Unregulated lawyers enable corporate wrongdoing, says BU legal ethicist
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.
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
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
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
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
B.U. Bridge: What repercussions does a lawyer in that
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
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
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.