REAL ESTATE PRACTICE IN A POST-ENRON WORLD
Q: What Does
the Post-ENRON World Mean
to Real Estate Law Practice?
A: It Means
You Have to Tell the Truth
B: Even If That Means That You
Are Disclosing What You Learned in Confidence!
by John P. Flannery*
The greedy and shoddy practices of some corporate executives and dishonest accountants, and, yes, lawyers all-too-willing to look the other way (or worse), has changed how much more cautiously you must conduct yourself in real estate practice.
I am not saying for a moment that you personally are untrustworthy or unethical.
But you must be careful and disciplined in how you go about your business including the confidential communications you enjoy with your client because our somewhat dishonored profession is being carefully scrutinized once again. A well-intentioned mis-step could cost you your good name and your license to practice law, if not worse.
We are being scrutinized in the practice of law with a vengeance, and are not beyond suspicion, either individually or collectively, because too many of our profession can't tell the truth, can't keep their hands off money that doesn't belong to them, and too willingly ignore the misconduct of their clients.
One of my favorite ancient writers, Seneca, born about 4 B.C., said: "If you have already advanced so far that words can no longer bring you to your senses, then you shall be held in check by public disgrace." Corporate executives, accountants and financial advisers, and legal counsel have been disgraced.
You may rightly ask how complicated could it possibly be to obey the commandment, "Thou shalt not steal." In every religion and every ethical system including the prescriptions published by state bars for lawyers, we are told "not to steal" and "not to bear false witness."
But there are some high-flying executives at Enron, WorldCom, Adelphia, and Arthur Andersen and their counsel who have been disgraced publicly. They may lose their liberty and suspiciously regarded fortunes because they could not restrain their greedy impulses to take what was not theirs, and to take it by lying and misleading others, or looking the other way.
The last time we had a problem like this, more than ten years ago, the focus
was sharply on the financial institutions. You may recall how Charles Keating
parlayed his single family home and construction development company into a
Savings and Loan Bank called Lincoln. See Lincoln Savings & Loan Association
v. American Continental Corp., 743 F. Supp. 901 (D.C. 1990). U.S. District
Judge Sporkin said at that time, in the Lincoln Savings opinion, 743
F. Supp. at 919, when addressing the gross misconduct of the bank officials:
"Bluntly speaking, their transactions amounted to a looting of Lincoln."
Judge Sporkin found it instructive that Keating testified that he literally
surrounded himself with scores of accountants and lawyers to make sure all the
transactions were legal.
Judge Sporkin was most concerned with the fact that this fraud was "not done crudely . . . [i]ndeed, it was done with a great deal of sophistication. The transactions," he concluded, "were all made to have an aura of legality about them." Id. at 919. This begged the question, posed by Judge Sporkin: "Where were these professionals, a number of whom are asserting their rights under the Fifth Amendment, when these clearly improper transactions were being consummated? Why didn't any of them speak up or dissociate themselves from the transactions? Where also were the outside accountants and attorneys when these transactions were effectuated?"
Almost plaintively, Judge Sporkin wondered: "Why at least one professional would not have blown the whistle to stop the overreaching that took place in this case?"
For those of us who believe in progress, the disclosures of misconduct at Enron and WorldCom and of the other spectacular frauds are daunting. They provide us with an almost daily diet of bad acts, including those by our legal brethren. We seem to have regressed instead.
In order to redress this most recent wave of lawless misconduct, President George W. Bush signed into law, on July 30, 2002, the Public Company Reform and Investor Act, Pub. L. No. 107-204, also known as the Sarbanes-Oxley Act of 2002 ("The Act"). This statute was in direct response to the scandals we've seen enumerated on a daily basis in our local and national newspapers and on TV and radio.
In brief, this statute creates a new accounting oversight board to monitor accounting firms, expanded protections to whistleblowers, and significantly stiffened criminal penalties for fraud and obstruction of justice. It also imposes affirmative obligations for lawyers to blow the whistle on their wayward clients.
