Lawyers Pressed to Give Up Ground on Client Secrets,
Mon Aug 11 14:55:39 2003
Lawyers Pressed to Give Up Ground on Client Secrets,
Impelled by a wave of corporate scandals, tax evasion and concerns over
terrorism, government regulators and prosecutors have taken a variety of
steps that seek to limit what some lawyers say is a core principle of their
profession: the ability to protect their clients' confidences.
Many lawyers have reacted to the new restrictions by arguing that the
lawyer-client privilege is not only a traditional tool in their arsenal but
a critical one in the proper functioning of the legal system.
But even the American Bar Association seems prepared to cede some ground on
the issue. The association, which began its annual meeting late last week
in San Francisco, will consider changes to its model code of conduct, which
state judiciaries draw on in defining lawyers' responsibilities. The
changes would recommend permitting lawyers greater discretion to disclose
client confidences, although lawyers would not be required to do so, as the
regulators are insisting.
Still, many lawyers said they could not remember such a broad encroachment
by the federal government on how they practice.
"In my experience, since the early 60's, there's been nothing like this,"
said Stefan F. Tucker, a tax lawyer in the Washington office of Venable,
who said that he was worried about the impact of new rules from both the
Justice Department and the Securities and Exchange Commission. "You can do
something that is perfectly kosher, it's perfectly above board, and someone
can come in after the fact and say it wasn't proper."
Earlier this year, the S.E.C. adopted a rule requiring lawyers to report
potential fraud to corporate boards and this fall it may well propose
additional rules; the Federal Trade Commission has filed suit to force law
firms to comply with a 1999 law on disclosing privacy policies to clients;
the Internal Revenue Service is trying to make law firms disclose which
clients bought questionable tax shelters; and the Justice Department, which
has already said that conversations between lawyers and terrorism suspects
are subject to eavesdropping, is also pressing corporate defendants harder
to waive their confidentiality privilege in order to avoid prosecution.
The government agencies do not appear to be working in concert and very
different kinds of clients are affected by each new policy. Each agency is
reacting to a different crisis but the overall result is worrying to many
lawyers and law professors.
"The tradition has always been that lawyers were the protectors and were
most concerned with a client's rights, trying to achieve for them through
the legal system the best results they could," said Timothy Terrell, a law
professor at Emory University. "The twist is, lawyers also have duties."
Just how worried lawyers are became apparent to Dana Welch, a lawyer in the
San Francisco office of Ropes & Gray, when she led a presentation in June
on the S.E.C. rules on reporting potential fraud. "All the tables were
filled," Ms. Welch recalled, adding that the visibly tense attendees
peppered her with questions. "People were very concerned about the rules
and the effect on their life."
Supporters of some of the new government rules argue that lawyers should
not stand idly by when a client does something wrong. And, while some
lawyers are trying to turn the debate into one about client confidences,
they say the real issue is less about the administration of justice and
more about lawyers' desire to avoid regulation.
"Prestige, autonomy and money — all these are at stake," said David
Wilkins, a law professor at Harvard. Lawyers traditionally have not been
heavily regulated, Mr. Wilkins said, and they are reluctant to see that
situation change, "especially in a way that could drive clients away."
Two years ago, the bar association rejected changes to its model code of
conduct to permit lawyers more latitude in disclosing client confidences to
prevent fraud. But the association seems to be more open to the idea now
that the government may impose more stringent responsibilities on the
Alfred P. Carlton Jr., president of the bar association, also pointed to
the influence of recent financial scandals and the terrorism battle.
"We are facing the gravest threat to our internal security in over 60
years, and we are facing the greatest crisis of confidence in our capital
markets in over 70 years," said Mr. Carlton, who supports the proposed
changes in the code of conduct. "The confluence of those events is what is
causing all this. It is a new day."
If the changes are approved, the code would permit, but not compel, a
lawyer to disclose client confidences to prevent or to mitigate "injury to
the financial interests or property of another," when the lawyer's services
were used to further a client's crime. In 2001, the delegates approved a
narrower change, permitting a lawyer to breach client confidentiality "to
prevent reasonably certain death or substantial bodily harm," but even that
change was controversial.
In late July, the chief justices of all 50 states adopted a resolution in
favor of the current proposal, putting pressure on the bar association.
Ronald M. George, chief justice of the California Supreme Court, said the
changes were necessary at least to make clear to lawyers that they would
not be disciplined for disclosing client confidences to prevent fraud. But
adopting the change might serve another purpose. "To the extent the legal
profession polices itself, it makes itself less susceptible to outside
regulation," he acknowledged.
