Tattlers and Trail Blazers: Attorneys' Liability for Clients' Fraud
17 Pages Posted: 18 Nov 2007
In his article The Corporate/Securities Attorney as a "Moving Target" - Client Fraud Dilemmas, Professor Marc Steinberg demonstrates that the tightening of ethics standards imposes greater responsibilities on attorneys who represent clients that engage in securities fraud, and, as he observes, private claimants increasingly seek redress from attorneys for damages caused by their clients' fraud. Courts, however, are skeptical, generally, about the deterrent value of private securities fraud cases, express concern about the costs they impose on corporate defendants, and, in particular, are suspicious of plaintiffs' efforts to recover from deep-pocket secondary participants like attorneys. Congress has also made it more difficult for plaintiffs to bring securities fraud actions by imposing rigorous pleading standards and preempting state law securities fraud class actions. It would not be surprising, therefore, to find judicial reluctance to impose monetary liability on attorneys for failing to confront their clients' fraud. Professor Steinberg's insightful analysis of the ethical rules provides a useful opportunity to explore the state of the law on private claims for damages for attorneys' breach of these duties. The first part of this paper examines judicial treatment, after Central Bank of Denver v. First Interstate Bank of Denver, of federal securities claims made by purchasers and sellers of securities alleging that the issuer's attorney participated in the corporation's fraud. The second part of the paper explores the Securities and Exchange Commission's (SEC) Rules of Professional Conduct as a basis for malpractice claims brought by or on behalf of the corporation itself against its attorneys for failing to report fraud by the corporate management that injured the corporation. The third part considers additional state law theories. I conclude, in the fourth part, that the likelihood that courts will impose liability on attorneys for involvement in their clients' fraud is not substantial.
Keywords: securities, malpractice
JEL Classification: K22
Suggested Citation: Suggested Citation