings is disturbing. Implicating numerous law firms, the evidence reveals three patterns of wrongdoing by outside counsel: design and participation in fraudulent transactions; facilitation of fraud by issuance of necessary legal opinions; and orchestration of non-disclosure by means of technically accurate yet misleading disclosure, none of which are investigated or addressed in the recent reform. B. Wrongdoing by lawyers conducting internal investigations: conflicts of interest and compromised professional judgment As allegations of corporate wrongdoing began to surface, implicated companies launched internal investigations, often supervised by law firms. The conduct of some of the lawyers involved in these investigations raises serious concerns of attorney wrongdoing. 1. Vinson & Elkins’ investigation of Enron Vinson & Elkins conducted a limited investigation into allegations of wrongdoing that surfaced after Sherron Watkins’ whistle-blowing.112 The firm, despite a prima facie conflict of interest—it was implicated in the alleged fraud to be investigated—agreed to conduct the inquiry. After a five weeks long investigation, the law firm essentially concluded that the transactions it investigated were adequately disclosed and that “bad cosmetics” concerns were unsupported because the transactions in question were useful vehicles that benefited Enron. The firm concluded that no further investigation was necessary.113 Despite that recommendation, just two weeks later, Enron’s special investigative committee charged Powers with undertaking precisely the sort of detailed investigation that Vinson & Elkins had found unnecessary. The Powers Committee criticised Vinson & Elkins’ actions with respect to many aspects of the investigation: the “result of the Vinson & Elkins review was largely predetermined by the scope and nature of the investigation and the process employed.”114 By contrast, the Powers Report notes that its own investigation was able to 111

Batson Report, supra n. 80, n. 13. Kathleen F. Brickey, “From Enron to WorldCom and Beyond: Life and Crime after Sarbanes-Oxley”, (2003) 81 Washington University Law Quarterly 357, 361, n. 21. The firm also advised Enron about retaliatory measures against corporate whistle-blowers. Id. at 362–63. 113 Batson Report, supra n. 80 at *65. 114 Powers Report, supra n. 77 at 176. 112

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identify the most serious problems at Enron only after making the detailed inquiries that Vinson & Elkins had agreed were unnecessary.115 The firm’s position is instructive as to the operation of the “We did nothing wrong” tactic: “Vinson & Elkins protests that its purported ‘whitewash’ investigation was not disclosed to the public until after the Class Period ended, and thus cannot be the basis of a s. 10(b) misrepresentation claim by the investors.”116 In other words, the law firm did not attempt to defend the propriety of its internal investigation and establish that it did nothing wrong. Instead, it argued that the Plaintiffs could not prove that the firm did something wrong.117 While possibly a viable defense against judicial finding of liability, the firm’s assertion should not shield it from responsibility and should not be invoked as a reason to avoid scrutiny and possible reform. 2. Simpson, Thacher & Bartlett’s (“Simpson”) Investigation of Global Crossing Global Crossing, the telecommunications provider, is alleged to have abused accounting techniques in order to inflate its profits and conceal its stalled series of shaky business endeavours.118 The allegations against Simpson, the company’s outside counsel, stem from the law firm’s role in conducting an internal investigation of the company’s accounting methods. After its accounting practices had been called into question by a former employee, Global Crossing asked its longtime outside counsel, Simpson, to look into the allegations. The law firm accepted the charge despite its multiple ties to the company, which included millions of dollars in annual legal fees;119 representation of Global Crossing, some of its affiliates, the CEO and his investment group, the general counsel and multiple directors and officers; Global Crossing’s general counsel was a former Simpson attorney; small investments in the company by some of he firm’s attorneys; and the position of company’s then current acting general counsel as a full-time partner at Simpson.120 Simpson conducted a limited investigation. It relied largely on representations made by company’s executives who assured the law firm that the board of directors and the company’s auditor, Arthur Andersen, had studied the questionable practices and that the auditor had signed off on the accounting. Notably, the law firm did not interview the “whistle-blower employee,” Mr. Olofson, Andersen or Global Crossing directors. Defending its actions, Simpson invoked the “We did nothing wrong” excuse asserting that it was asked to conduct a narrow investigation of accounting issues. “I do not believe we did anything wrong,” argued Richard Beattie, Chairman of Simpson’s executive committee.121 In February 2002, Global Crossing’s special board committee began exploring Olofson’s allegations, retaining the services of the Washington office of Coudert Brothers LLP Id. See also, Rhode & Paton, supra n. 3 at 20–21. In re Enron, supra n. 78 at 705. 117 The judge rejected the law firm’s argument finding that: “the investigation and report can serve as the basis of a s. 10(b) and Rule 10b–5. Id. 118 The company allegedly utilised pro forma reporting (a technique that conceals real GAAP results by omitting items GAAP considers expenses while retaining items of revenue) and capacity “swaps” with carriers who were also customers, immediately realising revenue based on the value of the swapped capacity while allocating the costs over numerous future periods. Cunningham, supra n. 3 at 930–32. 119 A reported $32 millions dollars in 2000 and 2001 alone, Id. 120 It should be noted, however, that unlike Vinson & Elkins, Simpson was not implicated in, and did not advise the company on the capacity swaps it was investigating. 121 Joseph Menn, “Global Crossing Case Figure Not Questioned”, Los Angeles Times, 22 February, 2002 at C1. 115 116