This last provision has been the hardest directive for our profession to embrace.
It is true that this Act basically covers publicly traded companies. The Act has a reach, however, beyond that seemingly easy to understand bright-line rule. This Act has already -- and will continue to influence and instruct -- our state legislatures, state bars, and the public in what they may expect of counsel; that means, more and more, when to blow the whistle on a wayward client.
Counsel are in a position to make an affirmative difference. Thus, they are also expected to be in a position to observe misconduct under the Act.
Counsel are expected to advise corporate clients and organizations on forward thinking policies that contain risk avoidance measures to assure that these businesses do not violate the Act. These risk avoidance provisions reflect the new responsibilities imposed upon the CEOs, CFOs, and businesses generally. They reflect the newly won protections for whistleblower employees and additional novel requirements to retain documents and, where applicable, reports to the SEC.
Section 307 is the most controversial provision for counsel. It strikes at the core privilege of our profession, the confidentiality of communications by and between counsel and client. Section 307 affirmatively obligates counsel "to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation" to the chief legal counsel or CEO of the company. If the counsel or officer does not remedy the violation, the counsel must report to the firm=s audit committee of the board of directors.
While not all counsel will find themselves exposed to a complex corporation that deals in real estate that may, by its nature, conform with the requirements of, and thus invoke the express provisions of the Act (Sarbanes-Oxley), many counsel may find themselves confronted by the client or organization that is set on a course of questionable conduct B and that is what these public policies seek to deter and punish.
What Virginia counsel may well appreciate is that the reporting requirement found in the Act already substantially applies to Virginia counsel by the express terms of Virginia's own ethical rules. Rule 1.13, "Organization as Client," states in relevant part that if a lawyer knows "that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is [a violation of law that may be imputed to the organization] likely to result in substantial injury to the organization, the lawyer shall proceed as is reasonably necessary to the best interest of the organization." That process may be a referral to a higher authority in the organization. Id. If that higher authority does not act, then the lawyer may resign in accord with Rule 1.16.
The underlying rationale for this policy is sound.
Many years ago when I was a young prosecutor, I had a case involving a defense attorney who had information about jury tampering by his own client, namely, the bribery of a petit juror, in the course of a jury trial hearing testimony of a major narcotics conspiracy to import heroin and cocaine. See In the Matter of a Grand Jury Subpoena Served upon David Doe, 551 F. 2d 899 (2d Cir. 1977).
The Circuit Court of Appeals found it key to requiring the disclosure of that communication that the conversation between client and counsel "alleged to be privileged related to an intended or ongoing illegality." Id. Thus, the privilege took flight as it was being abused. This was and remains the law.
As a guide for when you
may and should blow the whistle on your client, you may want to consider X
Corp. v. Doe, 805 F. Supp. 1298 (E.D. Va. 1992), involving a lawsuit to
preclude counsel from disclosing confidential information. Judge Ellis set forth
the standard to invoke the crime-fraud exception to the attorney-client privilege,
when he said that one need "make only a prima facie showing that the communications
either (1) were made for an unlawful purpose or to further an illegal scheme
or (ii) reflect an ongoing or future unlawful or illegal scheme or activity."
Id. at 1307.
In other words, the counsel who is disclosing what he learned from a client
need not prove the crime. To do so - and read Judge Ellis' reasoning on this
point carefully - would impose "an impractical and unduly burdensome standard
that tips the balance too far in favor of confidentiality and against the 'full
and free discovery of the truth.'"
*John P. Flannery II is Of Counsel at the firm of Campbell Miller Zimmerman, P.C., in Leesburg, Virginia. He served as a federal prosecutor in the Southern District of New York. He has been engaged as a Senior Associate for a Washington, D. C., firm and has served as Special Counsel to both the U. S. House of Representatives and the US Senate and also was Chief of Staff to a Congresswoman from California=s Silicon Valley.