Extract from--
Theodore Sonde and F. Ryan Keith, "Up the Ladder" and Over: Regulating Securities Lawyers -- Past, Present & Future, (2002).
A finalized version will appear in a forthcoming issue of Washington & Lee Law Review.  The article as drafted in late November 2002 and submitted to the SEC with Mr. Sonde's letter of comment on its proposed attorney conduct rules is posted in PDF format at  http://www.crowell.com/pdf/Ladder.pdf                          [Return to the referring web page.]

[From pages 5 and 6:]

          [T]he SEC in 1972 did something nevertheless unheard of in the history of securities regulation: it sued two large law firms for securities fraud.  Further, the SEC claimed, as it had never done before, that both of those law firms had a professional obligation to not only stop the consummation of a fraudulent merger, but, when their clients failed to heed what would have been sound legal advice under the circumstances, the firms had an additional obligation to report to the shareholders of the two companies or to the SEC the fraudulent nature of the transaction.6  Although unprecedented, the complaint in that case, SEC v. National Student Marketing, at least on its face, did not seem so remarkable.

          Indeed, the Bar’s existing ethical rule on point precluded the conduct at the heart of the National Student Marketing case. At the time, the ABA Model Code of Professional Responsibility provided thus:

          A lawyer who receives information clearly establishing that
(1)  His client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal.

(2)  A person other than his client has perpetrated a fraud upon a tribunal shall promptly reveal the fraud to the tribunal. 

The Commission’s theory in the case was consistent with this duty, as well as with the historical exemption of crime or fraud from attorney-client communications that enjoyed a privilege in the first place.7

          Yet as the case moved forward, the Court noted that the litigation had, to mild surprise,

generated significant interest and an almost overwhelming amount of comment within the legal profession on the scope of a securities lawyer’s obligations to his client and to the investing public.8
Consequently, the Court recognized,
this action … has provided a necessary and worthwhile impetus for the profession’s recognition and assessment of its responsibilities in this area.9
After watching the litigation continue for more than five years, the Bar’s “comment” and
“assessment” culminated in – to major surprise – the functional evisceration of the ethical rule on its books.  By the decade’s end, information “protected as a privileged communication,”10 even if that information was perpetrating an unrectified fraud, purportedly no longer needed to be disclosed.11 This move turned National Student Marketing, and, of course, the historical rule, on their heads.

          With this change, the legal profession was reacting to National Student Marketing with unabashed denial. Rather than accept any form of public responsibility, the organized Bar proceeded to weaken its ethical rules, and provided its members with many confusing notions and no guidance on how to act. In fact, the Bar actually provided so much misdirection that it may have actually caused many members of the profession to lose sight of their professional obligations.

[end of the excerpt from the main text]


Footnotes to the above extract:

      6. One of the authors, Mr. Sonde, was one of the principal draftsmen of the SEC’s complaint in National Student Marketing and principal trial counsel throughout that proceeding. At the same time, as in most SEC enforcement actions, the “blame” or “credit” for the case justly needs to be shared with many other staff members who were also instrumental in causing the Commission to take that step. These include Alan Levenson, Richard Rowe, and David Belkin, to name just a few. Their work is reported at 412 CCH Federal Securities Law Reports ¶ 93,360 (Feb. 24, 1972).

     7. This had been the rule in American law for at least 100 years, though, as a practical matter, was never enforced against large law firms, as in National Student Marketing. See 1928 ABA Canon of Professional Ethics 37 (“announced intentions of a client to commit a crime is not within the confidences which [the attorney] is bound to respect”); 1908 ABA Canon of Professional Ethics 41 (lawyer “should endeavor to rectify” fraud or deception, independent of client confidentiality); see also Nix v. Whiteside, 475 U.S. 157, 167-68 (1986) (these rules “articulate centuries of accepted standards of conduct”); Queen v. Cox, 14 Q.B.D. 153, 168 (1884) (quoted with approval in Clark v. United States, 289 U.S. 1, 15 (1932)). In fact, in 1969, when the conduct at issue in National Student Marketing occurred, the somewhat stricter Canon of Professional Ethics 37 remained the law in most states. See generally [Theodore] Sonde, [Professional Responsibility – A New Religion, or the Old Gospel?, 24 EMORY L.J. 827 (1975)], at 830-32.

     8. SEC v. National Student Marketing Corp., 457 F. Supp. 682, 714 (D. D.C. 1978); see also, e.g., The Troubled Professions, BUS. WEEK (Aug. 16, 1976), at 126 (with National Student Marketing, the SEC “loosed a thunderbolt,” spawned “fears that the SEC would make [lawyers] responsible for the securities violations of their clients,” and began expecting lawyers to become the “corporate conscience”). Over ten years later, the then-General Counsel of the SEC remarked, almost wryly, that National Student Marketing “had the effect of crystallizing the bar’s awareness of its relations with the Commission and the Commission’s expectations of counsel’s function.” See [Edward F.Greene, SEC General Counsel’s Remarks on Lawyer Disciplinary Proceedings, January 13, 1982, reprinted at BNA Securities Regulation and Law Report, at 168 (Jan. 20, 1982)].

     9.  National Student Marketing Corp., 457 F. Supp. at 714.

    10.  ABA Model Code of Professional Responsibility 7-102(B)(1) (1981).

    11.  See ABA Code of Professional Responsibility 7-102(B)(1) (as amended in 1974).

[end of footnotes to the extract from the article]     [Return to the referring web page.]