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(“Coudert”). In its report, released in March 2003, Coudert cleared the company from allegations of wrongdoing with regard to the accounting practices, yet issued a harsh indictment of Simpson. It raised conflict-of-interest questions, concluding that the Simpson partner in charge of the investigation and the acting Global Crossing general counsel at the time, conducted an “inquiry of little or no independent importance.”122 The report blamed Simpson, rather than Global Crossing, for any potential liability that the company may incur and for damages for lost company contracts. Simpson responded by retaining New York-based Davis Polk & Wardwell to defend itself against Coudert’s charges of wrongdoing. Reasserting that the firm had “done nothing wrong,” Simpson added that since “the [special] committee exonerated the company’s accounting treatment . . . there was no victim,”123 once again illustrating the “We did nothing wrong” tactic of evasion. Rather than defending the propriety of the internal investigation it conducted, it seems that the law firm chose to hide behind the inability of critics to prove in a court of law it did something wrong. 3. Boies, Schiller & Flexner LLP’s (“Boies”) Investigation of Tyco In late April 2002, in an attempt to restore investor confidence in the company, Tyco asked Boies to conduct an internal investigation analysing transactions between the company and certain senior corporate officers and directors and represent the company in any related litigation (“Phase 1” investigation).124 In July 2002 the company expanded the law firm’s mandate to include a review and analysis of selected accounting and governance issues and transactions with the explicit purpose of reviewing Tyco’s 1999–2002 reported revenues (“Phase 2” investigation).125 In a filing with the Commission Tyco described the scope of the engagement: “the firm would have full and complete access to all information available to the company . . . [Tyco] did not limit the work of the Boies firm in connection with its review . . . The Boies firm was given unfettered access to the company’s independent outside auditors, had no fixed or limited budget, and was free to, and in fact did, expand the scope of its review when it believed it appropriate to do so.”126

The company concluded by stating: “Few, if any, major companies have ever been subjected to the corporate governance and accounting scrutiny entailed in Phase 2 of the Boies Firm’s work.”127 Boies completed its Phase 2 investigation in December 2002 and concluded, inter alia, that “There was no significant or systemic fraud affecting the company’s prior financial statements” and that “The incorrect accounting entries and treatments are not individually or in the aggregate material to the overall financial statements of the company.”128 Since December 2002, however, Tyco has acknowledged accounting problems, totaling more than $1.6 billion dollars. In a February 2003 filing with the Commission Tyco 122 Dennis K. Berman, “Global Crossing Board Report Rebukes Counsel”, Wall Street Journal, 11 March, 2003 at B9. 123 Id. 124 Tyco International Ltd. Form 8-K filing with the SEC, 30 December, 2002, Item 9 (“Tyco Filing”). 125 Id. 126 Id. See also, Laurie Cohen, “Tale of Two Probes”, Wall Street Journal, 12 June, 2003, at C1. 127 Tyco Filing, supra n. 124. 128 Id. Section H, Conclusions and Recommendations.

