Lawyers and Corporate Scandals

Legal Ethics, Volume 7, No.
Lawyers and Corporate Scandals
ELI WALD 1
I. Introduction
A. Misguided scholarship, a lost opportunity and Bruce Ackerman

A lot of ink has been spilled exploring various aspects of Enron and Enron-like corporate col-
lapses,2 including the roles lawyers played in the debacles.3 The breadth and scope of the
existing scholarship alone should give one pause before attempting to add to it. Indeed,
merely attempting to synthesise and engage with current insights would be a massive under-
taking,4 which I do not attempt here. Instead, I argue that recent corporate failures have
resulted in a rare and important opportunity to revisit our core basic assumptions about,
expectations of, and understandings of the roles corporate lawyers play and their duties to
their organisational clients, the legal system and the general public, an opportunity the exist-
ing scholarship as a whole regrettably fails to take advantage of.5
Re-evaluation of corporate law practice, as well as the underlying justifications that explain
and support it is long overdue.6 The opportunity to revisit the fundamentals of corporate law
1 Assistant Professor of Law, University of Denver College of Law. I would like to thank my colleagues
Arthur Best, John Reece and Kris Miccio for invaluable comments on multiple versions of this manuscript. I
wish to gratefully acknowledge Stephanie Izaguirre and Peter Waltz, my research assistants, and Diane
Burkhardt, the University of Denver College of Law research librarian, for their work on this article.
2 Enron alone is the subject of over a one hundred law review articles and numerous symposia issues, hun-
dreds of business articles and dozens of books. The literature spans issues of corporate law and corporate gov-
ernance, securities and monitization, bankruptcy, banking law, finance, accounting and criminal law just to name
a few.
3 See, eg, Roger C. Cramton, “Enron and the Corporate Lawyer: A Primer on Legal and Ethical Issues”,
(2002) 58 Business Law 43; Lawrence A. Cunningham, “The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light
Reform (And It Just Might Work)”, (2003) 35 Connecticut Law Review 915; Susan P. Koniak, “When the
Hurlyburly’s Done: The Bar’s Struggle with the SEC”, (2003) 103 Columbia Law Review 1236; Deborah L.
Rhode & Paul D. Paton, “Lawyers, Ethics and Enron”, (2002) 8 Stanford Journal of Law, Business & Finance 9;
Robert W. Gordon, “A New Role for Lawyers? The Corporate Counselor After Enron”, (2003) 35 Connecticut
Law Review 1185; Susan P. Koniak, “Corporate Fraud: See, Lawyers”, (2003) 26 Harvard Journal of Law &
Public Policy 195.
4
For secondary literature offering summaries and selected readings from the primary literature, see, eg,
Nancy B. Rapoport & Bala G. Dharan eds., Enron: Corporate Fiascos and Their Implications (New York,
Foundation Press, 2004).
5
But see, Gordon, supra n. 3, at 1207–1216 (proposing a separate professional role for a distinct type of cor-
porate lawyer, the Independent Counselor, featuring public-centered role-morality).
6
Justice Brandeis’ call for a reform in our understanding of the roles played by corporate lawyers and his
passionate appeal to attorneys to practice law as “peoples’ lawyers” remains as timely today as it was over a cen-
tury ago. Louis D. Brandeis, “The Opportunity in the Law”, (1905) 39 American Law Review 555.
LAWYERS AND CORPORATE SCANDALS 55
practice, possibly leading to much needed reform in the regulation of the corporate bar
should not have been missed. And yet, the opportunity is all but gone, and as the saying goes
desperate times call for desperate, or unusual, measures. This plea for a radical change in the
way we think about and discuss the roles corporate lawyers play and the roles they did, and
should have played in Enron et al 7 thus begins not with a summary of the downfall of Enron,8
or with rehashing of traditional accounts of lawyers’ roles,9 but rather with a (brief) lesson
from a leading constitutional law scholar.
In his seminal body of work, We the People,10 Bruce Ackerman argues that “constitutional
law is characterized by periods of relative equilibrium and continuity, which in rare consti-
tutional moments are disrupted, resulting in upheaval and then a critical shift in our under-
standing of the Constitution.”11 Ackerman distinguishes between rare moments of
constitutional politics, characterised by a mobilised mass of American citizens expressing their
assent through extraordinary institutional norms in periods of heightened political con-
sciousness; and ordinary normal politics, characterised by factions trying to manipulate the
constitutional forms of political life to pursue their own narrow interests.12
Others have expanded Ackerman’s constitutional law analysis into a general theory of law
development, looking more broadly to explore moments of upheaval across all areas of law.13
The image I would like to borrow from Ackerman is one of status quo as the ordinary state of
legal doctrine affairs.14 Whereas in constitutional law allowing normal politics to dominate
constitutional politics is necessary to achieve a workable democracy,15 in general law is char-
acterised by periods of relative equilibrium, or sustained status quo. Critical shifts in our
understanding of legal doctrines and of law are relatively rare.16 I argue that recent corporate
collapses presented such an Ackermanian rare moment of heightened public interest in the
regulation of the legal profession opening a window of opportunity for “mobilized
Americans” to bring about much needed upheaval in our understanding of corporate lawyer-
ing. Unfortunately, the window is all but closed and the opportunity is all but lost.
7 See, Gordon, supra n. 3, at 1204.

8 See, eg, Rhode & Paton, supra n. 3, at 13–17 for a concise statement of the factual background; also Jeffrey
D. Van Niel, “Enron—The Primer”, in Rapoport & Dharan (eds), supra n. 4, at 3–26.
9 See, Richard Wasserstrom, “Lawyers as Professionals: Some Moral Issues”, (1975) 5 Human Rights 1;
Murray L. Schwartz, “The Zeal of the Civil Advocate” in D. Luban (ed), The Good Lawyer: Lawyers’ Roles and
Lawyers’ Ethics (Totowa, NJ, Rowman & Allanheld, 1983) 150–171.
10 Bruce A. Ackerman, We The People: Foundations (Cambridge, MA, Harvard University Press, 1991); We
The People: Transformations (Cambridge, MA, Harvard University Press, 1998). See also, Bruce A. Ackerman,
“The Storrs Lectures: Discovering the Constitution”, (1984) 93 Yale Law Journal 1013.
11 Ackerman, Discovering the Constitution, id. at 1022–1023.
12 Id.
13 See, eg, Edward Lee, “The Public’s Domain: The Evolution of Legal Restraints on the Government’s
Power to Control Public Access Through Secrecy of Intellectual Property”, (2003) 55 Hastings Law Journal 91,
171–175.
14 See also, Peter Margulies, “Progressive Lawyering and Lost Traditions”, (1995) 73 Texas Law Review 1139.
15 Indeed, allowing the former to dominate the latter is Ackerman’s proposed solution to the “problematics
of successful revolution.” Ackerman, Discovering the Constitution, supra n. 10, at 1017–1031.

16 See, Russell G. Pearce, “The Professionalism Paradigm Shift: Why Discarding Professional Ideology will
Improve the Conduct and Reputation of the Bar”, (1995) 70 New York University Law Review 1229. See also,
more generally, Morton J. Horwitz, The Transformation of American Law 1780–1860 (Cambridge, MA, Harvard
University Press, 1977).
56 ELI WALD
B. The self-regulation duty and normal legal profession politics

While law generally embodies the status quo, certain features of law practice and the regula-
tion of lawyers render moments of constitutional legal profession politics particularly
unlikely. It is quite difficult for lay clients, even ex post, to evaluate the quality of legal
services they receive because such services are the product of esoteric legal knowledge they
usually do not possess. The public and the profession thus strike a social bargain whereby the
public grants the profession a monopoly over the provision of legal services and the profes-
sion in turn promulgates and enforces rules of conduct.17 Thus self-regulation, even at its
best, insulates and protects the profession from outside critiques. Even in rare Ackermanian
moments of legal consciousness interested Americans seeking to challenge the regulation of
lawyers will run against institutionalised self-regulation: at the promulgation level opposition
by well-organised lawyer interest groups and reluctance of legislatures to disturb the long-
standing tradition of self-regulation; and at the enforcement level state bar associations’ dis-
ciplinary committees and supreme courts’ regulatory offices featuring procedural screening
mechanisms, administrative bureaucracy and a culture of chronic under-enforcement—all
decreasing the probability of such “constitutional” moments.18
At the same time self-regulation protects the profession from outside critics, it imposes on
it a heightened duty to monitor and study its own practices. Constant re-examination of the
diverse roles different lawyers play across various practice arenas and of the rules of conduct
that apply to them is essential to guarantee that the profession is living up to its side of the
social bargain, to maintain public trust in the bar and to prevent the appearance of impro-
priety, especially given that outside scrutiny is improbable.19
Viewed in this light, allegations of lawyer wrongdoing ought to be embraced by the pro-
fession as opportunities to explore and improve law practice. Of course, the mere fact that
clients and the public demand reform does not constitute a good reason for it. Doomsday
accounts challenging law practice and announcing the death of the American legal profession
17 See, Talcott Parsons, “The Professions and the Social Structure”, in Essays in Sociological Theory (Glencoe,
IL, Free Press, 1954), 34–49; Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care”,
(1963) 53 American Economic Review 941. See also, Magali S. Larson, The Rise of Professionalism (Berkeley, CA,
University of California Press, 1977); Andrew Abbott, The Systems of Professions (Chicago, University of Chicago
Press, 1988).
18 Other features making moments of upheaval less likely, which I do not explore here, include the bar’s rel-
ative immunity to market pressures. See, eg, Peter B. Pashigian, “The Market for Lawyers: The Determination
of the Demand for and the Supply of Lawyers”, (1973) 20 Journal of Law & Economics 53; Sherwin Rosen, “The
Market for Lawyers”, (1992) 35 Journal of Law & Economics 215; Ronald J. Gilson, “The Devolution of the Legal
Profession: A Demand Side Perspective”, (1990) 49 Maryland Law Review 869. In fact, it seems that the pro-
fession has flourished despite a centuries-long love-hate relationship with the public, which seems to hold the
profession in low esteem. Deborah L. Rhode, “The Professionalism Problem”, (1998) 39 William & Mary Law
Review 283.
19 “The legal profession is self-governing . . . [Its] relative autonomy carries with it special responsibilities of
self-government. The profession has a responsibility to assure that its regulations are conceived in the pubic
interest . . . Every lawyer is responsible for observance of the Rules of Professional Conduct . . . Neglect of these
responsibilities compromises the independence of the profession and the public interest which it serves.”
American Bar Association, Model Rules of Professional Conduct, (Chicago, ABA, 2003) Preamble: A Lawyer’s
Responsibilities, Comments 10, 12. See also, David B. Wilkins, “Who Should Regulate Lawyers?” (1992) 105
Harvard Law Review 799, 812–813 (discussing the bar’s insistence on self-regulation as “the only enforcement
system compatible with the fact that lawyers are independent professionals”).
have been constant throughout its history.20 The last decade alone featured the “accountants
are coming, the accountants are coming” crisis claim predicting the overtaking of the provi-
sion of legal services by the “Big Five” accounting firms and multidisciplinary practices;21
the “lost lawyer” claim asserting that current practice realities render desirable professional
ideals unattainable and finding the demise of such ideals to be “a catastrophe for lawyers” and
a “disaster for the country as well”;22 and the “unhappy lawyers” claim mourning the rising
levels of dissatisfaction and attrition among young attorneys and law students.23 Such
accounts, or crisis claims, may be nothing more than the rehashing of longstanding unper-
suasive complaints about the legal profession.24
Rather, faced with allegations of lawyer wrongdoing, the profession, consistent with its
self-regulation duty, should employ a two-tier inquiry, one at the rules level the other at the
roles level. First, did those lawyers accused of wrongdoing violate applicable rules of profes-
sional conduct? If lawyers did violate the rules the appropriate response may entail stricter
enforcement of the existing rules. If wrongdoing is not the result of non-compliance with
rules then a rule reform is appropriate if (a) the lawyers conduct caused or wrongfully
exacerbated the harm; (b) if the rules were changed, the harm that occurred would have been
prevented; and (c) the changes in the rules will do more good than harm, in other words, that
in preventing the next Enron, we are not creating different mischief.25 To be sure, attorney
conduct that is not in violation of applicable rules of conduct may nonetheless constitute
wrongdoing if it caused or exacerbated harms to clients or third parties.
Secondly, wrongdoing that is not the result of non-compliance with current rules may also
indicate a need for examination at the roles level. Rules of conduct embody and implement a
vision about the roles lawyers play in society, a vision that justifies and explains particular
rules. Lawyer wrongdoing that is not inconsistent with rules of conduct indicates a failure at
the roles level and suggests that the roles lawyers occupy may be harmful. A failure at the
roles level explains how lawyers may be in compliance with applicable rules of conduct and
still be responsible for wrongdoing. A reform at the roles level will lead to a reform at the
rules level. Yet it is important to note that a failure at the roles level cannot be corrected for
by a reform at the rules level because the failure in the latter is but a symptom of a failure in
the former.
Normal legal profession politics, like normal politics, is characterised by factions trying to
manipulate the regulation of lawyers to pursue their own narrow interests. It is therefore not
surprising that in times of normal legal profession politics the American Bar Association
20 Rhode, supra n. 18 at 283 (“Lawyers belong to a profession permanently in decline. Or so it appears from
the chronic laments by critics within and outside the bar.”).

