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SOX, the ABA Model Rules, & the Nevada Rules of Professional Conduct: Legal and Ethical Duties of Nevada Lawyers

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Title: SOX, the ABA Model Rules, & the Nevada Rules of Professional Conduct: Legal and Ethical Duties of Nevada Lawyers


1
SOX, the ABA Model Rules, the Nevada Rules of
Professional Conduct Legal and Ethical Duties
of Nevada Lawyers
  • John S. Delikanakis
  • Snell Wilmer LLP
  • 3883 Howard Hughes Parkway, Suite 1100
  • Las Vegas, NV  89169
  • (702) 784-5259 (direct)
  • (702) 784-5252 (fax)
  • jdelikanakis_at_swlaw.com
  • June 26, 2007

2
Reporting Up the Ladder
  • SOX, the ABA Model Rules, and the Nevada Rules of
    Professional Conduct

3
SOX 205Required reporting up the ladder
  • SOX 205 requires a lawyer "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"

4
ABA Model Rule / Nev.R.P.C. 1.13 (b)Shared
Language
  • (b) If a lawyer for an organization knows that an
    officer, employee or other person associated with
    the organization is engaged in action, intends to
    act, or refuses to act in a matter related to the
    representation that is a violation of a legal
    obligation to the organization, or a violation of
    law that reasonably might be imputed to the
    organization and that is likely to result in
    substantial injury to the organization then the
    lawyer shall proceed as is reasonably necessary
    in the best interest of the organization
  • ABA Model rule and Nevada rule are identical to
    this point

5
ABA Model Rule 1.13 (b)Eventual required
reporting up the ladder
  • Model Rule 1.13(b) (cont).
  • 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

6
Nev. R.P.C 1.13(b) Discretion to proceed in the
best interest of the organization
  • Nev. R.P.C 1.13(b) (cont)
  • In determining how to proceed, the lawyer shall
    give due consideration to
  • the seriousness of the violation and its
    consequences
  • the scope and nature of the lawyers
    representation
  • the responsibility in the organization and the
    apparent motivation of the person involved
  • the policies of the organization concerning such
    matters and
  • any other relevant considerations.
  • Any measures taken shall be designed to minimize
    disruption of the organization and the risk of
    revealing information relating to the
    representation to persons outside the
    organization.

7
Nev. R.P.C 1.13(b) Discretion to proceed in the
best interest of the organization
  • Nev. R.P.C 1.13(b) (cont)
  • Such measures may include among others
  • (1) Asking reconsideration of the matter
  • (2) Advising that a separate legal opinion on the
    matter be sought for presentation to appropriate
    authority in the organization and
  • (3) Referring the matter to higher authority in
    the organization, including, if warranted by the
    seriousness of the matter, referral to the
    highest authority that can act in behalf of the
    organization as determined by applicable law.

8
Rule Comparison
  • SOX 205
  • Required reporting to the Chief Legal Officer or
    CEO
  • ABA Model Rule 1.13(b)
  • Some discretion allowed initially
  • Eventual requirement to report to the highest
    authority
  • Nev.R.P.C. 1.13(b)
  • Required to proceed in the best interest of the
    organization
  • Suggested factors to weigh in deciding how to
    proceed
  • Suggested options as to how to proceed
  • Eventual permission to report up the ladder

9
What Triggers the Lawyers Duty to Report up the
Ladder?
10
SOX - What Triggers the Lawyer's Initial Duty to
Report Up the Ladder?
  • In 307, Congress abandoned the "subjective"
    approach of Model Rule 1.13(b), which imposes no
    obligations on a lawyer unless she "knows" that
    illegal activity is occurring, or will occur.
  • Congress mandated an objective trigger, while at
    the same time lowering the triggering standard
    from one of definitive violation to "evidence" of
    a violation.

11
SOX - What Triggers the Lawyer's Initial Duty to
Report Up the Ladder?
  • The SEC rules define "evidence of a material
    violation" in Section 205.2(e) as "credible
    evidence, based upon which it would be
    unreasonable, under the circumstances, for a
    prudent and competent attorney not to conclude
    that it is reasonably likely that a material
    violation has occurred, is occurring, or is about
    to occur."