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back-pedaled and said that the Boies investigation “was not an exhaustive review,” and that it had “limitations.” Boies conducted the investigation despite representing Tyco in complex litigations, including serving as lead counsel in Tyco’s lawsuit against its three former top officers, giving rise to the appearance of impropriety and conflict of interest concerns. As the firm had possible expectations of conducting future legal work for Tyco, it had an incentive to vindicate the company from any wrongdoing. Disturbing conflict of interest concerns are present in all three internal investigations and suggest a pattern of lawyer wrongdoing. Two of the law firms were longstanding outside counsel of the companies they investigated, and the other was former and current counsel to the target of its investigation; all three firms received substantial annual legal fees from the respective companies and possibly had expectations of doing additional work for them; two of the law firms formerly represented parties that were implicated in the investigations; attorneys, including the General Counsel, at the in-house legal departments of two of the companies were former partners and associates of the investigating law firms; and two of the law firms accepted a narrow investigatory mandate later to be questioned by critics. In all three instances the law firms essentially dismissed the allegations of corporate and accounting wrongdoing only to have the companies acknowledge wrongdoing shortly after the conclusion of the investigations. All three instances raise disturbing questions about the firms’ handling of conflict of interest concerns, the balancing of legal and business conflicts of interest and the exercise of independent professional judgment. C. Wrongdoing by General Counsel Corporate and accounting improprieties that took place on a general counsel’s watch strongly suggest that the in-house legal department or attorney in charge failed to fulfill their duties to its organisational client. General counsels nonetheless deny wrongdoing and assert “We did nothing wrong.” First, arguing at the roles level and building on the principles of zealous partisan advocacy and non-accountability,129 general counsels contend that clients and clients alone are responsible for the ultimate goals of the representation. Since the client is the ultimate decision-maker, client wrongdoing should not be attributed to advising corporate attorneys absent actual knowledge and participation in wrongdoing.130 Secondly, in a complex business environment general counsels cannot and do not know all of the relevant information, or the “big picture,” and thus cannot meaningfully be expected to monitor and prevent client’s wrongdoing.131 The argument is further strengthened by business considerations. In an increasingly competitive market for legal services, general counsels no longer occupy a position of power that allows them to exercise significant influence over their clients. Actual lawyer conduct tends not to support these arguments. Instead, a study of general counsels’ conduct reveals a disturbing pattern: some in-house attorneys actively participated in, and facilitated, misleading accounting practices, insider-trading, self-dealing and corporate looting, and other corporate improprieties. Some general counsels did know or should 129 130 131

See, eg, Schwartz, supra n. 9. See, ABA Model Rules of Professional Conduct, Rule 1.2(d). Gordon, supra n. 3, at 1193–94.