21 See, eg, Preserving the Core Values of the American Legal Profession, Report of the New York State Bar
Association Special Committee on the Law Governing Firm Structure and Operation (2000). Interestingly, a less than
obvious consequence of the recent corporate debacles and the collapse of Arthur Anderson has been the retreat
of the remaining Final Four accounting firms from the legal services market.
22 See, Anthony T. Kronman, The Lost Lawyer (Cambridge, MA, Bellknap Press, 1993) at 3; Mary Anne
Glendon, A Nation Under Lawyers (Cambridge, MA, Harvard University Press, 1993); Sol M. Linowitz, The
Betrayed Profession: Lawyering at the End of the Twentieth Century (New York, Scribener, 1994).
23 Patrick J. Schiltz, “On Being A Happy, Healthy, and Ethical Member of an Unhappy, Unhealthy, and
Unethical Profession”, (1999) 52 Vanderbilt Law Review 871; Sharon Dolovich, “Making Docile Lawyers: An
Essay on the Pacification of Law Students”, (1998) 111 Harvard Law Review 2027.
24 Rhode, supra n. 18.
25 Lawrence J. Fox, “It Takes More Than Cheek to Lose Our Way”, (2003) 77 St. John’s Law Review 277,
282–83.
58 ELI WALD
(“ABA”) and other lawyer interest groups pursuing the self-interest of the bar have
traditionally embraced the regulatory status quo and opposed reform efforts.26 In times of
normal politics, secured in the shield afforded to it by self-regulation, the profession usually
fails to live up to the self-regulation duty. Thus, when allegations of attorney wrongdoing
become known, they often go unexplored and unaddressed.27
The sheer scope and magnitude of Enron et al resulted in unusual public legal conscious-
ness creating an opportunity for a rare moment of constitutional legal profession politics, an
opportunity to study allegations of lawyer wrongdoing and comprehensively examine cor-
porate law practice at both the rules level and the roles level. An opportunity, moreover, that
is important because of the dominance of normal legal profession politics over “constitu-
tional” politics, and because of the chronic failure of the bar to discharge its self-regulatory
mandate.28
I argue that the opportunity to experience a “constitutional” legal profession moment is all
but lost because lawyer interest groups have launched a successful campaign to derail public
discourse and prevent a serious study of the actual role of lawyers and the need for reform.
Specifically, the interest groups have successfully employed what I call the We did nothing
wrong tactic of evasion to frustrate attempts to explore the actual role lawyers played in recent
corporate failures.
Part II identifies the tactic used by such groups to avoid responding to serious allegations
of lawyer wrongdoing, explains its operation and suggests possible reasons for its success.
Part III establishes the success of lawyer interest groups in derailing the “constitutional”
moment by demonstrating that the reform that followed the corporate debacles built on the
premise that lawyers did nothing wrong. Studying allegations of lawyer wrongdoing in con-
nection with recent corporate failures, Part IV identifies distinct patterns of attorney mis-
conduct, patterns that due to the successful lawyer campaign were not studied or addressed
by the current reform. These patterns not only expose the shortcomings of current reform
efforts at the rules level, but also raise serious doubts about the desirability of the roles cor-
porate attorneys play.
II: “We did nothing wrong”
In the late 1990s corporate America experienced significant turmoil as numerous companies
collapsed amid allegations of misconduct. The corporate scandals featured a few patterns of
misbehaviour: accounting meltdowns (eg Enron, Global Crossing, WorldCom Inc., Qwest
Communications International Inc., Rite Aid Corp., Xerox Corp.), looting and improper
corporate loans to executives (eg Adelphia Communications Corp., Tyco International Ltd.)
and insider trading (eg ImClone Systems Inc.).29
26 See, eg, William H. Simon, “The Kaye Scholer Affair: The Lawyer’s Duty of Candor and the Bar’s
Temptations of Evasion and Apology”, (1998) 23 Law & Social Inquiry 243.
27 Id. See also, Cramton, supra n. 3, at 143.
28 See, eg, William D. Langford, Jr., “Criminalizing Attorney-Client Sexual Relations: Toward Substantive
Enforcement”, (1995) 73 Texas Law Review 1223, 1230.

29 Cunningham, supra n. 3, at 923–28.
The collapses caused billions of dollars in damages and led to public outcry and a reported
loss of trust in the financial markets.30 The debacles also led to critiques of the legal profes-
sion: “where were the lawyers?” and “how could the legal profession let this happen?”31 The
bar’s usual normal politics of refusal to explore allegations of wrongdoing and opposition to
reform proposals seemed impossible given the magnitude of the losses and the extent of the
public rage.32 Consistent with its duty of self-regulation the profession could have launched
a comprehensive study of allegations of lawyer wrongdoing and, if appropriate, explore pos-
sible reforms at the rules and possibly roles level. A rare opportunity for a critical assessment
of corporate law practice presented itself.
Lawyer interest groups chose instead to launch a campaign aimed at achieving three
related goals: first, appease the angry public, restore public trust in the profession and
frustrate the possibility of a “constitutional” moment that could result in a threat to self-
regulation; secondly, prevent a study of actual lawyer conduct that can conceivably expose
lawyer wrongdoing and might lead to imposition of liability on culprits and an informed call
for reform; and finally, defeat reform at both the rules and roles levels and maintain the
status quo.
A. The tactic of evasion—We did nothing wrong

“There is nothing that I am aware of that we would change. We never saw anything at Enron that
we considered illegal.”
Joseph C. Dilg, managing partner of Vinson & Elkins LLP.33

“We know all our work for Enron was of the highest caliber and consistent with all of our profes-
sional obligations.”
Howard Ayers, managing partner of Andrews & Kurth LLP.34