Several government agencies have recently demonstrated their willingness to
take a tougher stance by pursuing law firms directly. The I.R.S. is
weighing a lawsuit against Jenkens & Gilchrist, a law firm based in Dallas
that has refused to give up the names of clients who invested in
questionable tax shelters; Jenkens & Gilchrist has said it will fight the
I.R.S. in court, if necessary.
The F.T.C. is battling the American and the New York State Bar Associations
in federal court over whether law firms are subject to a 1999 law requiring
financial institutions to send privacy notices to clients. Lawyers argue
that they are subject to state codes of conduct that, they say, are more
stringent than those in the legislation.
The S.E.C. has gone further, adopting rules that took effect last week
requiring lawyers to report "up the ladder" to top executives or the board
of a public company that is a client if they find "evidence of a material
violation" of securities laws. Several New York lawyers said that big firms
were sending out memos to partners and associates, advising them of what
their new responsibilities were — even though no one, lawyers say, is sure
precisely what might be evidence of a material fraud, let alone what kind
of response by a client told of such evidence would be appropriate.
The S.E.C. will probably consider whether to require lawyers or their
clients to report to the agency as well, said Harvey J. Goldschmid, one of
the commissioners. "We expect to revisit that sometime in the fall," Mr.
The focus on lawyers is appropriate, he added, because "lawyers are
critical gatekeepers, and asking them to bear certain burdens to protect
shareholders and investors, and separate themselves from loyalty to
managers in appropriate circumstances, just makes sense."
Some lawyers say they will fight further reporting requirements that the
S.E.C. is considering, which they say would lead clients to withhold
information from outside legal advisers. Mr. Carlton, the bar association
president, said his group stood "united in our opposition" to such possible
"The client wants assurance that what he or she discusses with an attorney,
something that's happened, that the attorney will not make a judgment that
can be made public," said David Bernstein, a corporate lawyer in the New
York office of Clifford Chance. More clients might ask their lawyers to
sign confidentiality agreements, Mr. Bernstein said — something he regarded
as unnecessary in the past.
The confidentiality privilege belongs to a client, Mr. Bernstein said, and
only the client can waive it. Besides, it is rarely a black and white
question whether a client's plan is illegal, and it is not the lawyer's job
to make that determination, he said.
The Justice Department has taken two steps that affect very different kinds
of clients when they talk to their lawyers. The department announced
shortly after the Sept. 11 attacks that its agents might eavesdrop on
conversations between lawyers and terrorism suspects "for the purpose of
deterring future attacks."
The department also has increased the pressure on corporations to
effectively waive the privilege by sharing information on potential fraud
with the government, lawyers say. That means the lawyer has to decide very
quickly to fight or to cooperate, even before a full investigation of
potential fraud may be completed, said Michael J. Shepard, a lawyer at
Heller Ehrman White & McAuliffe in San Francisco.
The decision whether to cooperate with regulators has already made
conversations with clients that much more stressful, Mr. Shepard said. "The
stakes are much higher, because there are a bunch of people running around
with their knives out, looking to cut off the heads of corporations and
If lawyers are duty-bound to report to the government when their clients
have or will commit some kind of crime, Mr. Terrell, the Emory professor,
said, lawyers will have to tell clients not to share confidences with them
— in effect, to lie — a perverse result of efforts to improve the justice
system, he said. "The lawyer will have to say, `I cannot hear you say, "I
did this crime" — that's something I can never know.' "
Some lawyers say the bar association's proposed changes would only catch up
its model code, which serves as a template for states' regulation of
lawyers, to what exists in the vast majority of states. While some states
prohibit disclosure of client confidences except to prevent crimes that
would cause death or serious bodily injury, codes of professional conduct
in 42 states already permit disclosure in cases of economic crime or fraud,
legal scholars say.
"All of these issues, when they arise, they try to turn into, `This is
snitching on clients and it will fundamentally affect the lawyer-client
relationship,' " said Roger C. Cramton, a law professor at Cornell
University who supports the proposed changes to the model. "They will never
affect an honest client who is going to an honest lawyer."
Besides, Mr. Cramton said, lawyers who have been defrauded by clients have
the right to disclose client confidences to defend themselves, and it is
not clear why others victimized by fraud should not have access to the same
information. "They don't really think much of the sanctity of the
relationship if it's a self-defense situation," he said.
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