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have known that their clients were violating the law. Others, enjoying longstanding tenure as general counsel, were in a position to monitor and prevent wrongdoing but failed to do so. Moreover, some of the implicated general counsels had apparent personal conflicts of interests: perverse compensation incentives allowed attorneys to cash out and benefit from the client’s wrongdoing thus creating a powerful incentive for attorneys to look the other way, and allow client wrongdoing on their watch. 1. We did not know what was going on Enron had a large in-house legal department with over 250 attorneys, most of whom had extensive legal experience when they joined Enron. Each of the company’s various business units all had its own legal department that was supervised by a general counsel. Each general counsel reported to the head of the unit he or she served, as well as to James Derrick, Enron’s General Counsel. Weekly meetings of the general counsels of the major business units occurred in Derrick’s office, and on a monthly basis the conferences grew to include the general counsels of overseas entities. Derrick characterised the meetings as a forum for attorneys to raise issues and concerns, as well as a time to communicate the activities of each group, but he testified that none of the concerns regarding the SPE transactions were ever voiced in these meetings.132 Derrick apparently viewed his principal role as that of administrator of the law department, relying upon the general counsels of each business unit to manage the attorneys and transactions within that business unit and did not become substantively involved in any of Enron’s business transactions unless a specific issue was brought to his attention. Few issues relating to the SPE transactions appear to have been reported to him.133 The Bankruptcy Examiner harshly criticised the company’s top attorneys for failing to inform themselves with regard to the discharge of their duties, and found that mid-level attorneys had knowledge of executive wrongdoing.134 The Examiner concluded that there was sufficient evidence from which a fact-finder could determine that Derrick committed malpractice based on negligence in connection with the performance of his duties as General Counsel of Enron in the following matters: (1) despite the size, frequency and number of the related party transactions in which Enron employees were involved, Derrick failed to inform himself and the Enron Board with respect to those matters or to confirm that those to whom he had delegated the responsibility were taking adequate steps to do so; (2) Derrick failed to educate himself on the facts of hedging transactions, the conflict of interest issues presented by these transactions and governing law, so as to enable proper execution of his responsibilities as legal advisor to the Enron Board; (3) Derrick also failed to inform himself as to the nature and extent of Watkins’ allegations so as to be in a position to effectively advise Enron, and failed to determine the extent of Vinson & Elkins’ roles in the transactions criticised by Watkins so as to determine whether such a conflict existed, which meant that he was unable to advise Kenneth Lay, Enron’s then CEO, properly with respect to the investigation or the propriety of retaining Vinson & Elkins to conduct that investigation.135 Rex Rogers, the Associate General Counsel, was the in-house attorney responsible for Enron’s compliance with the securities laws. Thus, all filings and Commission related 132 133 134 135

Batson Report, supra n. 80 at *6–10, 11–58. Id. Id. at *6–8. Id.

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matters went through Rogers. The Examiner concluded that a fact-finder could determine that Rogers committed malpractice based on negligence for his failure to inform himself about the SPE transactions so that he could properly advise Enron with respect to the disclosure issues raised by these transactions.136 The Examiner also concluded that there was sufficient evidence from which a fact-finder could determine that Kristina Mordaunt, a senior in-house attorney, committed malpractice or breached fiduciary duties because, inter alia, she was aware of the conflict of interest created by the related party transactions; and knew that hedging transactions, lacking any economic substance or rational business purpose, were intended by certain Enron officers to manipulate Enron’s financial statements.137 Each in-house attorney implicated in the Examiner’s Report may contend that the evidence is not sufficient to establish one or more essential elements of the allegations. One or more of these issues, including the knowledge of the implicated in-house attorneys, are factual issues that could be determined in favour of such attorneys. Moreover, the in-house attorneys may assert that the wrongful acts committed by Enron’s officers should be imputed to Enron. While such defenses may limit civil liability, they do not allow attorneys to escape responsibility and do not support the conclusion that no reform is warranted. The “we did not know” pattern of attorney misconduct is by no means limited to Enron in-house attorneys. For example, ImClone’s general counsel allegedly failed to report multiple counts of forgery by the company’s top executive.138 Qwest Communications’ general counsel allegedly ignored internal concerns about the company’s accounting improprieties,139 ignored and advised about retaliation against external critics,140 aggressively denied company wrongdoing despite indications to the contrary,141 and fostered unethical and illegal conduct by setting impossible financial goals for Qwest employees.142 FLIR Systems, Inc.’s (“FLIR”) general counsel, Fitzhenry, negotiated with company buyers attempting to obtain a binding and unconditional sales agreement. From his negotiations, the general counsel clearly understood that the sales were conditional in nature. Nonetheless, in April 1999, in response to inquiries by its outside auditor, Fitzhenry signed two representation letters to the accounting firm PricewaterhouseCoopers LLP confirming that the sales were final, arguably making material misrepresentations and omitting material information, and facilitating the misleading accounting treatment. On 21 November, 2002, Fitzhenry consented, without admitting or denying the findings within, to accept a five-year suspension from appearing and practicing before the Commission and the imposition of a cease-and-desist order.143