[T]here has been a hasty and unsupported judgment by the general public and prominent people in
law and academia that lawyers violated ethical obligations and broke the law with their representa-
tion of Enron. . . . The author takes particular issue with suggestions . . . that ethical and legal
violations of lawyers abounded in the representation of Enron. The author first argues that [critics]
have falsely overstated that lawyers have been “found” legally responsible for numerous financial
scandals over the past half-century. He then argues that the [critics]’ entire premise is based on the
unsupported conclusion that where there is financial fraud, the company’s lawyers played some part.
The author counters that the performance of individual law firms representing Enron has not
revealed to this point any unethical or illegal behavior. Finally, the Enron investigation has uncov-
ered no evidence of an epidemic of misconduct among lawyers, as others have suggested. What is
happening here? No sooner does the media hysteria begin over the Enron affair than calls for a
change in the lawyers’ rules of professional conduct ring throughout the land.
30
Report of the American Bar Association Task Force on Corporate Responsibility, (2003), 1–10 (“Task Force”),
available at http://www.abanet.org/buslaw/corporateresponsibility/final_report.pdf.
31
Following a House hearing exploring the conduct of Enron attorneys, one commentator noted that “no one
could remember a hearing specifically focusing on the lawyer’s role.” Otis Bilodeau, “Vinson Partner Defends
His Firm, His Integrity”, Recorder, 21 March, 2002, at 3, cited by Jill E. Fisch & Kenneth M. Rosen, “Is there
a Role for Lawyers in Preventing Future Enrons?”, (2003) 48 Villenova Law Review 1097, 1098 fn. 3.
32
Simon, supra n. 26, at 282.
33 Mike France, What About the Lawyers? Business Week, 23 December, 2003 at 58.
34 Id.
60 ELI WALD
Lawrence F. Fox.35
“[M]ost members of the securities bar . . . have always performed their duties in a proactive, ethical
and impartial manner . . . the Sarbanes-Oxley Act does little or nothing meaningful with regard to
lawyers’ conduct.”
Lawrence A. Cunningham.36
The first element of the tactic—We—refers not to lawyers actually implicated in allega-
tions of wrongdoing but rather to the legal profession as a whole. “We” operates to obscure
the nature of the inquiry by ignoring context and the important differences between differ-
ent types of lawyers. The Enron et al allegations do not implicate all lawyers, rather, they
specifically involve the corporate segment of the bar. By defining the parameters of the
investigation to include all lawyers the tactic deflects attention from the subject-matter that
should be studied—the conduct of corporate lawyers—and redefines it to be the conduct of
all lawyers.
Further, redefining the subject-matter of the inquiry allows proponents of the tactic to
benefit from an inference of “bad apples” or de minimis. Once the reference group is defined
to be the entire bar, interest groups can assert—possibly correctly—that an overwhelming
majority of all lawyers (to be sure, including non-corporate lawyers who are not implicated
in allegations of corporate wrongdoing) comply with applicable rules of conduct and have
done nothing wrong, suggesting that no reform is necessary and no inquiry is needed: of
course, bad apples exist everywhere and the legal profession is no exception. But the excep-
tion proves the rule and since “We”—the profession as a whole and the majority of the bar—
“did nothing wrong” no reform is warranted.
In a meaningful way the second element of the tactic—Did nothing wrong—rings true. It
is factually accurate in that instances of adjudication resulting in final judicial findings of
lawyer wrongdoing are quite rare. Furthermore, the “We did nothing wrong” argument fits
with the well-acknowledged problem of the lack of sufficient empirical research of lawyers
and law practice,37 making the lack of hard evidence with regard to lawyer wrongdoing seem
to be but a symptom of a larger problem.
Persuasive as it may seem, “We did nothing wrong” is an evasion tactic designed to allow
the profession to escape scrutiny. Judicial findings of wrongdoing after final adjudication are
an accepted standard for purposes of determining attorney criminal and civil liability. It is
also a plausible one for purposes of determining the need for reform given that courts are
charged with regulating the conduct of the bar, but it is by no means a self-explanatory stand-
ard. Despite its rhetoric appeal, “We did nothing wrong,” invoked in the sense of few
instances of judicial findings of attorney wrongdoing does not mean that lawyers did nothing
wrong. Instead, it means that plaintiffs are unable to prove in court that lawyers are guilty of
35 Lawrence J. Fox, “The Fallout from Enron: Media Frenzy and Misguided Notions of Public Relations Are
No Reason to Abandon Our Commitment to Our Clients”, (2003) University of Illinois Law Review 1243,
1243–1244.
36 Cunningham, supra n. 3, at 966–67 (Citing David J. Sorin et al., “Sarbanes-Oxley Act: Politics or Reform?
Statute’s Effects Are Not as Profound as Legislators Would Have Us Believe”, New Jersey Law Journal, 2 Sept.,
2002, at 3.)
37 See, eg, Leslie C. Levin, “The Emperor’s Clothes and other Tales About the Standards for Imposing
Lawyer Discipline Sanctions”, (1998) 48 American University Law Review 1, 6–7 (observing insufficient empiri-
cal research of lawyers’ conduct and law practice).
wrongdoing. And while a judicial standard may allow lawyers to escape liability, it should not
be enough to allow the bar to escape responsibility, let alone be used as an excuse to avoid
investigation and possible reform. Specifically, the judicial standard is ill-suited for evaluat-
ing the need for reform at the rules and roles levels for three reasons: it favours the profes-
sion by setting a very high standard for finding lawyer-wrongdoing, it imposes the burden of
proof on critics, and it implies a forum that may favour the profession.
Irrespective of actual lawyer conduct, a standard that requires final adjudication yields a
small sample size because of the selection of cases for litigation problem:38 some potential
cases against lawyers are never pursued. A plaintiff may choose not to sue if the attorney is
judgment-proof or does not carry liability insurance; if the costs of litigation are too high; or
due to pro-attorney liability rules which either do not give rise to a cause of action39 or impose
on the plaintiff a high burden of proof. Cases that are filed are often settled by attorneys wish-
ing to avoid a negative judicial finding before adjudication is exhausted.40 Thus, by produc-
ing a small sample size irrespective of actual lawyer conduct, a standard requiring judicial
adjudication lends credibility to the “We did nothing wrong” excuse.
But the small sample size does not mean that there are few instances of lawyer wrongdoing.
Rather, it means that plaintiffs are unable to establish attorney liability in court. “We did
nothing wrong” collapses and equates the claim “critics failed to establish that ‘we’ did some-
thing wrong” with “we did nothing wrong.” Logically, the former simply does not support
the conclusion that no lawyer wrongdoing actually took place and that an inquiry is not called
for, let alone that no reform is warranted. The tactic of evasion cleverly shifts the burden of
proof from the legal profession to its critics.41 Self-regulation, however, suggests that the
burden of accounting for lawyer conduct, justifying rules of conduct and examining the
desirability of roles occupied by lawyers should rest on the profession, not its critics. The
bar’s tactic of evasion is essentially a demurrer—a motion to dismiss the scrutinising “pro-
ceedings” based on the failure of critics to state a claim upon which relief (that is, reform) can
be granted.42
Finally, invoking “We did nothing wrong” in the sense of no final judicial findings of
wrongdoing implies, but fails to convincingly argue, that the appropriate forum for dis-
cussing and deciding appropriate rules of conduct and appropriate roles for the corporate bar
should be a courtroom. The tactic suggests that court proceedings (on liability issues) should
be dispositive (on regulation of the bar and reform issues) and lead to a conclusion that no
inquiry into lawyer wrongdoing is warranted. And yet the appropriate forum for assessing
the bar’s compliance with the terms of the social bargain between the public and the profes-
sion should be the court of public opinion, not a courtroom.
38 See, eg, George Priest & Benjamin Klein, “The Selection of Disputes for Litigation”, (1984) 13 Journal of
Legal Studies 1. See also, Marc Galanter, “Why the ‘Haves’ Come Out Ahead: Speculations on the Limits of
Legal Change”, (1974) 9 Law & Society Review 95.
39 See, eg, Central Bank of Denver, N.A. v First Int’l Bank of Denver, 114 S.Ct. 1439 (1994) (no private cause
of action under the federal securities statutes against lawyers for aiding and abetting violations of securities law).
40 Simon, supra n. 26. To be sure, a settlement does not necessarily mean that the settling attorney is guilty
of wrongdoing but it does mean that the case is not litigated and irrespective of the lawyer guilt or innocence
there is no judicial finding regarding lawyer misconduct.
41 For example, Larry Fox, after identifying what needs to be demonstrated before rule changes should be
implemented, clearly places the burden of persuasion on reform proponents stating. See, Fox, supra n. 25, at 283.
42 See, Federal Rules of Civil Procedure, 12(b)(6).
62 ELI WALD
Overall, “We did nothing wrong” is a tactic of evasion because it refuses to engage with
allegations of wrongdoing on the merits and aims to avoid investigation into the role of
lawyers in recent corporate collapses. It attempts to disengage interested Americans and
decrease the possibility of a “constitutional” legal profession moment, prevent a compre-
hensive study of actual lawyer conduct and defeat reform. Nevertheless, by confusing and
redefining the subject-matter of inquiry, invoking the intuitive notion of “bad apples,” rely-
ing on pro-lawyer standards of evaluation, shifting the burden of proof on to critics, and
invoking the metaphor of a trial by “filing” a demurrer, the “We did nothing wrong” tactic
has proven to be an effective tactic of evasion. Invoking the common sense idiom “if it ain’t
broke, don’t fix it,” the tactic cleverly disguises its real bite: “if you do not know whether it’s
broken, don’t find out.”
The tactic of evasion, however, is a two-edged sword. As so far as it is successful in pre-
venting inquiries into actual lawyer misconduct, preventing analyses of the applicable rules
of conduct and the roles that justify them, and defeating reform efforts, the tactic is a pow-
erful weapon in the hands of lawyer interest groups. However, if reform is implemented
despite the tactic, the reform is bound to be analytically inapt. Not based on an informed
understanding of actual problems and not supported by policy analysis, reform efforts sus-
pended in mid legal air are likely to, at best, amount to nothing more than tinkering with the
existing regulatory apparatus. At worse, such reforms could harm the profession and the
public by compromising desirable rules of conduct and undermining desirable lawyers’ roles.
Regrettably, the reform that followed the recent corporate collapses, implemented in the
shadow of an effective evasion campaign, does little more than tinker with existing rules leav-
ing unexplored and unaddressed deficiencies in rules of conduct and disturbing aspects of
roles occupied by corporate attorneys.
III: The reform efforts
Lawyer interest groups have achieved two of their three desired goals. First, the public’s
anger with the profession seems to have been defused and the opportunity for a “constitu-
tional” legal profession moment is all but gone. Currently, the discourse over lawyer wrong-
doing and the reform that followed seems to be limited to the legal academia and courtrooms.
Secondly, to date, there has been no systematic and comprehensive study of allegations of
attorney misconduct. Nonetheless, the tactic has been unable to prevent reform efforts.
A. The reform
1. Sarbanes-Oxley Section 307 and Securities and Exchange Commission (“Commission”)

Part 205
Moving swiftly following the corporate collapses Congress adopted the Sarbanes-Oxley Act
of 2002, which President George W. Bush described as “the most far reaching reform of
American business practices since the time of Franklin Delano Roosevelt.”43
43
President George W. Bush, The East Room, The White House, President Signs Corporate Corruption Bill,
at www.whitehouse.gov/news/releases/2002/07/print/20020730.html (30 July, 2002).
Section 307 of the Sarbanes-Oxley Act of 200244 requires the Commission to prescribe
minimum standards of professional conduct for attorneys appearing and practicing before
the Commission in any way in the representation of issuers. The Commission’s Part 20545
imposes an up-the-ladder reporting requirement when attorneys appearing and practicing
before the Commission become aware of evidence of a material violation by the issuer or any
officer, director, employee, or agent of the issuer. An attorney must report such evidence to
the issuer’s Chief Legal Officer (“CLO”) or to both the CLO and Chief Executive Officer
(“CEO”).46 If the CLO, after investigation, determines that there is no violation, he or she
must so advise the reporting attorney. Unless the CLO reasonably believes that there is no
violation, he or she must take reasonable steps to cause the issuer to adopt an appropriate
response to stop, prevent or rectify any violation. The CLO must also report on the remedial
measures or sanctions to the reporting attorney.47
The rules also require attorneys to take certain steps if the CLO or CEO does not provide
an appropriate response to a report of evidence of a violation. These steps include reporting
the evidence up-the-ladder to the audit committee, another committee consisting solely of
independent directors if there is no audit committee, or to the board of directors if there is
no such committee. If the attorney believes that the issuer has not made an appropriate
response to the report, the attorney must explain the reasons for his or her belief to the CEO,
CLO or directors to whom the report was made.48
Alternatively, an attorney other than the CLO may report the evidence to the issuer’s
Qualified Legal Compliance Committee (“QLCC”). In such a case he or she need take no
further action under the rules. The QLCC must have written procedures for the receipt,
retention and consideration of reports of material violations, and must be authorised and
responsible to notify the CLO and CEO of the report, determine whether an investigation is
necessary and, if so, to notify the audit committee or the board of directors. The QLCC may
also initiate an investigation to be conducted by the CLO or outside attorneys, and retain any
necessary expert personnel. At the conclusion of the investigation, the QLCC may recom-
mend that the issuer adopt appropriate remedial measures and/or impose sanctions, and
notify the CLO, CEO, and board of directors of the results of the inquiry and appropriate
remedial measures to be adopted. Where the QLCC decides, by a majority vote, that the
44
15 USC 7245. Section 307 mandates that the Commission:
shall issue rules, in the public interest and for the protection of investors, setting forth minimum standards of
professional conduct for attorneys appearing and practicing before the Commission in any way in the represen-
tation of issuers, including a rule –
(1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty
or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer
of the company (or the equivalent thereof); and
(2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropri-
ate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence
to the audit committee of the board of directors of the issuer or to another committee of the board of directors
comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.
45
Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Part 205, Release Nos.
33-8185; 34–47276; IC–25919; File No. S7–45-02, RIN 3235-AI72 (“Release”).
46
A subordinate attorney complies with the rule if he or she reports evidence of a material violation to his
or her supervisory attorney (who is then responsible for complying with the rule’s requirements). A subordinate
attorney may also take the other steps described in the rule if the supervisor fails to comply.
47
Id.
48
Id.
64 ELI WALD
issuer has failed to take any remedial measure that the QLCC has directed the issuer to take,
the QLCC has the authority to notify the Commission. A CLO may also refer a report of evi-
dence of a material violation to a QLCC, which then would have responsibility for taking the
steps required by the rule.49
2. ABA Model Rules of Professional Conduct 1.13 and 1.6

