Dating to the sixteenth century, the attorney-client privilege is one of the
oldest privileges for confidential communications recognized by our law. It
applies not only to individuals, but to business entities, including publicly
Described as "sacred" by some courts, the privilege has some exceptions,
which historically have been limited in number and scope. The care by which the
privilege has been guarded these many centuries is rooted in the recognition
that it promotes an unfettered dialogue between a lawyer and his client deemed
vital to the system of justice.
Until now. Today the attorney-client privilege is under assault like never
before, thanks largely to prosecutors aided by securities laws such as the
Sarbanes-Oxley Act of 2002 and related rules promulgated or proposed by the
Securities and Exchange Commission.
In enforcing Sarbanes-Oxley, the SEC has promulgated rules that require
attorneys to report what they perceive to be "material violations" of securities
laws or breaches of fiduciary duties by their client companies. As many
corporate lawyers now know, the report must go first to the company's chief
legal officer or chief executive officer. Those officials, in turn, must report
back to the attorney on the steps taken in response to the report itself.
Unless the attorney "reasonably believes" that the response is appropriate,
he must submit his report "up the ladder" to the company's board of directors or
a designated board committee. What happens if the attorney is dissatisfied with
the board's response? Under the rules' mandatory language, the attorney's
reporting obligation generally ends there. However, the rules also provide that
the attorney may reveal to the SEC, without the company's consent,
confidential information gathered in the course of the attorney's work if such
disclosure will, in the attorney's mind, protect investors.
All of this sounds very noble on paper. In reality, the rules risk placing an
attorney in the untenable position of serving not as his client's advocate or
fiduciary, but as its policeman. Far worse, the rules are subject to varying
interpretations. What is a "material" violation? Is one attorney's "reasonable
belief" the same as all other attorneys? Although the rules attempt to define
those terms, the definitions are somewhat circular. At the end of the day, we
are left with no universally-accepted standard by which to judge either the
attorney's conduct or that of his corporate client.
As initially proposed by the SEC, the rules went even further. They would
have required an attorney to reveal certain confidential information to
the government when withdrawing as the company's lawyer. The so-called "noisy
withdrawal" requirement, although not adopted as proposed, might yet emerge as a
To get a broader picture of the assault, we must consider the Justice
Department guidelines that describe how federal prosecutors are to behave when
seeking criminal charges against business entities. The guidelines state that in
assessing a company's level of cooperation, which could result in reduced
charges against the entity or no charges at all, prosecutors may consider
whether the company has waived the attorney-client privilege as a prelude to
disclosure of confidential information. Even the unsophisticated corporate
officer gets the message: Waive the privilege - or else.
We would not tolerate such practices outside the corporate context. If, for
example, the hand of government routinely forced individual suspects to waive
the attorney-client privilege, civil libertarians would cry "foul!" And rightly
Why, then, is the corporate setting any different? In theory, it is because
corporate fraud and other misdeeds can result in multiple victims, including
shareholders, investors, and pensioners. Thus, the logic goes, erosion of the
centuries-old attorney-client privilege is a small price to pay for uncovering
the truth and preserving the greater public good.
There are, however, some problems with that line of reasoning. First, if
finding the truth rather than treating an accused fairly were the system's
highest objective, then there would be no such thing as suppression of evidence,
which, of course, happens everyday in our criminal courts. Second, it is by no
means certain that turning attorneys into whistle-blowers or forcing privilege
waivers will have the intended effect of protecting the investing public.
These rules actually might have the opposite effect. Revealing confidential
communications between a lawyer and client will, over time, undoubtedly chill
such communications in the first instance. That can mean that corporate
decision-makers will be denied the candid advice of their counsel, or will
hesitate in asking for such advice, precisely when they need it the most. From
society's standpoint, the relevant inquiry is whether we would rather have a
business executive, when confronting allegations of corporate wrongdoing and
charting a response, be guided by professional legal advice or not.
Perhaps it will not come to that choice, but it might. Hopefully, Congress
and the SEC will monitor these rules with an eye toward modifying them should it
become apparent that they are having unintended consequences.
R. Max Crane is Co-Chair of the Corporate
Governance and Compliance Practice Group and Peter G. Verniero
is Chair of the Corporate Internal Investigations and Business Crimes
Practice Group of Sills Cummis Epstein & Gross