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Week of 11 October 2002 · Vol. VI, No. 7

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Unregulated lawyers enable corporate wrongdoing, says BU legal ethicist

By David J. Craig

By the time the federal government completes its investigation of Enron’s bankruptcy, scores of executives, bankers, and accountants are expected to face criminal charges or lawsuits for not trying to stop allegedly fraudulent deals that lined the pockets of millionaires and left thousands of employees broke.

Susan Koniak Photo by Mark Lastow
  Susan Koniak Photo by Mark Lastow

But one group of professionals in the thick of the mess probably will escape serious repercussions, says Susan Koniak, a School of Law professor and a prominent legal ethicist, who has been quoted extensively in news reports about Enron. “To pull the wool over the eyes of the investing public, regulators, and the media for any considerable period of time, a corporation needs more than malleable accountants,” she testified before the Senate Judiciary Committee earlier this year. “It needs the help of lawyers.”

Koniak says that lawyers in this country, however, are virtually unregulated. That’s partly because the federal Securities and Exchange Commission (SEC), which traditionally has overseen the legal profession, now lacks the teeth to do so. State authorities, meanwhile, would be pathetically outgunned, she adds, if they tried to take on premier corporate law firms like Vinson and Elkins, which represented Enron.

Koniak, who is on sabbatical this semester editing a book of essays about the economics of the legal profession, recently spoke with the B.U. Bridge about the role of lawyers in the Enron affair, and what should be done to avoid similar scandals.

B.U. Bridge: What determines if a corporation’s financial statements are legitimate?
Koniak: You can’t do two things in the financials: you can’t make false statements, and you can’t omit material information, which is information a reasonable person would want to know before making a decision about investing in a company. With Enron, a big question is whether financial statements made to the SEC or to shareholders were adequate under federal securities laws.

B.U. Bridge: What is a lawyer’s role in filing these statements?
Koniak: Lawyers mainly do two things in this country: they participate in court proceedings, and they approve transactions, which might involve forming a business partnership or approving financial statements that are seen by a company’s investors, potential investors, and creditors, as well as the SEC.

The obligations of a lawyer in these two situations are very different. When you’re approving a transaction, it’s not like being in a courtroom, where there’s another lawyer arguing against what you say. You’re alone with your client, and your job is to determine if the client’s statements are legal.
Lawyers who worked for Enron have been saying things like, ‘The accountants told us what the numbers were, and we had no way of knowing if they were OK.’ If that’s true, they had no business getting paid. When facilitating transactions, it is part of a lawyer’s job to be skeptical of the client’s tale when there are signs it’s not true.

B.U. Bridge: What is a lawyer supposed to do if he suspects a financial statement is misleading?
Koniak: If a lawyer asks the client some standard questions and does at least a minimal investigation into what’s going on before approving the statement, then the lawyer has acted in accordance with the law.
A key question is what kind of red flags were going up about potentially illegal activity at Enron. From what’s been disclosed to Congress so far, it sounds like Vinson and Elkins had fireworks bursting all around them -- forget red flags.

Now, if lawyers sign off on a statement that they’re not reasonably certain is legal, they’re at the very least negligent, which means that they’ve breached their duty to the client. And if a lawyer blindly goes along with a client’s strange story, despite all sorts of signs saying, ‘Fraud, fraud, just look over here,’ then she’s moved past negligence into recklessness, which in legalese means she was deliberately closing her eyes to facts she has a duty to see.

B.U. Bridge: What repercussions does a lawyer in that situation face?
Koniak: For more than 40 years, up until 1995, it was a civil wrong and a crime for lawyers to act recklessly when signing off on a securities report. But in 1995, Congress acted to stop private parties from suing lawyers for aiding and abetting securities fraud and said that if the SEC goes after a lawyer for aiding and abetting fraud, it has to prove that the lawyer knew she was involved in fraud, not just that she had acted recklessly. That makes it very hard to get lawyers.

B.U. Bridge: How should lawyers be regulated?
Koniak: We have to reinstate civil suits by private parties against lawyers who aid and abet fraud and return to the recklessness standard for the SEC and for private parties.

B.U. Bridge: Is there any indication that this might happen?
Koniak: None. Even if Congress returned to the recklessness standard for the SEC, the agency will never have the resources to monitor enough lawyer conduct for it to be a sufficient deterrence against bad lawyer behavior. Look at all the SEC has on its plate now: accountants, investment bankers, inside traders. But Congress has shown no interest in doing that.

Congress also is opposed to reinstating the right of private parties to sue lawyers for aiding and abetting fraud because of all the rhetoric against frivolous class action and other lawsuits, which was the excuse for dumping these suits in 1995. I’m a very harsh critic of the plaintiff’s bar, but it is outrageous to take away a person’s or group’s right to sue someone who has harmed them because of lawyer misconduct. There are other ways to crack down on frivolous suits -- remedies targeting lawyers. Letting lawyers loose to help huge corporations break securities laws is a bigger drain on the economy than frivolous lawsuits.

B.U. Bridge: Was the 1995 legislation a response to private suits previously brought against lawyers?
Koniak: Yes. Many major American law firms each paid tens of millions of dollars in the early 1990s to the government and to private parties for having helped crooked savings and loan operators. The bar and accountants were intent on preventing any recurrence, not of their own bad behavior but of having to pay for it.

B.U. Bridge: Is such misbehavior on the part of lawyers common?
Koniak: Absolutely. It’s rampant. These are the biggest, most prestigious law firms in the country we’re talking about. If they’re doing it, everybody is.

B.U. Bridge: What do you tell your students to do if they’re asked to do something illegal on the job?
Koniak: There’s enormous pressure for lawyers to turn a blind eye to these sorts of things, and as a junior person at a firm, you’re caught between a rock and a hard place. If you raise questions, you’re likely to never be promoted. But if you go along with something illegal, there’s some chance you will find yourself in a lawsuit or charged with a crime. So I tell students that if they suspect illegal activity, to keep their hands off the project no matter what it takes -- including lying to your boss about why you can’t work on the project, saying you’re sick, or asking to be transferred -- and then start looking for another job immediately. I also tell them that when they start at a firm, the first thing they should do is try to identify a person with power who has integrity, so if they’re asked to work on or approve something that is illegal, they’ll have someone who might be able to do something about it.


11 October 2002
Boston University
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