In August 2003 the ABA House of Delegates approved the recommendations of the Task
Force and revised Model Rules 1.13 and 1.6.50 The ABA reform addresses two principal sub-
jects: the role of lawyers in facilitating the flow of information within the organisational
clients they represent (Rules 1.13(a),(b),(d)–(g)); and the ability of lawyers to disclose to third
parties information concerning criminal or fraudulent conduct by the client (Rules
1.6(b)(2),(3) and 1.13(c)).51
In its report, the Task Force stresses the importance of establishing more effective lines of
communications and analysis within organisational clients, including communications
between General Counsels and independent directors and between outside counsel and
General Counsels.52 Attempting to reinforce the obligation of corporate attorneys to
communicate with higher corporate authorities, the ABA approved two substantive revisions
to Rule 1.13. Whereas the former 1.13(b) stated quite ambiguously that the lawyer had to take
appropriate action in the best interest of the client-organisation, the new Rule refines the
definition of the circumstances that trigger the lawyer’s duty to take action within the organ-
isation; and clarifies the circumstances under which the lawyer is required to communicate
with a higher authority within the organisation.53
The Task Force grounds its analysis of confidentiality in the notion of trust as the corner-
stone of the attorney-client relationship: “A client must feel free to seek legal assistance and
to communicate fully and frankly with the client’s lawyer. Without such full and frank
communication the lawyer will be unable to represent the client effectively.”54 Recognising,
however, competing policy considerations, such as the protection of the client or third
49 Id.
50 Task Force, supra n. 30.
51 Id. at 34.
52 Id. at 36–40.
53 Rule 1.13: Organization as Client, reads in part:
(a) A lawyer employed or retained by an organization represents the organization acting through its duly
authorized constituents.
(b) If a lawyer for an organization knows that an officer, employee or other person associated with the orga-
nization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a
violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to
the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall pro-
ceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that
it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher
authority in the organization, including, if warranted by the circumstances, to the highest authority that can act
on behalf of the organization as determined by applicable law.
...
(e) A lawyer who reasonably believes that he or she has been discharged because of the lawyer’s actions taken
pursuant to Paragraphs (b) or (c), or who withdraws in circumstances that require or permit the lawyer to take
action under either of those Paragraphs, shall proceed as the lawyer reasonably believes necessary to assure that
the organization’s highest authority is informed of the lawyer’s discharge or withdrawal. See, Task Force, supra
n. 30 at 42.
54 Id. at 48.
parties and the protection of the professional integrity of the lawyer, the Task Force recom-
mended three additional exceptions to the doctrine of confidentiality. First, new Rule 1.13(c)
permits, but does not require, the lawyer for the organisation to communicate with persons
outside of the organisation in order prevent substantial injury to the client-organisation.55
Secondly, new Rule 1.6(b)(2) permits, but does not require, the attorney to reveal informa-
tion relating to the representation of a client to prevent the client from committing a crime
or fraud reasonably certain to result in substantial injury to the financial interests of a third
party;56 and finally, new Rule 1.6(b)(3) permits, but does not require, the attorney to reveal
information relating to the representation of a client to prevent, mitigate or rectify substan-
tial injury to the financial interests of a third party caused by the client.57
B. Understanding the reform: the consequences of (an unsuccessful) “We did nothing wrong”
campaign
1. Understanding Part 205
Part 205 identifies lack of appropriate communications within the client-organisation as the
locus of attorney wrongdoing. The Commission’s release states that: “Part 205 is designed to
protect investors and increase their confidence in public companies by . . . helping to prevent
instances of significant corporate misconduct and fraud.”58 How so?
55
Rule 1.13(c), d reads:
Except as provided in Paragraph (d), if
(1) despite the lawyer’s efforts in accordance with Paragraph (b) the highest authority that can act on behalf
of the organization insists upon or fails to address in a timely and appropriate fashion action, or a refusal to act,
that is clearly a violation of law, and
(2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the
organization, then the lawyer may reveal information relating to the representation whether or not Rule 1.6
permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent sub-
stantial injury to the organization.
(d) Paragraph (c) shall not apply with respect to information relating to a lawyer’s engagement by an organ-
ization to investigate an alleged violation of law, or to defend the organization or an officer, employee or other
person associated with the organization against a claim arising out of an alleged violation of law.
56
Rule 1.6: Confidentiality of Information, reads in part:
(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives
informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure
is permitted by paragraph (b).
(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer rea-
sonably believes necessary:
...
(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial
injury to the financial interests or property of another and in furtherance of which the client has used or is using
the lawyer’s services;
57
Rule 1.6(b)(3) states:
(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer rea-
sonably believes necessary:
...
(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is
reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of
which the client has used the lawyer’s services;
58
Release, supra n. 45.
66 ELI WALD
“The rule requires that attorneys report up-the-ladder when they become aware of evidence of a
material violation. The Commission believes that [the rule] will make it more likely that companies
will address instances of misconduct internally, and act to remedy violations at earlier stages. By
requiring attorneys to report potential misconduct up-the-ladder within a corporation, the rule pro-
vides a measure of comfort to investors that evidence of fraud will be known and evaluated by the top
authorities in a corporation, including its board of directors, and not dismissed by lower-level employees.
(emphasis added).”59
Moreover,
“Corporate wrongdoers at the lower or middle levels of the corporate hierarchy will be aware that an
attorney who becomes aware of their misconduct is obligated under the rule to report it up-the-
ladder to the highest levels of the corporation. In the event that wrongdoing or fraud exists at the
highest levels of a corporation, those committing the misconduct will similarly know that the cor-
poration’s attorneys are obligated to report any misconduct of which they become aware up-the-
ladder to the corporation’s board and its independent directors.”60
The Commission concludes that

“By mandating up-the-ladder reporting of violations, the rule helps to ensure that evidence of mate-
rial violations will be addressed and remedied within the corporation, rather than misdirected or
‘swept under the rug’.”61
Nothing in the Commission’s explanation of Part 205 suggests or even contemplates direct
wrongdoing by lawyers. If at all, attorneys are responsible for not effectively communicating
with, and facilitating communications within their organisational clients. Part 205 instead
accepts the unsupported assertion that corporate lawyers “did nothing wrong”. The
Commission, called upon by Congress to promulgate “in the public interest and for the
protection of investors, minimum standards of professional conduct for attorneys,”62 simply
assumed lawyers did nothing wrong and promulgated a rule that builds on the role of cor-
porate lawyers as information and communications facilitators within the organisational
structure of their clients. Such a rule not only fails to question lawyers’ current practices, but
in fact reinforces them.
In its proposed version, the Commission’s rule,63 did implicitly question lawyers’ con-
duct and incorporated several elements that suggested lawyers’ wrongdoing. First, in addi-
tion to an up-the-ladder reporting requirement, the proposed rule contemplated a so-called
“noisy withdrawal” provision, permitting or requiring attorneys under certain circum-
stances, to notify the Commission that they have withdrawn from the representation of the
issuer, and permitted attorneys to report evidence of material violations to the Commission.
Such a rule implied that corporate lawyers knew about their clients’ wrongdoing and sug-
gested a gate-keeping role for the corporate bar that is radically different from the current
one lawyers occupy. The final rule did not incorporate such a provision and the
59 Id.
60 Id.
61 Id.
62 15 USC 7245, supra n. 44.
63 Standards of Professional Conduct for Attorneys Appearing and Practicing before the Commission in the
Representation of an Issuer, Proposed Part 2005, 21 November, 2002.

Commission is still considering the “noisy withdrawal” provisions of its original proposal
under section 307.64
Secondly, the proposed rule also included a documentation requirement, which would
have required attorneys to keep a record of their actions in conjunction with attempting to
insure compliance with Part 205.65 The Commission cited comments by opposing lawyer
interest groups arguing that such a requirement could be an impediment to open and can-
did discussions between attorneys and their issuer clients because if the client knew the
lawyer was documenting discussions regarding a potential material violation, managers
would be less likely to be honest and forthcoming. Furthermore, opponents of the docu-
mentation requirement argued that it may create a conflict of interest between the lawyer
and his or her client. The documentation would “occur at exactly the time when there was
disagreement between an attorney and the client. At the very least, requiring the attorney
to produce such product by virtue of his or her separate obligation to the Commission is
bound to present potential for conflict of interest.”66 Again, this proposed rule implied pos-
sible wrongdoing by corporate lawyers and invoked a role very much different from the one
opponents of the requirement assert. The documentation requirement was not adopted by
the Commission.
Thirdly, the Commission clarified and made explicit in Section 205.7 that no private right
of action exists based on compliance or non-compliance with the rule.67 In addition, the
Commission has made it clear in Section 205.6(c) that an attorney who complies in good faith
with the rule will not be subject to discipline or otherwise liable under an inconsistent state
standard. This “safe harbor” provision has been added to protect attorneys, law firms, issuers
and officers and directors of issuers.68
Part 205 thus implicitly accepts that lawyers “did nothing wrong” by adopting rules of
conduct that sustain the corporate law practice status quo and implement no meaningful
reform at either the rules or roles levels; and rejecting proposed provisions that implied pos-
sible attorney wrongdoing or contemplated revision of the roles played by the corporate bar.
Notably, Part 205 does authorise a covered attorney to reveal to the Commission confidences
or secrets relating to the attorney’s representation of an issuer before the Commission to the
extent the attorney reasonably believes it necessary to: (i) prevent the issuer from commit-
ting a material violation likely to cause substantial harm to the financial interest or property
of the issuer or investors; (ii) prevent the issuer from perpetrating a fraud upon the
Commission; or (iii) rectify the consequences of the issuer’s illegal act that the attorney’s
64
In its Release, the Commission proposes an alternative procedure to the “noisy withdrawal” provisions.
Under this proposed alternative, in the event that an attorney withdraws from representation of an issuer after
failing to receive an appropriate response to reported evidence of a material violation, the issuer would be
required to disclose its counsel’s withdrawal to the Commission as a material event.
65
Section 205.3(b)(2) of the proposed rule read:
The attorney reporting evidence of a material violation shall take steps reasonable under the circumstances to
document the report and the response thereto and shall retain such documentation for a reasonable time. Supra
n. 64.
66
Supra n. 45.
67
Id.
68
Id.
68 ELI WALD
services had furthered.69 And yet, placing a discretionary provision that is arguably incon-
sistent with the spirit and roles of corporate attorneys otherwise endorsed by Part 205 seems
like little more than an empty rhetorical gesture to appease public opinion.
2. Understanding the revised Rules of Conduct

The ABA Task Force report contemplates at times the possibility of lawyer wrongdoing. For
example, the report acknowledges that: “The competition to acquire and keep client busi-
ness, or the desire to advance within the corporate executive structure, may induce lawyers
to seek to please the corporate officials with whom they deal rather than to focus on the long-
term interest of their client, the corporation.”70 It further states: “lawyers for the public cor-
poration must bear in mind that their responsibility is to the corporation, and not to the
corporate directors, officers or other corporate agents with whom they necessarily commun-
icate . . . there are times, moreover, when the corporate lawyer must recognize that his or her
own independence may be compromised by relationships with senior executives officers.”71
The Report, however, fails to meaningfully investigate or address these concerns. Rather,
it identifies corporate governance failure as the locus of wrongdoing and, following in the
footsteps of Part 205, implicitly accepts as a premise that lawyers did nothing wrong.
Nowhere does it discuss or explore allegations of lawyer wrongdoing, study the causes of it
or offer remedial measures. Instead, revised Model Rule 1.13 clarifies the role of corporate
lawyers as information and communications facilitators within the organisational structure.
By electing to tinker with its existing Model Rules, the ABA implicitly suggest that lawyers
did nothing wrong and that therefore no significant reform is needed. Furthermore, the revi-
sions to Model Rules 1.6(b)(2),(3) and 1.13(c) are somewhat puzzling. If lawyers did nothing
wrong, why allow greater disclosure and add new exceptions to the fundamental doctrine of
confidentiality? Infusing the Model Rules with duties to protect, in some circumstances, the
financial interests of third parties, duties that are inconsistent with both the letter and the
spirit of the otherwise client-centred Model Rules make little sense without a comprehensive
analysis of the role corporate lawyers play and the underlying basic assumptions that justify
that role.
The ABA Task Force failed to investigate the allegations of wrongdoing against lawyers,
elected instead to assume that by-and-large lawyers did nothing wrong and suggested revi-
sions to the Model Rules that are based neither on an informed understanding of failure in
actual corporate practice nor on an a persuasive policy of analysis.
69 205.3(d)(2) entitled “Disclosure to the SEC without issuer’s consent” provides:
An attorney appearing and practicing before the Commission in the representation of an issuer may reveal to the
Commission, without the issuer’s consent, confidential information related to the representation to the extent
the attorney reasonably believes necessary:
(i) To prevent the issuer from committing a material violation that is likely to cause substantial injury to the
financial interest or property of the issuer or investors;
(ii) To prevent the issuer, in a Commission investigation or administrative proceeding from committing
perjury, proscribed in 18 USC 1621; suborning perjury, proscribed in 18 USC 1622; or committing any act pro-
scribed in 18 USC 1001 that is likely to perpetrate a fraud upon the Commission; or
(iii) To rectify the consequences of a material violation by the issuer that caused, or may cause, substantial
injury to the financial interest or property of the issuer or investors in the furtherance of which the attorney’s
services were used.
70 Task Force, supra n. 30 at 14–15.
71 Id. at 23, 24.
3. The federalisation of legal ethics

Prior to passage of the Sarbanes-Oxley Act, attorneys appearing and practicing before the
Commission were regulated primarily by their home states.72 Part 205 sets forth minimum
standards of professional conduct for attorneys appearing and practicing before the
Commission in the representation of an issuer. These standards supplement applicable
standards of any jurisdiction where an attorney is admitted or practices and are not intended
to limit the ability of any jurisdiction to impose additional obligations on an attorney not
inconsistent with the application of this part. However, where the standards of a state or
other United States jurisdiction where an attorney is admitted or practices conflict with Part
205, Part 205 governs.73 While the Commission clarified that Part 205 does not preempt eth-
ical rules in United States jurisdictions that establish more rigorous obligations than imposed
by it, it reaffirmed that its rules shall prevail over any conflicting or inconsistent laws of a state
or other United States jurisdiction in which an attorney is admitted or practices.74
For example, addressing concerns that granting covered lawyers the discretion to reveal
confidences without the client-issuer’s consent75 would preempt state law ethics rules that do
not permit disclosure of information concerning such acts, the Commission made clear that
in such a case Part 205 would preempt state law. Similarly, the Commission stated that it
intends:
“that the issue whether an attorney-client relationship exists for purposes of this part will be a fed-
eral question and, in general, will turn on the expectations and understandings between the attorney
and the issuer. Thus, whether the provision of legal services under particular circumstances would
or would not establish an attorney-client relationship under the state laws or ethics codes of the state
where the attorney practices or is admitted may be relevant to, but will not be controlling on, the
issue under this part.”76
Section 307 and Part 205 thus represent a first step toward the federalisation of legal ethics,
a move from state regulation of the bar to regulation by a federal agency and a move from self-
regulation to administrative regulation. All represent significant changes in the regulation of
the corporate bar and the profession as a whole, changes that merit great attention. And yet,
as a result of the “We did nothing wrong” campaign, these changes were passed without such
due consideration.
Furthermore, analysis of available evidence of the roles played by attorneys in recent cor-
porate collapses reveals disturbing patterns of attorney misconduct, that illustrate the short-
comings of the reform efforts and provide insights regarding much needed reform.
72 But see, SEC v Nat’l Student Marketing Corp., 457 F. Supp. 682 (D.D.C. 1978); In re Carter and Johnson,
1981 Fed. Sec. L. Rep. para 82,847 (SEC 1981).

