PRINT PAGESpecial Report: Corporate Governance
The Wall Street scandals — notably the collapse of Enron — have caught the attention of citizens and lawmakers. Innocent investors are feeling victimized; prosecutors are feeling pressure to respond. This means more big lawsuits and more white-collar prosecutions on the horizon.
Directors and executives, beware! The prestige of your position won’t dull the impact of the liability you may face for the misdeeds of the company, whether you knew about them or not.
Under the Sarbanes-Oxley Act of 2002, Congress has raised the stakes, codifying the “duty to remain informed” for public companies. This duty includes the responsibility to comprehend business and financial matters relevant to the company, which means reading and understanding the company’s financial statements, familiarizing yourself with complexities of proposed transactions, and implementing internal information systems and controls.
Claims of ignorance and reliance on others will fall on deaf ears. If you have doubts about the quality of information upon which you are relying, you have an implicit, if not explicit, obligation to make further inquiries before proceeding on, according to Lisa M. Fairfax, who wrote “The Sarbanes-Oxley Act as Confirmation of Recent Trends in Director and Officer Fiduciary Obligations.” Approving a transaction and signing on the dotted line has never been so fraught with liability.
And lawyers, like outside auditors, run the same gauntlet. Just ask Arthur Andersen.
Sarbanes-Oxley directed some of Congress’ anger at lawyers, imposing obligations on lawyers advising a publicly traded company. Although somewhat illusory, the Securities and Exchange Commission now requires lawyers to report to the chief executive officer or chief legal officer “credible evidence” of a violation that has occurred, is ongoing or is about to occur.
The American Bar Association responded by amending the Model Rules of Professional Responsibility to permit lawyers to reveal otherwise privileged communications if necessary to prevent the client from committing a crime or fraud or to rectify substantial injury to the financial interests or property of another caused by the client while using the lawyer’s services. Although the disclosure is permissive (“may reveal”) under the ABA rule, many states including Florida have longstanding rules requiring that a lawyer “shall reveal” otherwise privileged communication if necessary to prevent a client from committing a crime.
The public cynically views the bar as consisting of greedy lawyers who exploit legal technicalities for rich fat cats while preying on the misfortunes and gullibility of ordinary citizens — that is, until they need a lawyer.
Even mom-and-pop shops find themselves trapped in a maze of rules and regulations that subject them to civil, if not criminal, liability. When companies, directors and officers seek the advice of counsel to navigate through the legal labyrinth, they want to hear cost-effective solutions to a wide range of problems: Tax issues, environmental laws, SEC regulations abound.
Suppose, for example, the client is considering a course of action that is in the gray area. Perhaps the client is running a business in a heavily regulated industry and wants to know the do’s and don’ts so she knows where to draw the line. Or the client is concerned that the company may face civil or criminal liability for an ongoing business practice that has come under scrutiny.
In the face of Sarbanes-Oxley and amended ABA rules, when the corporate executive meets with counsel, will she tell all or keep counsel on a “need to know” basis? Will he reveal the company’s questionable practices or instead choose her words carefully for fear that the lawyer will turn informant against the company and the executive, if he does not follow the lawyer’s advice to the letter and with the deliberate speed that he demands?
Clients have every right to expect lawyers to champion their cause and counsel with the most aggressive strategies within the bounds of the law. And they have every expectation that their secrets will remain secrets. But what they cannot count on is a lawyer who will encourage criminal conduct, be it fraudulent financial statements, false tax returns, or ongoing deceptive practices.
The general rule: What’s done is done. However, don’t expect your lawyer to bury his head in the sand if the company or its executives are continuing to commit what is undoubtedly a crime. Expect your lawyer to advise you on the lawful course of action.
Then, take his advice.
Howard M. Srebnick is a criminal defense lawyer and partner at the Miami firm Black Srebnick Kornspan & Stumpf.
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