136

Id. at *72. Id. at *73. 138 Landes’ testimony before the House Energy and Commerce Committee on Thursday, 10 October, 2002, quoted in Marcy Gordon, “Lawmakers Fault ImClone Directors”, The Associated Press, 10 October, 2002. 139 Kris Hudson & Miles Moffeit, “Unmasking Qwest”, Denver Post, 16 December, 2002, at A1. 140 Id. at 16. 141 Id at 24–25. 142 Gary Young, “GCs Scrutinized Amidst Scandals”, National Law Journal, 2 December, 2002, at A14. 143 In the Matter of James A. Fitzhenry, Order Instituting Public Administrative Proceedings, Administrative Proceeding File No. 3–10943. 137

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2. Obstruction of justice Because Arthur Anderson played a central role in designing and auditing Enron’s questionable investment vehicles, and in certifying the company’s financial statements and public disclosures,144 Anderson’s mass shredding of documents regarding those matters led to its conviction of obstruction of justice. The conduct of Nancy Temple, in-house counsel at Anderson, drew particular attention. Arguably, while knowing that Enron was likely to become a target of a SEC investigation, Temple sent an e-mail to the firm’s Houston practice director making reference to the Anderson document retention and destruction policy stating: “It might be useful to consider reminding the engagement team of our documentation and retention policy.”145 While Anderson, prior to its conviction, supported Temple asserting that: “Nancy just told people to use their judgment. She did not instruct them to do anything,” the firm fired David Duncan, its Enron team leader, for displaying “extremely poor judgment in the destruction of documents issue.”146 Attention was also drawn to revisions that Temple made on drafts of Enron’s press releases.147 In June 2002 Rite Aid general counsel Franklin Brown, was indicted along with other top executives for allegedly conspiring to inflate the company’s value and then interfere and obstruct the investigation by the Commission.148 The Commission filed a civil complaint against the executives in June 2001, which was stayed pending resolution of the parallel criminal proceedings.149 While the other executives plead guilty in June 2003, Brown elected to stand trial. Brown was convicted on 17 October, 2003 of conspiracy. The jury found, inter alia, that Brown made false and fraudulent material statements and representations, and instructed a Ride Aid employee to prepare a back-dated letter awarding Mr. Grass, the company’s then CEO, benefits. Mr. Brown’s attorney, invoking the “We did nothing wrong” excuse, argued that Brown was a zealous company lawyer and blamed the outcome on “a difficult environment for corporate executives in America,” adding that “these would have been normal business transactions in a different environment.”150 3. Approval and participation in insider-trading The Bankruptcy Examiner in the Enron bankruptcy concluded that Enron’s Mordaunt may have committed malpractice and breached her fiduciary duties in connection with her $5,826 investment in a transaction called Southampton and her receipt of more than $1 million as a return on that investment without advising general counsel Derrick of the investment and without receiving the necessary approval as required by Enron’s Code of Conduct and rules of professional conduct.151 Once again, the pattern of misconduct was not unique to Enron attorneys. After receiving disappointing news that the FDA rejected one of is cancer treatment drugs and before the 144

Rhode & Paton, supra n. 3 at 21–24. Id. 146 Id. 147 Id. 148 Rite Aid Corp’s former chief counsel Franklin Brown has decided to stand trial on 35 criminal counts stemming from his alleged role in an accounting scandal at the drugstore chain, Wall Street Journal, 23 July, 2003, at D7. 149 1:02-cv-01084-SHR, Order, 3 September, 2002. 150 Supra n. 148. 151 Batson Report, supra n. 80 at *73. 145