73 Release, supra n. 45. See also, Implementation of Standards of Professional Conduct for Attorneys, 17 CFR
Parts 205, 240 and 249, Release Nos. 33-8186; 34–47282; IC–25920; File No. S7–45-02, RIN 3235–AI72
(“Second Release”).
74 Id.
75 Section 205.3(d)(2), supra n. 69.
76 Id, Supra n. 45.
70 ELI WALD
IV: Patterns of lawyer wrongdoing
The collapses of Enron et al led to unprecedented allegations of attorney wrongdoing.

Lawyer interest groups have responded by asserting “We did nothing wrong.” Analysis of
existing evidence disproves this tactic of evasion. It reveals distinct patterns of attorney
misconduct that implicate numerous lawyers and law firms and question attorney conduct
that is common in the representation of organisational clients. Some of these patterns violate
current rules of conduct suggesting insufficient enforcement of existing rules. Other patterns
of misconduct are consistent with current rules suggesting the need to revisit the rules and
the underlying justifications that support them at the roles level. The evidence lends no
support to recent reform efforts that assume no attorney wrongdoing and embrace the reg-
ulatory status quo.
A. Wrongdoing by outside counsel: design and participation in fraudulent transactions;

facilitation of fraud; and participation in non-disclosure
1. Allegations against outside counsel—Vinson & Elkins LLP, Andrews & Kurth LLP, and
Kirkland & Ellis LLP.
In the mid-1990s, Enron began to transform its strategic focus from transportation of natural
gas to energy trading and ventured away from traditional business and accounting
approaches in order to generate higher financial returns.77 As financial problems arose in
operations outside it core traditional energy business, Enron orchestrated “an enormous
Ponzi scheme involving illusory profits generated by phony, non-arm’s-length transactions
with Enron-controlled entities and improper accounting tricks in order to inflate Enron’s
earnings and conceal its growing debts.”78
Vinson & Elkins LLP (“Vinson & Elkins”) is a large Houston, Texas-based law firm with
approximately 800 lawyers in ten offices world-wide.79 While at its hey-day Enron had a large
in-house legal department with over 250 attorneys and employed “hundreds of outside law
firms,” Vinson & Elkins was the company’s main outside counsel in terms of the number and
variety of matters handled and legal fees paid.80 Indeed, Enron was Vinson & Elkins’ largest
client, accounting for more than 7 per cent of the law firm’s revenues in 2001. Over the years
more than 20 Vinson & Elkins lawyers have left the firm and joined Enron’s in-house legal
department.81
Allegations of lawyer wrongdoing against Vinson & Elkins first surfaced in the Powers
Report commissioned by Enron’s special investigative committee of the company’s board of
directors. The Powers Report concluded that:
77
Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.
(“Powers Report”), at *15.
78
In re Enron Corp. Sec. Derivative & ERISA Litig., 235 F. Supp. 2d 549, 613 (S.D. Tex. 2002).
79
See http://www.vinson-elkins.com/firm_overview/firm_overview.cfm
80
See, In re: Enron Corp., et al., Debtors, Appendix C (Role of Enron’s Attorneys) to Final Report of Neal
Batson, Court-Appointed Examiner, Case No. 01–16034 (AJG) (“Batson Report”) at *10. Between 1997 and
2001 Enron paid Vinson & Elkins fees in excess of $160 million.
81
In re Enron, supra n. 78 at 656.
“Vinson & Elkins, as Enron’s longstanding outside counsel, provided advice and prepared docu-
mentation in connection with many of the transactions discussed in the Report. It also assisted
Enron with the preparation of its disclosures of related-party transactions in the proxy statements
and the footnotes to the financial statements in Enron’s periodic SEC filings. Management and the
Board relied heavily on the perceived approval by Vinson & Elkins of the structure and disclosure
of the transactions. Enron’s Audit and Compliance Committee, as well as in-house counsel, looked
to it for assurance that Enron’s public disclosures were legally sufficient. It would be inappropriate
to fault Vinson & Elkins for accounting matters, which are not within its expertise. However, Vinson
& Elkins should have brought a stronger, more objective and more critical voice to the disclosure
process.”82
The complaint in the Enron class action identifies four categories of attorney wrongdoing,
alleging that Vinson & Elkins designed and participated in fraudulent transactions; facilitated
fraud by issuing necessary legal opinions; orchestrated Enron’s non-disclosure by means of
technically accurate yet misleading disclosure; and conducted a cover-up investigation
despite of conflict-of-interest concerns.
First, the complaint alleges that Vinson & Elkins participated in the negotiations for, pre-
pared the transactions for, participated in the structuring of, and approved numerous illicit
partnerships and special purpose entities (“SPEs”) with knowledge that they were manipu-
lative devices designed to move debt off Enron’s books, inflate its earnings, and falsify
Enron’s reported financial results and financial condition.83 Secondly, the complaint alleges
that the law firm, from 1997 through 2001,84 provided “true sale”85 opinions and other legal
documents that were false and were indispensable for the sham deals to close and the fraud-
ulent scheme to continue, and, over time, continually issued false opinions about the illegit-
imate business transactions, such as that they were “true sales.”86 Vinson & Elkins’
willingness to provide Enron with these legal opinions was, as a practical matter, crucial to
the company’s ability to complete the transactions.87 Thirdly, the complaint alleges that
Vinson & Elkins drafted and approved the adequacy of Enron’s SEC filings, including annual
reports on Forms 10K, registration statements, shareholder reports and press releases that
the law firm knew were false and misleading. Vinson & Elkins also drafted disclosure state-
ments about related party transactions, which it also knew were false and misleading because
they concealed material facts.88 Finally, the complaint alleges that the law firm conducted a
cover-up investigation in order to assist Enron executives conceal the wrongdoing.89
82 Powers Report, supra n. 77 at *15.

83 In re Enron, supra n. 78 at 614–15.
84 “Enron continued to use the SPEs in non-arm’s length transactions to generate false profits and conceal
Enron’s actual indebtedness from 1997 through 2001 in transactions that Vinson & Elkins participated in struc-
turing and provided false ‘true sale’ opinions to effectuate.” Id. at 626–27. For example, in September of 2001,
when Enron’s stock value was dipping to precarious ‘trigger’ levels and threatening the possibility of large asset
write downs, Vinson & Elkins allegedly effected a fictitious swap asset transaction between Enron and Qwest
intended to limit the write-offs and conceal Enron’s financial situation by creating an appearance of healthy oper-
ating earnings. Id.
85 “[T]rue sales opinions are letters that law firms write vouching for the fact that the business transactions
meet particular legal requirements.” Id.

86 Id. at 657.
87 Batson Report, supra n. 80 at *11.
88 In re Enron, supra n. 78 at 657.
89 See infra, IV.B.1. pages 75–76.
72 ELI WALD
Rejecting the firm’s motion to dismiss, Judge Harmon refused to accept the firm’s “We did
nothing wrong” assertion. The Judge found that “Vinson & Elkins was necessarily privy to its
client’s confidences and intimately involved in and familiar with the creation and structure of
its numerous businesses, and thus, as a law firm highly sophisticated in commercial matters, had
to know of the alleged ongoing illicit and fraudulent conduct.”90 Responding to the law firm’s
argument that it only fulfilled its role as a zealous advocate on behalf of Enron, the Judge ruled:
“contrary to Vinson & Elkins’ contention, the situation alleged in the complaint is not one in which
Vinson & Elkins merely represented and kept confidential the interests of its client, which has ‘the
final authority to control the contents of the registration statement, other filing, or prospectus.’
Instead, the complaint alleges that the two were in league, with others, participating in a plan, with
each participant making material misrepresentations or omissions or employing a device, scheme or
artifice to defraud, or engaging in an act, practice or course of business that operated as a fraud, in
order to establish and perpetuate a Ponzi scheme that was making them all very rich.”91
Judge Harmon’s ruling illustrates the effectiveness of the “We did nothing wrong” tactic
of evasion and the problematic nature of relying on judicial findings as the standard for eval-
uating lawyer misconduct for purposes of assessing reform. After making her factual
findings, the Judge states: “Nevertheless, had Vinson & Elkins remained silent publicly, the
attorney-client relationship and the traditional rule of privity for suit against lawyers might
protect Vinson & Elkins from liability to non-clients for such alleged actions on its client’s
(and its own) behalf.”92 In other words, Vinson & Elkins’ actual wrongdoing identified above
may nonetheless result in no judicial findings of wrongdoing because pro-lawyer liability
rules demand that plaintiffs identify a duty owed to it by the attorney, a burden plaintiffs may
not be able to meet.93 Thus, despite possible actual lawyer wrongdoing that is very much
relevant for purposes of evaluating the need for reform, the judicial proceeding may result in
a legal finding of no liability.
The most detailed allegations of wrongdoing against Vinson & Elkins to date were made
in conjunction with the Enron bankruptcy proceedings.94 On April 8, 2002, Judge Gonzales
ordered the appointment of an Examiner to inquire into, inter alia, all transactions involving
SPEs, including a mandate to identify all parties involved and assess their involvement in the
transactions. The Examiner studied the role Vinson & Elkins played in certain of Enron’s
SPE transactions and in Enron’s disclosures concerning these transactions. The Examiner
concluded that there was sufficient evidence from which a fact-finder could conclude that
Vinson & Elkins attorneys involved in Enron’s SPE transactions (i) committed legal mal-
practice based on Texas Rule 1.12, (ii) committed legal malpractice based on negligence and
(iii) aided and abetted the Enron officers’ breaches of fiduciary duty.95 The Examiner further
90
In re Enron, supra n. 78 at 704–05.
91
Id.
92
Id.
93
Judge Harmon found that despite their inability to meet the privity requirement the plaintiffs may still be
able to establish a duty owed to them by Vinson & Elkins. The judge held that when lawyers (and other pro-
fessionals) take the affirmative step of speaking out, whether individually or as essentially an author or co-author
in a statement or report, whether identified or not, about their client’s financial condition, they have a duty to
third parties not in privity not to knowingly or with recklessness issue materially misleading statements on which
they intend or have reason to expect that those third parties will rely. Id.
94
Batson Report, supra n. 80.
95
Id. at *64–69.
found that while there was little or no direct evidence of particular Vinson & Elkins attor-
neys’ knowledge of wrongful conduct by an Enron officer, and the law firm’s attorneys
affirmatively denied having any such knowledge, in some instances there was circumstantial
evidence that would be sufficient for a fact-finder to infer that Vinson & Elkins’ attorneys did
possess actual knowledge of wrongful conduct by Enron’s officers.96
Andrews & Kurth is another Houston, Texas-based law firm97 that handled the vast
majority of Enron’s controversial SPE transactions. Andrews & Kurth’s conduct was not
questioned in the Powers Report, and the firm was not named as a defendant in the class
action lawsuit. However, investigating allegations that Andrews & Kurth designed, partici-
pated, and facilitated fraudulent transactions and drafted misleading disclosure statements,
the bankruptcy Examiner concluded that:
“there is sufficient evidence from which a fact finder could determine that Andrews & Kurth com-
mitted malpractice, aided and abetted a breach of fiduciary duty or committed malpractice based on
negligence in connection with [fraudulent SPE] transactions. A fact finder could determine that
Andrews & Kurth knew that Enron had no intention to relinquish control over, or the risks and
rewards of, the assets transferred in certain of the [SPE] transactions and therefore was engaging in
the [SPE] transactions to produce materially misleading financial statements.”98
Kirkland & Ellis is a large full-service law firm with more than 1000 lawyers in office loca-
tions throughout the United States and other countries.99 The class action complaint alleges
that Kirkland & Ellis actively engaged in Enron’s Ponzi scheme to defraud the company’s
investors, asserting that the law firm was hand-picked by Enron to provide “independent”
representation to the SPEs.100 In addition, Kirkland & Ellis allegedly participated in Enron’s
misleading disclosures, reviewed SEC filings by Enron and knew that related party trans-
actions were unfair to Enron contrary to the company’s false assertion that the transactions
were on terms similar to those it could have obtained with independent third parties.101
Judge Harmon dismissed the action against Kirkland & Ellis, finding that: “All the asser-
tions against the firm are conclusory and general.”102 It is important to note, however, that
the ruling clearly rejected the “We did nothing wrong” assertion:
While the allegations against Kirkland & Ellis may indicate that it acted with significant conflicts of inter-
ests and breached professional ethical standard, unlike its claims against Vinson & Elkins, Lead Plaintiff
has not alleged that Kirkland & Ellis made any material misrepresentations or omissions to investors
or the public generally that might make it liable to non-clients under s. 10(b).”103 (emphasis added).
96
The Examiner did point out that a fact-finder may draw alternative or contrary inferences from the same
evidence, and clearly noted that Vinson & Elkins has viable defenses to such claims that would be presented to
the fact-finder including lack of any knowledge of wrongdoing, absence of any duty, under the circumstances,
to take “remedial actions,” and that such claims are barred or reduced by the wrongful conduct of Enron’s
officers under rules of comparative fault. Id.
97 See, http://www.akllp.com/FirmOverview/MnAbout.html
98 See Batson Report, supra n. 80 at sp*5, 69–70.
99 http://www.kirkland.com/firm/firm.asp In 2002, Kirkland & Ellis was named one of the top two firms
most mentioned as primary outside counsel by corporate America’s in-house attorneys.

