Tuesday, Aug. 12, 2003 | 9:27 a.m.
SAN FRANCISCO -- Lawyers who learn that a client is cooking the books or looting a company's till could snitch to authorities with a clear conscience under changes to lawyers' ethical rules approved narrowly Monday by the American Bar Association's policy-making board.
The board voted 218-201 to loosen restrictions on when lawyers can reveal suspected fraud by a client. The changes are a departure from the organization's traditional refusal to place society's concern over financial crimes above a lawyer's duty to keep client confidences.
The ABA rejected nearly identical changes two years ago, before revelations about alleged boardroom fraud and accounting flimflams at Enron, Tyco, WorldCom and other companies. Then as now, debate was emotional over what opponents saw as a dimming of lawyers' fundamental mission to be trustworthy confidants and represent those who need help the most.
"The lesson we've learned over the past two years is that the substantial injury ... is not just to the big guys," said incoming ABA President Dennis Archer, who supported the changes. "We're talking about the employees who lost not just their jobs but their pensions," and about small investors who were bilked, said Archer, who assumes his post Tuesday.
The changes approved during the ABA's annual meeting do not go as far as regulators want but would bring the nation's largest lawyers' group in line with state rules that already bind many lawyers.
Opponents said the ABA was knuckling under out of fear that government regulators might step in to require more cooperation from lawyers if lawyers failed to change they way they do business.
"This is not the proper time to bow to threats by others who seek to regulate us," argued ABA President-elect Robert Grey Jr., who will succeed Archer in 2004.
"It is not a time to take the position that the core values of the profession are subject to compromise."
The ABA's model ethics rules are not law, but they often are the basis for state mandates and policies on lawyer conduct.
The new rules affect in-house lawyers for corporations as well as outside lawyers who learn of current or planned wrongdoing.
The new rules permit disclosure of confidential client information if it would head off fraud, shady accounting or other wrongdoing that the lawyer thinks would harm other people, including shareholders. Lawyers also could rat out a client without violating ethics in instances where a client had used or abused a lawyer's services to commit a crime in the past.
Lawyers already can breach a client's confidence to save lives or prevent serious injury. An ABA ethics panel used the example of a hypothetical lawyer who knows that a client has accidentally discharged toxic waste into a town's water supply, and alerts authorities to try to head off a health crisis.
Likewise, it makes sense that lawyers disclose information that could head off a financial crisis, and a client who uses a lawyer's services to commit fraud is not entitled to the protection that the confidential lawyer-client relationship affords, the panel said.
The ABA is scheduled to vote today on another proposed change that would clarify when corporate lawyers should report fraud or other lawbreaking up the chain of command and when those lawyers should take their concerns to authorities outside the company.
Lawyers have a higher ethical duty to protect and defend clients no matter what, lawyer Lawrence Fox told colleagues before Monday's vote.
In an interview, Fox said the new rules will not prevent another Enron.
"The lawyer-client confidence does so much more to protect the public than any exception will ever accomplish," Fox said. "Any time we have to read our clients Miranda warnings before they talk to us, the likelihood of them telling us the truth goes down."
The Securities and Exchange Commission said this year that lawyers must report possible fraud to a company's board of directors. The agency, which regulates publicly traded companies, soon might go further.
The Internal Revenue Service wants law firms to tattle on clients who buy possibly shady tax shelters, and other government regulators also are pressing lawyers to be more forthcoming.
Chief justices of all 50 states have voted to back the proposed changes.
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