Sarbanes-Oxley Act Section 307 and Corporate Counsel: Who Better to Prevent Corporate Crime?
Peter J. Henning
Wayne State University Law School
Buffalo Criminal Law Review, Vol. 8, p. 101, 2004
While much of the Sarbanes-Oxley Act concerned the minutiae of corporate governance, Section 307 of the Act was aspirational by directing the Securities & Exchange Commission (SEC) to adopt rules that enlist lawyers in preventing - or at least reporting - corporate misconduct. In addition to adopting the "up-the-ladder" reporting rules mandated by Congress, the SEC sought to put teeth into the regulation of corporate lawyers by proposing the "noisy withdrawal" rule that would have required outside corporate counsel to disclose publicly the reasons for withdrawal if the corporation persisted in a course of misconduct. The reaction of the organized bar was almost wholly negative, focusing on the supposed harm to the confidential lawyer-client relationship from the disclose of privilege information, and the SEC ultimately withdrew the proposal.
The flaw in the SEC's proposed rule was that it coupled "noisy" with "withdrawal." Lawyers are not "gatekeepers" in the same way accountants have a duty to the investing public to ensure that a company conveys accurate information. Compelling disclosure to the public of a lawyer's withdrawal from representation imparts a gatekeeper role that can create more confusion in the market than clarity. The noise is largely superfluous to the goal of preventing corporate crime, while withdrawal is an important step toward removing lawyers from the process that can lead to criminal conduct. Unfortunately, the Commission missed its chance to fulfill the congressional mandate of Section 307 and take an important step in preventing future corporate crimes when it failed to require attorneys to withdraw from representation if a client persists in misconduct.
The Article argues that the SEC should adopt the withdrawal portion of the noisy withdrawal rule, and that withdrawal should be mandatory for both outside counsel and in-house lawyers when they become aware of corporate misconduct and the corporation refuses to take adequate remedial measures. Mandatory complete withdrawal and the required disclosure to successor counsel can make lawyers more effective in preventing or impeding corporate crimes because the rule makes it significantly more difficult for the corporation to continue a course of conduct without considering the consequences. Much like the public disclosure sought by the Commission, withdrawal is a signal, only to a more limited audience: the corporation and the new lawyer. The rule relies on that second attorney to be as ethical as the first lawyer, and to refuse to accept the corporate client if there is "evidence of a material violation" and a refusal to act appropriately.
Number of Pages in PDF File: 61
Keywords: Legal Ethics, Corporate Crime, Securities & Exchange Commission
JEL Classification: K14, K22, K42
Date posted: January 5, 2005