101 Id. at 672–73.
102 Id. at 706.
103 Id.
74 ELI WALD
In other words, while the judge indicates possible actual lawyer wrongdoing (ie, conflict of
interests and breach of ethical standards), she nonetheless finds that the plaintiffs were
unable to establish a duty owed by Kirkland & Ellis to them and meet the legal standard of
malpractice, and thus finds no legal lawyer wrongdoing.
2. Wrongdoing “below the radar screen”

In August 2002 the Enron Examiner petitioned the bankruptcy Court arguing that it was
necessary to begin the review of documents in the possession of third parties,104 including
some 50 law firms “that are or have been involved in various transactions with the Debtors
or the SPEs.”105 In supporting his motion the Examiner argued that such discovery was
appropriate because the Examiner was “attempting to determine the scope of the matters
concerning the Debtors’ SPEs . . . and most importantly, who was involved in such transactions
and to what extent” (emphasis added).106 Judge Gonzales granted the motion, sparking spec-
ulation that the Examiner was looking to pin some of the blame for Enron’s collapse on the
company’s attorneys.107
In February 2003 the Examiner filed another discovery motion with the Court, asserting
that: “After reviewing certain documents produced the Examiner has concluded that oral
examinations are necessary and appropriate to obtain further evidentiary background for the
Examiner’s reports.”108 The Motion targeted 24 law firms previously subpoenaed and
identified, three additional law firms not previously subpoenaed by the Examiner: Weil,
Gotshal & Manges (“Weil”); Skadden, Arps, Slate, Meagher & Flom (“Skadden”); and
Milbank, Tweed, Headly & McCloy (“Milbank”). The targeting of these three prominent
law firms drew significant attention due to the key roles played by the firms in the bankruptcy
proceedings: Weil is Enron’s lead bankruptcy counsel. In May 2002 Weil disclosed that in
2000 the firm represented Deutsche Bank in an Enron deal called “Project Valhalla.” The
Examiner served Weil with a subpoena requesting documents related to that deal. Skadden
is Enron’s primary corporate counsel and has also represented the company in connection
with government probes. Milbank is lead counsel to the committee of Enron’s unsecured
creditors.109
Fifteen law firms filed objections with the court, asserting, inter alia, that the Examiner’s
requests were burdensome and violated attorney-client privilege. Despite those objections,
in a rare move—law firms are rarely compelled to turn over documents, let alone be subjected
to depositions—Judge Gonzales once again granted the Examiner’s Motion.110
104 Motion of Neal Batson, The Examiner, Pursuant to Federal Rule of Bankruptcy Procedure 2004 for an
Order Directing the Production of Documents, Case No. 01-16304 (AJG) (United States Bankruptcy Court
S. D. N. Y., 1 August, 2002), para. 7.
105 Id. at para. 9b.
106 Id. at para. 15.
107 See, eg, Gary Young, “50 Law Firms Subpoenaed in Enron Bankruptcy”, (2003) 26 The National Law
Journal 29.
108 Third Motion of Neal Batson, The Examiner, Pursuant to Federal Rule of Bankruptcy Procedure 2004
for an Order Directing Production of Documents and Oral Examinations, Case No. 01–16304 (AJG) (United
States Bankruptcy Court S. D. N. Y., 5 February, 2003), Preliminary Statement, paras. 7–8.
109 See, Otis Bilodeau, “Enron Investigation Focuses on N.Y. Firms”, (2003) 26 Legal Times 6.
110 But see, Fisher v US, 425 US 391 (1976) (allowing the IRS to issue search warrants against attorneys in
possession of client tax information).

In his Final Report filed on 4 November, 2003, the Examiner fails to mention any of the
law firms that he subpoenaed and deposed. Rather, the Report merely states that “Enron’s
outside law firms discussed in this report are: Vinson & Elkins and Andrews & Kurth.”111
While the Report does not explicitly justify the Examiner’s failure to make any findings
whatsoever with regard to the law firms he subpoenaed and deposed, in the context of his
mandate, the Examiner’s failure to assess the roles played by additional outside counsel may
be understandable. The Examiner was operating in the shadow of a statute of limitations and
was focusing on identifying deep pockets for the benefit of the bankrupt estate, rather than
scrutinising the conduct of lawyers per se. Nonetheless, the Examiner’s Motions and scope of
investigation raise serious questions with regard to the role and responsibility of numerous
law firms in conjunction with Enron’s downfall.
The picture painted by the Powers and Batson investigations, and by Judge Harmon’s and
Judge Gonzales’ preliminary findings is disturbing. Implicating numerous law firms, the
evidence reveals three patterns of wrongdoing by outside counsel: design and participation
in fraudulent transactions; facilitation of fraud by issuance of necessary legal opinions; and
orchestration of non-disclosure by means of technically accurate yet misleading disclosure,
none of which are investigated or addressed in the recent reform.
B. Wrongdoing by lawyers conducting internal investigations: conflicts of interest and

compromised professional judgment
As allegations of corporate wrongdoing began to surface, implicated companies launched
internal investigations, often supervised by law firms. The conduct of some of the lawyers
involved in these investigations raises serious concerns of attorney wrongdoing.
1. Vinson & Elkins’ investigation of Enron

Vinson & Elkins conducted a limited investigation into allegations of wrongdoing that sur-
faced after Sherron Watkins’ whistle-blowing.112 The firm, despite a prima facie conflict of
interest—it was implicated in the alleged fraud to be investigated—agreed to conduct the
inquiry. After a five weeks long investigation, the law firm essentially concluded that the
transactions it investigated were adequately disclosed and that “bad cosmetics” concerns
were unsupported because the transactions in question were useful vehicles that benefited
Enron. The firm concluded that no further investigation was necessary.113
Despite that recommendation, just two weeks later, Enron’s special investigative commit-
tee charged Powers with undertaking precisely the sort of detailed investigation that Vinson
& Elkins had found unnecessary. The Powers Committee criticised Vinson & Elkins’ actions
with respect to many aspects of the investigation: the “result of the Vinson & Elkins review
was largely predetermined by the scope and nature of the investigation and the process
employed.”114 By contrast, the Powers Report notes that its own investigation was able to
111 Batson Report, supra n. 80, n. 13.

112 Kathleen F. Brickey, “From Enron to WorldCom and Beyond: Life and Crime after Sarbanes-Oxley”,
(2003) 81 Washington University Law Quarterly 357, 361, n. 21. The firm also advised Enron about retaliatory
measures against corporate whistle-blowers. Id. at 362–63.
114 Powers Report, supra n. 77 at 176.
76 ELI WALD
identify the most serious problems at Enron only after making the detailed inquiries that
Vinson & Elkins had agreed were unnecessary.115
The firm’s position is instructive as to the operation of the “We did nothing wrong” tac-
tic: “Vinson & Elkins protests that its purported ‘whitewash’ investigation was not disclosed
to the public until after the Class Period ended, and thus cannot be the basis of a s. 10(b)
misrepresentation claim by the investors.”116 In other words, the law firm did not attempt to
defend the propriety of its internal investigation and establish that it did nothing wrong.
Instead, it argued that the Plaintiffs could not prove that the firm did something wrong.117
While possibly a viable defense against judicial finding of liability, the firm’s assertion should
not shield it from responsibility and should not be invoked as a reason to avoid scrutiny and
possible reform.
2. Simpson, Thacher & Bartlett’s (“Simpson”) Investigation of Global Crossing

Global Crossing, the telecommunications provider, is alleged to have abused accounting
techniques in order to inflate its profits and conceal its stalled series of shaky business endeav-
ours.118 The allegations against Simpson, the company’s outside counsel, stem from the law
firm’s role in conducting an internal investigation of the company’s accounting methods.
After its accounting practices had been called into question by a former employee, Global
Crossing asked its longtime outside counsel, Simpson, to look into the allegations. The law
firm accepted the charge despite its multiple ties to the company, which included millions of
dollars in annual legal fees;119 representation of Global Crossing, some of its affiliates, the
CEO and his investment group, the general counsel and multiple directors and officers;
Global Crossing’s general counsel was a former Simpson attorney; small investments in the
company by some of he firm’s attorneys; and the position of company’s then current acting
general counsel as a full-time partner at Simpson.120
Simpson conducted a limited investigation. It relied largely on representations made by
company’s executives who assured the law firm that the board of directors and the company’s
auditor, Arthur Andersen, had studied the questionable practices and that the auditor had
signed off on the accounting. Notably, the law firm did not interview the “whistle-blower
employee,” Mr. Olofson, Andersen or Global Crossing directors.
Defending its actions, Simpson invoked the “We did nothing wrong” excuse asserting that
it was asked to conduct a narrow investigation of accounting issues. “I do not believe we did
anything wrong,” argued Richard Beattie, Chairman of Simpson’s executive committee.121
In February 2002, Global Crossing’s special board committee began exploring Olofson’s
allegations, retaining the services of the Washington office of Coudert Brothers LLP
115 Id. See also, Rhode & Paton, supra n. 3 at 20–21.
117 The judge rejected the law firm’s argument finding that: “the investigation and report can serve as the
basis of a s. 10(b) and Rule 10b–5. Id.