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information became public, ImClone insiders used the private information to sell company stock and tip others. John B. Landes, an attorney for the company for almost 20 years and its General Counsel, was the first executive to sell 40,000 shares worth approximately $2.5 million. In the course of the next two weeks additional top executives at ImClone sold their stock. On 21 December, 2001 the company imposed a blackout on employee stock-trading. On 28 December the FDA formally rejected ImClone’s pending application and the information became public, sending the shares into a tailspin. Landes has maintained that he arranged for the sale of his stock in early November and so had other individuals who have traded their shares. Nevertheless, the timing deepens the suspicions of illegal insider-trading. “Everybody but the mailroom boy was dumping stock, you cannot tell me they all suddenly had a hunch to sell.”152 Indeed, in May 2002 Sam Waksal resigned as CEO and in October 2002 he pled guilty to charges of insider-trading. Even if Landes did in fact arrange for the sale of his own stock in November of 2002, the appearance of impropriety is rather striking. First, as general counsel, Landes had the veto power over employee stock-trading, and the approval of his associate general counsel, Catherine Vaczy, was required for trading by all ImClone officers. With the hindsight of Waksal’s plea-bargain one has to wonder as to the propriety of the approval process. Indeed, the appearance of impropriety may have led to Landes’ demotion in February of 2002 from general counsel to a senior vice-president, perhaps because the company feared it could not sustain its credibility with Landes as general counsel at a time when it was being investigated for insider-trading.153 Landes resigned from ImClone in October of 2002. 4. Approval and participation in self-dealing In 1997 a group of ImClone top executives, including Landes, wanted to exercise warrants and options they acquired in 1987 and 1991. Wishing to avoid the tax liability, the group wanted to consider the options as noncompensatory, however, it could not get a favourable opinion from a tax attorney to that effect. Allegedly, the group nonetheless went ahead and exercised the options without paying taxes on the gains. A board investigation, conducted by Simpson Thacher & Bartlett LLP and David Polk & Wardwell, subsequently concluded that three top executives avoided millions of dollars in taxes and that Landes avoided smaller amounts of taxes.154 Even if the allegations against Landes are not well founded they raise serious concerns with regard to his conduct as general counsel. Because the executives decided not to pay taxes on exercising the options, ImClone did not withhold taxes on the options and in fact continued with a policy of not withholding taxes on the exercise of warrants and options for several years. This practice exposed ImClone to liability because under federal tax law, a company may be liable for paying the tax liability if its officials fail to do so. ImClone’s audit committee subsequently issued a statement asserting that it did not conclude that its top executives knowingly sought to avoid paying taxes on the options, instead 152 Billy Tauzin, Chairman of the House Energy and Commerce Committee, quoted in Michael Weisskopf, ImClone’s Busy Traders, Time Magazine, Monday, 22 July, 2002 at *12. 153 Andrew Pollack, “Lawyer Is Said To Have Sold ImClone Shares”, The New York Times, 14 July, 2002, at *20. 154 Geeta Anand, “ImClone’s Auditing Firm Sweats as a Taxing Story Emerges”, Wall Street Journal, 9 May, 2003 at C1.