12
SOX - What Triggers the Lawyer's Initial Duty to
Report Up the Ladder?
  • Deficiencies in the SEC triggering standard
  • Double-negative formulation in the definition of
    "evidence of a material violation" (Unreasonable
    not to conclude)
  • Ambiguity of the "reasonably likely" standard
  • Uncertain meaning of "becomes aware"
  • Failure to address imputed knowledge.

13
ABA / Nev.R.P.C - What Triggers the Lawyer's
Initial Duty to Report Up the Ladder?
  • ABA Model Rule and Nev.R.P.C 1.13(b), despite
    their mandatory language, contain limitations and
    qualifications that give lawyers some discretion
  • Actual knowledge standard as the trigger for the
    lawyer's duty
  • A definitive "violation" rather than evidence of
    a violation or a potential violation
  • Requirement that the violation be related to the
    representation
  • Requirement that the violation is likely to
    result in substantial injury rather than simply
    being material

14
ABA / Nev.R.P.C - What Triggers the Lawyer's
Initial Duty to Report Up the Ladder?
  • ABA Model Rule and Nev.R.P.C 1.13(b), require
    that the substantial injury be to the
    organization, ignoring the situations in which
    only third persons are harmed by the illegality
  • ABA Model Rule 1.13(b) exception to the reporting
    up duty if the lawyer reasonably believes that
    it is not necessary in the best interests of the
    organization to do so
  • ABA Model Rule 1.13(b) limitation that lawyers
    need to report to the highest authority only
    if warranted by the seriousness of the matter

15
Nevada What Triggers the Lawyer's Duty to
Report Up?
  • Before reporting, lawyer shall weigh
  • Seriousness of the violation and its consequences
  • Scope and nature of the lawyers representation
  • Responsibility in the organization and the
    apparent motivation of the person involved
  • Policies of the organization concerning such
    matters and any other relevant considerations
  • Further, the lawyer is directed to modify his
    actions, so that any actions minimize disruption
    of the organization

16
Monitoring and Following Up
  • What are the lawyers responsibilities after the
    report is filed?

17
SOX - Qualified Legal Compliance Committee
  • Under the SEC rules, if the corporation has
    previously formed a Qualified Legal Compliance
    Committee (QLCC), and the lawyer reports to the
    QLCC, the lawyers obligation to monitor the
    response to the report and to report further up
    the ladder vanishes
  • Creates safe harbor for the reporting lawyer, at
    least for SEC actions

18
SOX 205.3(b)(3) - Obligations of the Reporting
Lawyer After the Initial Report
  • Reporting lawyer shall report the evidence of a
    material violation" to the board or relevant
    board committee, unless the lawyer "reasonably
    believes that the chief legal officer or the
    chief executive officer ... has provided an
    appropriate response within a reasonable time."
  • The lawyer who reports up to the board must also
    "explain his or her reasons" for believing that
    the issuer has not made an appropriate response
    to the CLO, CEO, and the Directors

19
SOX - Obligations of the Reporting Lawyer After
the Initial Report
  • 205.2(b) defines "appropriate response" as "a
    response to an attorney regarding reported
    evidence of a material violation as a result of
    which the attorney reasonably believes" any one
    of three things
  • (1) There is no problem that is, "no material
    violation ... has occurred, is ongoing, or is
    about to occur."
  • (2) The issuer is fixing whatever problem exists
    by adopting "appropriate remedial measures."
  • The difficulties in determining what counts as
    "appropriate measures" creates significant
    interpretive question

20
SOX - Obligations of the Reporting Lawyer After
the Initial Report
  • (3) The issuer, with the consent of the issuer's
    board of directors or relevant board committee
    has retained or directed an attorney to review
    the reported evidence of a material violation,
    as a result of which one of two further things
    must happen.
  • Either the investigatory lawyer must conduct a
    reasonable investigation and evaluation of the
    reported evidence, make remedial
    recommendations and have those recommendations
    substantially implemented by the issuer, or
  • The investigatory lawyer must advise the issuer
    that he or she may, consistent with his or her
    professional obligations, assert a colorable
    defense on behalf of the issuer in any
    investigation or judicial or administrative
    proceeding relating to the reported evidence of a
    material violation.

