-
Essay / Between a rock and a hard place: the erosion of...
Despite the long-standing acceptance and promotion of the criminality and fraud exception, it seems that the use of the exception for reporting fraud has been relatively rare and the use of ethical rules to sanction lawyers is also rare. To those who might favor private regulation or the market's ability to dictate its own terms, it appears that the balance has been achieved without lawyers revealing it of their own volition. This could simply be seen as a problem of lack of information: even if the possibility of reporting fraud at a higher level was technically already available, the lack of knowledge could have prevented lawyers from reporting fraud when they would have done otherwise. Whatever the reason, the state's rules appear to have been ill-equipped to fend off Enron. As a result, the ABA commissioned a working group to recommend changes to Rules 1.6 and 1.13. The state model rules differ significantly and offer little guidance to rectify the overall situation. In most states, disclosure is now permitted, but is not required to prevent a customer from committing fraud that could result in financial harm to others. Additionally, fraud may be reported in the latter case when an organization is represented. Lawyers must reveal fraud if it is committed in court. Additionally, disclosure is required when the client's intent to commit fraud is apparent and the lawyer is unable to dissuade the client. In some states, disclosure is reserved for financial crimes: the Wisconsin and Virginia model rules ostensibly require lawyers to report securities fraud through the general duty to report crimes likely to cause harm to others. New Jersey has the most stringent explicit reporting requirements, modifying the standard model clause. optional 'may' returns wording to 'shall' in middle of paper...... in court and to the extent that whistleblowers would take into account likely success in court ex ante - there is There certainly appear to be high information costs here that might lead us to believe that individuals are probably not sufficiently aware of the success of other whistleblowers to actually affect their behavior at the margin, although lawyers, the if anything, seem at least decently likely to take this. taken into account in their decision-making process – this would raise the costs of whistleblowing even higher than the currently high bar. Additionally, although the SEC adopts a fairly broad definition of appearing before the commission in its rules for attorneys, the risk of falling outside of this uncertain range likely deters whistleblowers. Of course, there are also a large number of potentially fraudulent behaviors that fall completely outside the scope of federal securities law..