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asserting that “the decision to treat the warrants as noncompensatory appears to have been made by the company’s general counsel,” Landes.155 Landes disputed the shift of blame arguing that “the company’s decision not to withhold taxes was a group decision and certainly not [mine] alone.”156 Other general counsels have been implicated in similar allegations. In May 2002 allegations surfaced that former Qwest executives, including general counsel Tempest, used improper influence in purchasing stock from some of Qwest’s suppliers. Allegedly, the executives received pre-IPO shares from suppliers that did business with Qwest, and in turn the company bought equipment from the suppliers with no intent of using it. The real purpose of these purchases was to allow Qwest executives to enrich themselves when the suppliers went public. In late 2002 Qwest ordered an internal investigation of the practice, common in the telecom industry in the late 1990s and early 2000s. The probe, conducted by Wilmer Cutler, determined that company executives did not break any laws in buying the stock, but might have violated the company’s code of conduct.157 Qwest and other telecommunications companies changed their policies in late 2002 to prohibit such stock purchases by their executives.158 Moreover, Qwest executives as a whole reaped $640 million in profit from selling Qwest stock from 1997 to 2001 (with Nacchio the company’s then CEO, accounting for $250 million), although the executives did not sell stock after Qwest’s stock began a steep decline in May 2001.159 During his four year tenure Tempest reportedly made $14.3 million in exercising stock options.160

V. Conclusion The patterns of attorney misconduct identified in this paper expose disturbing corporate law practice realities. Numerous outside counsels allegedly designed and participated in fraudulent transactions; facilitated fraud by issuing necessary legal opinions; and orchestrated non-disclosure by means of technically accurate yet misleading disclosure. Lawyers charged with conducting internal investigations arguably failed to appropriately address conflict of interest concerns, balance legal and business conflicts of interest and exercise independent professional judgment to the benefit of clients. General counsels allowed corporate wrongdoing to take place under their watch; obstructed justice; participated in self-trading; and benefited from self-dealing. These patterns of misconduct disprove the “We did nothing wrong” tactic of evasion and undermine the assumption underlying the recent reform efforts—that lawyers, by-andlarge, did nothing wrong. Instead, analysis of available evidence indicates that attorney wrongdoing results from under-enforcement of existing rules. Applicable rules of conduct 155

Id. Id. 157 Kris Hudson, “SEC Probes Ex-Qwest Execs’ Deals”, Denver Post, 2 May, 2003, at C1; Kris Hudson, “Qwest’s Re-audit May Clear Books”, Denver Post, 13 October, 2003, at E1. 158 Hudson, “SEC Probes Ex-Qwest Execs’ Deals”, supra n. 157. 159 Kris Hudson, “Criminal Probe of Qwest”, Denver Post, 7 July, 2002, at A18. 160 Jeff Smith, “Tempest Out”, Rocky Mountain News, 15 November, 2002, at 15B. 156

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already forbid lawyers from participating in client fraud; permit disclosure of client confidences in certain circumstances; disallow personal conflicts of interest between attorney and client; clarify that attorneys owe fiduciary duties to their organisational clients, and not to the clients’ various constituencies; and require withdrawal in some circumstances. Analysis of available evidence of actual lawyer misconduct suggests that many corporate lawyers failed to comply with these rules. Consequently, reform efforts should focus on stricter enforcement of the existing rules. Furthermore, the patterns of misconduct suggest a need to revisit our basic understandings of the roles corporate lawyers play. At the core of lawyers’ “we did nothing wrong” assertion is a belief in adversarial role-morality that demands attorney partisanship on behalf of clients and fosters attorney non-accountability. Consistent with its self-regulation mandate the legal profession must be able to justify its practice realities. Widespread corporate attorney wrongdoing indicates a need to revisit these justifications in the corporate sphere. Analysis of allegations of attorney wrongdoing exposes disturbing patterns of misconduct that suggest failures at both the rules and roles levels. Recent corporate collapses provided the corporate bar a rare Ackermanian opportunity to address the concerns, assess current practice realities, evaluate current rules of conduct and revisit their justifications. Lawyer interest groups, however, have launched a successful evasion campaign to derail the possibility of such a “constitutional” moment. The reform efforts that followed the corporate debacles accepted the “We did nothing wrong” premise and thus failed to explore the allegations seriously and tackle the troubling patterns of misconduct that the allegations reveal. The opportunity to rethink corporate law is all but lost.161 We ought to take advantage of it.

161

Brandeis, supra n. 6.