21
ABA and Nevada
  • ABA Model Rules and Nevada Rules of Professional
    Conduct do not explicitly require post-report
    monitoring, but implicitly require monitoring, as
    seen in the next section.

22
Reporting Out - When is reporting outside the
organization required/permitted?
23
SOX 205(d)(2) - Permissive Disclosure
  • An attorney ...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 ... or suborning perjury ... or
    committing any act ... 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 have been used.

24
ABA Model Rule 1.6(b) Permissive Reporting Out
  • (b) A lawyer may reveal information relating to
    the representation of a client to the extent the
    lawyer reasonably 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
  • (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

25
ABA Model Rule 1.13(c) Permissive Disclosure
  • (c) 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
    manner an 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 substantial injury to the organization

26
ABA Model Rule 1.13(c)Advisory Comment
  • Rule 1.13 (c) supplements Rule 1.6(b) by
    providing an additional basis upon which the
    lawyer may reveal information relating to the
    representation, but does not modify, restrict, or
    limit the provisions of Rule 1.6(b)
  • The lawyer may reveal such information only when
    the organization's highest authority insists upon
    or fails to address threatened or ongoing action
    that is clearly a violation of law, and then only
    to the extent the lawyer reasonably believes
    necessary to prevent reasonably certain
    substantial injury to the organization.
  • It is not necessary that the lawyer's services be
    used in furtherance of the violation, but it is
    required that the matter be related to the
    lawyer's representation of the organization.
  • If the lawyer's services are being used by an
    organization to further a crime or fraud by the
    organization, Rules 1.6(b)(2) and 1.6(b)(3) may
    permit the lawyer to disclose confidential
    information.

27
Nev.R.P.C. 1.6(b) Permissive Reporting Out 
  • (b) A lawyer may reveal information relating to
    the representation of a client to the extent the
    lawyer reasonably believes necessary
  • (2) To prevent the client from committing a
    criminal or fraudulent act in furtherance of
    which the client has used or is using the
    lawyers services, but the lawyer shall, where
    practicable, first make reasonable effort to
    persuade the client to take suitable action
  • (3) To prevent, mitigate, or rectify the
    consequences of a clients criminal or fraudulent
    act in the commission of which the lawyers
    services have been or are being used, but the
    lawyer shall, where practicable, first make
    reasonable effort to persuade the client to take
    corrective action

28
Nev.R.P.C 1.13(c) Permitted Withdrawal, Not
Disclosure
  • Ifthe highest authority that can act on behalf
    of the organization insists upon action, or a
    refusal to act, that is
  • clearly a violation of law and
  • is likely to result in substantial injury to the
    organization,
  • the lawyer may resign in accordance with Rule
    1.16.

29
Comparison
  • SOX Permits a lawyer in some circumstances to
    disclose client fraud to the SEC without the
    issuer's consent
  • ABA Model Rules permit the lawyer to reveal
    confidential information in certain circumstances
    whether or not Rule 1.6 permits the disclosure
  • Nevada Rules stress that if the highest internal
    authority refuses to act on behalf of the
    corporation, the attorney may do nothing but
    exercise his right to resign
  • Upon termination of representation, a lawyer
    shall take steps to the extent reasonably
    practicable to protect a clients interests
  • The Nevada lawyer would still only be permitted
    to make disclosures allowed by Rule 1.6

30
Which Rules Govern?
  • State Bar Associations have not adopted revised
    ABA rules, leading to jurisdiction battle between
    the states and the SEC

31
Which Set of Rules Governs?
  • ABA Model Rules never govern
  • Not self-effectuating. Must be adopted by states.
  • For SEC actions, SOX governs
  • The SEC can sanction by precluding the lawyer
    from appearing and practicing before the SEC
  • In State Court Ethics Prosecutions
  • State Bar Association ethics rules normally
    govern
  • But, SEC claims to immunize attorneys who use
    "good faith" efforts to comply with part 205
  • State Bar Associations warn lawyers against
    relying on safe harbor