118 The company allegedly utilised pro forma reporting (a technique that conceals real GAAP results by omit-
ting items GAAP considers expenses while retaining items of revenue) and capacity “swaps” with carriers who
were also customers, immediately realising revenue based on the value of the swapped capacity while allocating
the costs over numerous future periods. Cunningham, supra n. 3 at 930–32.
119
A reported $32 millions dollars in 2000 and 2001 alone, Id.
120
It should be noted, however, that unlike Vinson & Elkins, Simpson was not implicated in, and did not
advise the company on the capacity swaps it was investigating.
121
Joseph Menn, “Global Crossing Case Figure Not Questioned”, Los Angeles Times, 22 February, 2002 at C1.
(“Coudert”). In its report, released in March 2003, Coudert cleared the company from alle-
gations of wrongdoing with regard to the accounting practices, yet issued a harsh indictment
of Simpson. It raised conflict-of-interest questions, concluding that the Simpson partner in
charge of the investigation and the acting Global Crossing general counsel at the time, con-
ducted an “inquiry of little or no independent importance.”122 The report blamed Simpson,
rather than Global Crossing, for any potential liability that the company may incur and for
damages for lost company contracts.
Simpson responded by retaining New York-based Davis Polk & Wardwell to defend itself
against Coudert’s charges of wrongdoing. Reasserting that the firm had “done nothing
wrong,” Simpson added that since “the [special] committee exonerated the company’s
accounting treatment . . . there was no victim,”123 once again illustrating the “We did noth-
ing wrong” tactic of evasion. Rather than defending the propriety of the internal investiga-
tion it conducted, it seems that the law firm chose to hide behind the inability of critics to
prove in a court of law it did something wrong.
3. Boies, Schiller & Flexner LLP’s (“Boies”) Investigation of Tyco

In late April 2002, in an attempt to restore investor confidence in the company, Tyco asked
Boies to conduct an internal investigation analysing transactions between the company and
certain senior corporate officers and directors and represent the company in any related
litigation (“Phase 1” investigation).124 In July 2002 the company expanded the law firm’s
mandate to include a review and analysis of selected accounting and governance issues and
transactions with the explicit purpose of reviewing Tyco’s 1999–2002 reported revenues
(“Phase 2” investigation).125
In a filing with the Commission Tyco described the scope of the engagement:
“the firm would have full and complete access to all information available to the company . . . [Tyco]
did not limit the work of the Boies firm in connection with its review . . . The Boies firm was given
unfettered access to the company’s independent outside auditors, had no fixed or limited budget,
and was free to, and in fact did, expand the scope of its review when it believed it appropriate to do
so.”126
The company concluded by stating: “Few, if any, major companies have ever been sub-
jected to the corporate governance and accounting scrutiny entailed in Phase 2 of the Boies
Firm’s work.”127 Boies completed its Phase 2 investigation in December 2002 and con-
cluded, inter alia, that “There was no significant or systemic fraud affecting the company’s
prior financial statements” and that “The incorrect accounting entries and treatments are not
individually or in the aggregate material to the overall financial statements of the com-
pany.”128 Since December 2002, however, Tyco has acknowledged accounting problems,
totaling more than $1.6 billion dollars. In a February 2003 filing with the Commission Tyco
122 Dennis K. Berman, “Global Crossing Board Report Rebukes Counsel”, Wall Street Journal, 11 March,
2003 at B9.
123 Id.
124
Tyco International Ltd. Form 8-K filing with the SEC, 30 December, 2002, Item 9 (“Tyco Filing”).
125
Id.
126
Id. See also, Laurie Cohen, “Tale of Two Probes”, Wall Street Journal, 12 June, 2003, at C1.
127
Tyco Filing, supra n. 124.
128
Id. Section H, Conclusions and Recommendations.
78 ELI WALD
back-pedaled and said that the Boies investigation “was not an exhaustive review,” and that
it had “limitations.”
Boies conducted the investigation despite representing Tyco in complex litigations,
including serving as lead counsel in Tyco’s lawsuit against its three former top officers, giv-
ing rise to the appearance of impropriety and conflict of interest concerns. As the firm had
possible expectations of conducting future legal work for Tyco, it had an incentive to vindi-
cate the company from any wrongdoing.
Disturbing conflict of interest concerns are present in all three internal investigations and
suggest a pattern of lawyer wrongdoing. Two of the law firms were longstanding outside
counsel of the companies they investigated, and the other was former and current counsel to
the target of its investigation; all three firms received substantial annual legal fees from the
respective companies and possibly had expectations of doing additional work for them; two
of the law firms formerly represented parties that were implicated in the investigations; attor-
neys, including the General Counsel, at the in-house legal departments of two of the com-
panies were former partners and associates of the investigating law firms; and two of the law
firms accepted a narrow investigatory mandate later to be questioned by critics. In all three
instances the law firms essentially dismissed the allegations of corporate and accounting
wrongdoing only to have the companies acknowledge wrongdoing shortly after the conclu-
sion of the investigations. All three instances raise disturbing questions about the firms’ han-
dling of conflict of interest concerns, the balancing of legal and business conflicts of interest
and the exercise of independent professional judgment.
C. Wrongdoing by General Counsel

Corporate and accounting improprieties that took place on a general counsel’s watch strongly
suggest that the in-house legal department or attorney in charge failed to fulfill their duties
to its organisational client. General counsels nonetheless deny wrongdoing and assert “We
did nothing wrong.” First, arguing at the roles level and building on the principles of zeal-
ous partisan advocacy and non-accountability,129 general counsels contend that clients and
clients alone are responsible for the ultimate goals of the representation. Since the client is
the ultimate decision-maker, client wrongdoing should not be attributed to advising corpo-
rate attorneys absent actual knowledge and participation in wrongdoing.130 Secondly, in a
complex business environment general counsels cannot and do not know all of the relevant
information, or the “big picture,” and thus cannot meaningfully be expected to monitor and
prevent client’s wrongdoing.131 The argument is further strengthened by business consider-
ations. In an increasingly competitive market for legal services, general counsels no longer
occupy a position of power that allows them to exercise significant influence over their
clients.
Actual lawyer conduct tends not to support these arguments. Instead, a study of general
counsels’ conduct reveals a disturbing pattern: some in-house attorneys actively participated
in, and facilitated, misleading accounting practices, insider-trading, self-dealing and cor-
porate looting, and other corporate improprieties. Some general counsels did know or should
129 See, eg, Schwartz, supra n. 9.
130 See, ABA Model Rules of Professional Conduct, Rule 1.2(d).
131 Gordon, supra n. 3, at 1193–94.
have known that their clients were violating the law. Others, enjoying longstanding tenure as
general counsel, were in a position to monitor and prevent wrongdoing but failed to do so.
Moreover, some of the implicated general counsels had apparent personal conflicts of inter-
ests: perverse compensation incentives allowed attorneys to cash out and benefit from the
client’s wrongdoing thus creating a powerful incentive for attorneys to look the other way,
and allow client wrongdoing on their watch.
1. We did not know what was going on

Enron had a large in-house legal department with over 250 attorneys, most of whom had
extensive legal experience when they joined Enron. Each of the company’s various business
units all had its own legal department that was supervised by a general counsel. Each general
counsel reported to the head of the unit he or she served, as well as to James Derrick, Enron’s
General Counsel. Weekly meetings of the general counsels of the major business units
occurred in Derrick’s office, and on a monthly basis the conferences grew to include the gen-
eral counsels of overseas entities. Derrick characterised the meetings as a forum for attorneys
to raise issues and concerns, as well as a time to communicate the activities of each group, but
he testified that none of the concerns regarding the SPE transactions were ever voiced in
these meetings.132 Derrick apparently viewed his principal role as that of administrator of the
law department, relying upon the general counsels of each business unit to manage the attor-
neys and transactions within that business unit and did not become substantively involved in
any of Enron’s business transactions unless a specific issue was brought to his attention. Few
issues relating to the SPE transactions appear to have been reported to him.133
The Bankruptcy Examiner harshly criticised the company’s top attorneys for failing to
inform themselves with regard to the discharge of their duties, and found that mid-level
attorneys had knowledge of executive wrongdoing.134 The Examiner concluded that there
was sufficient evidence from which a fact-finder could determine that Derrick committed
malpractice based on negligence in connection with the performance of his duties as General
Counsel of Enron in the following matters: (1) despite the size, frequency and number of the
related party transactions in which Enron employees were involved, Derrick failed to inform
himself and the Enron Board with respect to those matters or to confirm that those to whom
he had delegated the responsibility were taking adequate steps to do so; (2) Derrick failed to
educate himself on the facts of hedging transactions, the conflict of interest issues presented
by these transactions and governing law, so as to enable proper execution of his responsibil-
ities as legal advisor to the Enron Board; (3) Derrick also failed to inform himself as to the
nature and extent of Watkins’ allegations so as to be in a position to effectively advise Enron,
and failed to determine the extent of Vinson & Elkins’ roles in the transactions criticised by
Watkins so as to determine whether such a conflict existed, which meant that he was unable
to advise Kenneth Lay, Enron’s then CEO, properly with respect to the investigation or the
propriety of retaining Vinson & Elkins to conduct that investigation.135
Rex Rogers, the Associate General Counsel, was the in-house attorney responsible
for Enron’s compliance with the securities laws. Thus, all filings and Commission related
132 Batson Report, supra n. 80 at *6–10, 11–58.
133 Id.
134 Id. at *6–8.
135
Id.
80 ELI WALD
matters went through Rogers. The Examiner concluded that a fact-finder could determine
that Rogers committed malpractice based on negligence for his failure to inform himself
about the SPE transactions so that he could properly advise Enron with respect to the dis-
closure issues raised by these transactions.136
The Examiner also concluded that there was sufficient evidence from which a fact-finder
could determine that Kristina Mordaunt, a senior in-house attorney, committed malpractice
or breached fiduciary duties because, inter alia, she was aware of the conflict of interest
created by the related party transactions; and knew that hedging transactions, lacking any
economic substance or rational business purpose, were intended by certain Enron officers to
manipulate Enron’s financial statements.137
Each in-house attorney implicated in the Examiner’s Report may contend that the evid-
ence is not sufficient to establish one or more essential elements of the allegations. One or
more of these issues, including the knowledge of the implicated in-house attorneys, are fac-
tual issues that could be determined in favour of such attorneys. Moreover, the in-house
attorneys may assert that the wrongful acts committed by Enron’s officers should be imputed
to Enron. While such defenses may limit civil liability, they do not allow attorneys to escape
responsibility and do not support the conclusion that no reform is warranted.
The “we did not know” pattern of attorney misconduct is by no means limited to Enron
in-house attorneys. For example, ImClone’s general counsel allegedly failed to report multi-
ple counts of forgery by the company’s top executive.138 Qwest Communications’ general
counsel allegedly ignored internal concerns about the company’s accounting impropri-
eties,139 ignored and advised about retaliation against external critics,140 aggressively denied
company wrongdoing despite indications to the contrary,141 and fostered unethical and ille-
gal conduct by setting impossible financial goals for Qwest employees.142 FLIR Systems,
Inc.’s (“FLIR”) general counsel, Fitzhenry, negotiated with company buyers attempting to
obtain a binding and unconditional sales agreement. From his negotiations, the general coun-
sel clearly understood that the sales were conditional in nature. Nonetheless, in April 1999,
in response to inquiries by its outside auditor, Fitzhenry signed two representation letters to
the accounting firm PricewaterhouseCoopers LLP confirming that the sales were final,
arguably making material misrepresentations and omitting material information, and facili-
tating the misleading accounting treatment. On 21 November, 2002, Fitzhenry consented,
without admitting or denying the findings within, to accept a five-year suspension from
appearing and practicing before the Commission and the imposition of a cease-and-desist
order.143
136 Id. at *72.

137 Id. at *73.
138 Landes’ testimony before the House Energy and Commerce Committee on Thursday, 10 October, 2002,
quoted in Marcy Gordon, “Lawmakers Fault ImClone Directors”, The Associated Press, 10 October, 2002.
139 Kris Hudson & Miles Moffeit, “Unmasking Qwest”, Denver Post, 16 December, 2002, at A1.
140 Id. at 16.
141 Id at 24–25.
142 Gary Young, “GCs Scrutinized Amidst Scandals”, National Law Journal, 2 December, 2002, at A14.
143 In the Matter of James A. Fitzhenry, Order Instituting Public Administrative Proceedings, Administrative
Proceeding File No. 3–10943.