32
State Bar Associations v. SEC
  • Some states argue that, to the extent SOX 205
    contradicts individual state Rules of
    Professional Conduct, the state rules must
    prevail
  • These states claim that, because there is not yet
    case law specifically upholding these SEC
    regulations, state bars are under no legal
    obligation to honor them, and therefore attorneys
    practicing in their jurisdictions may obey the
    SEC rules only at their peril
  • States claim the right to prosecute such
    violations of rules of professional conduct even
    though 205 immunizes attorneys against such
    prosecutions of "good faith" efforts to comply
    with SOX 205

33
State Bar Associations v. SEC
  • In the absence of specific case law, states claim
    that there is no evidence that Congress intended
    to give the SEC the power to effect such a
    massive intrusion into the affairs of the legal
    profession
  • Courts have struck down other SEC regulations
    because there was no evidence of Congressional
    intent.
  • The SEC, an administrative agency, only has the
    power to adopt regulations to carry into effect
    the will of Congress as expressed by the statute.

34
State Bar Associations v. SEC
  • Historically, when Congress does not specifically
    address the preemptive effect of a new law on
    existing state laws, that silence is taken to
    evidence a lack of intent to supersede existing
    laws.
  • However, although Congress did not mention any
    intent to supersede existing laws, the SEC wrote
    regulations which claimed this preemptive power.
  • States rights advocates see this as an
    unwarranted inflation of power by an
    administrative agency.
  • When challenged in courts, the SEC rules may be
    struck down under the mandate of the
    Administrative Procedure Act, which holds that a
    reviewing court must invalidate any agency rule
    which exceeds that agency's authority.

35
State Bar Associations v. SEC
  • Whether most states follow the ABA's lead and
    concede all but the most onerous SEC requirement
    --"noisy withdrawal"-- may well depend on the
    outcome of this legal fight.
  • Since attorneys may be forced to choose between
    obeying SEC 205 or obeying local Rules of
    Professional Conduct, this fight may begin when
    an attorney makes a choice that results in his
    prosecution by a state bar association.

36
Discussion
37
SEC Strikes Back
  • SEC has responded to these state challenges by
    outlining legal precedents that suggest that the
    Commission does indeed have the authority to
    supersede state laws, even though specific case
    law on these regulations has not yet been
    established.
  • SEC emphasizes that the Supreme Court has
    consistently affirmed that, when a federal agency
    enacts rules of conduct which conflict with
    existing state rules of conduct, the federal
    agency's rules prevail.

38
SEC Strikes Back
  • In response to state attacks on the SEC's grant
    of immunity from state prosecution to attorneys
    who comply with part 205, the Commission cites
    several other legal precedents.
  • Barnhart v. Walton holds that a federal agency's
    interpretation of its own regulation is afforded
    judicial deference.
  • Since the issue of whether an attorney has acted
    in a "good faith" effort to comply with part 205
    requires an interpretation of an SEC regulation,
    the SEC maintains that its definition of "good
    faith" must be accepted by states that wish to
    prosecute attorneys for violating state bar rules
    in an effort to comply with part 205.

39
SEC Strikes Back
  • Further, the SEC warns that state attempts to
    define "good faith" differently from the SEC to
    justify prosecution of complying attorneys will
    fail, since City of New York v. FCC holds that
    federal agency regulations preempt any state
    regulation that "frustrates the purposes" of the
    regulation.
  • Consequently, any prosecution of a complying
    attorney will be construed as an attempt to
    thwart the purpose of a preemptive federal
    regulation.

40
SEC Strikes Back
  • Assuming that the SEC can demonstrate in the
    impending court battles that Congress intended to
    empower the Commission to narrow the reach of
    attorney-client privilege, the SEC will most
    likely prevail in this legal battle because of
    the extensive precedent for federal preemption of
    state laws.

41
SEC Strikes Back
  • However if states revise their local ethics rules
    to mirror the ABA's revised rules, attorneys who
    do not practice before the SEC will also have
    increased latitude to reveal client confidences
    since the ABA Rules do not limit this permission
    to attorneys practicing before the SEC.
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