2. Obstruction of justice
Because Arthur Anderson played a central role in designing and auditing Enron’s question-
able investment vehicles, and in certifying the company’s financial statements and public
disclosures,144 Anderson’s mass shredding of documents regarding those matters led to its
conviction of obstruction of justice. The conduct of Nancy Temple, in-house counsel at
Anderson, drew particular attention. Arguably, while knowing that Enron was likely to
become a target of a SEC investigation, Temple sent an e-mail to the firm’s Houston prac-
tice director making reference to the Anderson document retention and destruction policy
stating: “It might be useful to consider reminding the engagement team of our documenta-
tion and retention policy.”145 While Anderson, prior to its conviction, supported Temple
asserting that: “Nancy just told people to use their judgment. She did not instruct them to
do anything,” the firm fired David Duncan, its Enron team leader, for displaying “extremely
poor judgment in the destruction of documents issue.”146 Attention was also drawn to
revisions that Temple made on drafts of Enron’s press releases.147
In June 2002 Rite Aid general counsel Franklin Brown, was indicted along with other top
executives for allegedly conspiring to inflate the company’s value and then interfere and
obstruct the investigation by the Commission.148 The Commission filed a civil complaint
against the executives in June 2001, which was stayed pending resolution of the parallel crim-
inal proceedings.149 While the other executives plead guilty in June 2003, Brown elected to
stand trial. Brown was convicted on 17 October, 2003 of conspiracy. The jury found, inter
alia, that Brown made false and fraudulent material statements and representations, and
instructed a Ride Aid employee to prepare a back-dated letter awarding Mr. Grass, the com-
pany’s then CEO, benefits. Mr. Brown’s attorney, invoking the “We did nothing wrong”
excuse, argued that Brown was a zealous company lawyer and blamed the outcome on “a
difficult environment for corporate executives in America,” adding that “these would have
been normal business transactions in a different environment.”150
3. Approval and participation in insider-trading

The Bankruptcy Examiner in the Enron bankruptcy concluded that Enron’s Mordaunt may
have committed malpractice and breached her fiduciary duties in connection with her $5,826
investment in a transaction called Southampton and her receipt of more than $1 million as a
return on that investment without advising general counsel Derrick of the investment and
without receiving the necessary approval as required by Enron’s Code of Conduct and rules
of professional conduct.151
Once again, the pattern of misconduct was not unique to Enron attorneys. After receiving
disappointing news that the FDA rejected one of is cancer treatment drugs and before the
144 Rhode & Paton, supra n. 3 at 21–24.

145 Id.
146 Id.
147 Id.
148 Rite Aid Corp’s former chief counsel Franklin Brown has decided to stand trial on 35 criminal counts
stemming from his alleged role in an accounting scandal at the drugstore chain, Wall Street Journal, 23 July,
2003, at D7.
149 1:02-cv-01084-SHR, Order, 3 September, 2002.
150 Supra n. 148.
82 ELI WALD
information became public, ImClone insiders used the private information to sell company
stock and tip others. John B. Landes, an attorney for the company for almost 20 years and its
General Counsel, was the first executive to sell 40,000 shares worth approximately $2.5 mil-
lion. In the course of the next two weeks additional top executives at ImClone sold their
stock. On 21 December, 2001 the company imposed a blackout on employee stock-trading.
On 28 December the FDA formally rejected ImClone’s pending application and the inform-
ation became public, sending the shares into a tailspin.
Landes has maintained that he arranged for the sale of his stock in early November and so
had other individuals who have traded their shares. Nevertheless, the timing deepens the
suspicions of illegal insider-trading. “Everybody but the mailroom boy was dumping stock,
you cannot tell me they all suddenly had a hunch to sell.”152 Indeed, in May 2002 Sam
Waksal resigned as CEO and in October 2002 he pled guilty to charges of insider-trading.
Even if Landes did in fact arrange for the sale of his own stock in November of 2002, the
appearance of impropriety is rather striking. First, as general counsel, Landes had the veto
power over employee stock-trading, and the approval of his associate general counsel,
Catherine Vaczy, was required for trading by all ImClone officers. With the hindsight of
Waksal’s plea-bargain one has to wonder as to the propriety of the approval process. Indeed,
the appearance of impropriety may have led to Landes’ demotion in February of 2002 from
general counsel to a senior vice-president, perhaps because the company feared it could not
sustain its credibility with Landes as general counsel at a time when it was being investigated
for insider-trading.153 Landes resigned from ImClone in October of 2002.
4. Approval and participation in self-dealing

In 1997 a group of ImClone top executives, including Landes, wanted to exercise warrants
and options they acquired in 1987 and 1991. Wishing to avoid the tax liability, the group
wanted to consider the options as noncompensatory, however, it could not get a favourable
opinion from a tax attorney to that effect. Allegedly, the group nonetheless went ahead and
exercised the options without paying taxes on the gains. A board investigation, conducted by
Simpson Thacher & Bartlett LLP and David Polk & Wardwell, subsequently concluded that
three top executives avoided millions of dollars in taxes and that Landes avoided smaller
amounts of taxes.154
Even if the allegations against Landes are not well founded they raise serious concerns
with regard to his conduct as general counsel. Because the executives decided not to pay taxes
on exercising the options, ImClone did not withhold taxes on the options and in fact contin-
ued with a policy of not withholding taxes on the exercise of warrants and options for several
years. This practice exposed ImClone to liability because under federal tax law, a company
may be liable for paying the tax liability if its officials fail to do so.
ImClone’s audit committee subsequently issued a statement asserting that it did not con-
clude that its top executives knowingly sought to avoid paying taxes on the options, instead
152 Billy Tauzin, Chairman of the House Energy and Commerce Committee, quoted in Michael Weisskopf,
ImClone’s Busy Traders, Time Magazine, Monday, 22 July, 2002 at *12.

153 Andrew Pollack, “Lawyer Is Said To Have Sold ImClone Shares”, The New York Times, 14 July, 2002, at
*20.
154 Geeta Anand, “ImClone’s Auditing Firm Sweats as a Taxing Story Emerges”, Wall Street Journal, 9 May,
2003 at C1.
asserting that “the decision to treat the warrants as noncompensatory appears to have been
made by the company’s general counsel,” Landes.155 Landes disputed the shift of blame
arguing that “the company’s decision not to withhold taxes was a group decision and cer-
tainly not [mine] alone.”156
Other general counsels have been implicated in similar allegations. In May 2002 allega-
tions surfaced that former Qwest executives, including general counsel Tempest, used
improper influence in purchasing stock from some of Qwest’s suppliers. Allegedly, the exec-
utives received pre-IPO shares from suppliers that did business with Qwest, and in turn the
company bought equipment from the suppliers with no intent of using it. The real purpose
of these purchases was to allow Qwest executives to enrich themselves when the
suppliers went public.
In late 2002 Qwest ordered an internal investigation of the practice, common in the tele-
com industry in the late 1990s and early 2000s. The probe, conducted by Wilmer Cutler,
determined that company executives did not break any laws in buying the stock, but might
have violated the company’s code of conduct.157 Qwest and other telecommunications com-
panies changed their policies in late 2002 to prohibit such stock purchases by their execu-
tives.158
Moreover, Qwest executives as a whole reaped $640 million in profit from selling Qwest
stock from 1997 to 2001 (with Nacchio the company’s then CEO, accounting for $250 mil-
lion), although the executives did not sell stock after Qwest’s stock began a steep decline in
May 2001.159 During his four year tenure Tempest reportedly made $14.3 million in exer-
cising stock options.160
V. Conclusion
The patterns of attorney misconduct identified in this paper expose disturbing corporate law
practice realities. Numerous outside counsels allegedly designed and participated in fraudu-
lent transactions; facilitated fraud by issuing necessary legal opinions; and orchestrated
non-disclosure by means of technically accurate yet misleading disclosure. Lawyers charged
with conducting internal investigations arguably failed to appropriately address conflict of
interest concerns, balance legal and business conflicts of interest and exercise independent
professional judgment to the benefit of clients. General counsels allowed corporate wrong-
doing to take place under their watch; obstructed justice; participated in self-trading; and
benefited from self-dealing.
These patterns of misconduct disprove the “We did nothing wrong” tactic of evasion and
undermine the assumption underlying the recent reform efforts—that lawyers, by-and-
large, did nothing wrong. Instead, analysis of available evidence indicates that attorney
wrongdoing results from under-enforcement of existing rules. Applicable rules of conduct
155
Id.
156
Id.
157
Kris Hudson, “SEC Probes Ex-Qwest Execs’ Deals”, Denver Post, 2 May, 2003, at C1; Kris Hudson,
“Qwest’s Re-audit May Clear Books”, Denver Post, 13 October, 2003, at E1.
158
Hudson, “SEC Probes Ex-Qwest Execs’ Deals”, supra n. 157.
159
Kris Hudson, “Criminal Probe of Qwest”, Denver Post, 7 July, 2002, at A18.
160
Jeff Smith, “Tempest Out”, Rocky Mountain News, 15 November, 2002, at 15B.
84 ELI WALD
already forbid lawyers from participating in client fraud; permit disclosure of client
confidences in certain circumstances; disallow personal conflicts of interest between attorney
and client; clarify that attorneys owe fiduciary duties to their organisational clients, and not
to the clients’ various constituencies; and require withdrawal in some circumstances.
Analysis of available evidence of actual lawyer misconduct suggests that many corporate
lawyers failed to comply with these rules. Consequently, reform efforts should focus on
stricter enforcement of the existing rules.
Furthermore, the patterns of misconduct suggest a need to revisit our basic understand-
ings of the roles corporate lawyers play. At the core of lawyers’ “we did nothing wrong”
assertion is a belief in adversarial role-morality that demands attorney partisanship on behalf
of clients and fosters attorney non-accountability. Consistent with its self-regulation man-
date the legal profession must be able to justify its practice realities. Widespread corporate
attorney wrongdoing indicates a need to revisit these justifications in the corporate sphere.
Analysis of allegations of attorney wrongdoing exposes disturbing patterns of misconduct
that suggest failures at both the rules and roles levels. Recent corporate collapses provided
the corporate bar a rare Ackermanian opportunity to address the concerns, assess current
practice realities, evaluate current rules of conduct and revisit their justifications. Lawyer
interest groups, however, have launched a successful evasion campaign to derail the possi-
bility of such a “constitutional” moment. The reform efforts that followed the corporate
debacles accepted the “We did nothing wrong” premise and thus failed to explore the alle-
gations seriously and tackle the troubling patterns of misconduct that the allegations reveal.
The opportunity to rethink corporate law is all but lost.161 We ought to take advantage of it.
161
Brandeis, supra n. 6.

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Legal Ethics, Volume 7, No.

Lawyers and Corporate Scandals

A. Misguided scholarship, a lost opportunity and Bruce Ackerman

7 See, Gordon, supra n. 3, at 1204.

of successful revolution.” Ackerman, Discovering the Constitution, supra n. 10, at 1017–1031.

B. The self-regulation duty and normal legal profession politics

the chronic laments by critics within and outside the bar.”).

II: “We did nothing wrong”

Enforcement”, (1995) 73 Texas Law Review 1223, 1230.

A. The tactic of evasion—We did nothing wrong

Joseph C. Dilg, managing partner of Vinson & Elkins LLP.33

Howard Ayers, managing partner of Andrews & Kurth LLP.34

III: The reform efforts

1. Sarbanes-Oxley Section 307 and Securities and Exchange Commission (“Commission”)

2. ABA Model Rules of Professional Conduct 1.13 and 1.6

The Commission concludes that

Representation of an Issuer, Proposed Part 2005, 21 November, 2002.

2. Understanding the revised Rules of Conduct

3. The federalisation of legal ethics

1981 Fed. Sec. L. Rep. para 82,847 (SEC 1981).

IV: Patterns of lawyer wrongdoing

The collapses of Enron et al led to unprecedented allegations of attorney wrongdoing.

A. Wrongdoing by outside counsel: design and participation in fraudulent transactions;

82 Powers Report, supra n. 77 at *15.

meet particular legal requirements.” Id.

most mentioned as primary outside counsel by corporate America’s in-house attorneys.

2. Wrongdoing “below the radar screen”

possession of client tax information).

B. Wrongdoing by lawyers conducting internal investigations: conflicts of interest and

1. Vinson & Elkins’ investigation of Enron

111 Batson Report, supra n. 80, n. 13.

2. Simpson, Thacher & Bartlett’s (“Simpson”) Investigation of Global Crossing

basis of a s. 10(b) and Rule 10b–5. Id.

3. Boies, Schiller & Flexner LLP’s (“Boies”) Investigation of Tyco

C. Wrongdoing by General Counsel

1. We did not know what was going on

136 Id. at *72.

Proceeding File No. 3–10943.

3. Approval and participation in insider-trading

144 Rhode & Paton, supra n. 3 at 21–24.

4. Approval and participation in self-dealing

ImClone’s Busy Traders, Time Magazine, Monday, 22 July, 2002 at *12.

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