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Do 20 years make a difference? Maybe not. The American Bar Association’s Ethics 2000 Commission is to recommend a revision of Rule 1.6 of the Model Rules of Professional Conduct. This would permit a lawyer, in the exercise of discretion, to disclose imminent client financial fraud to prevent its consummation. A similar recommendation 20 years ago by the Kutak Commission was scornfully denounced in the ABA House of Delegates as a weakening of the duty of confidentiality and a blot on the profession’s escutcheon; the proposal was rejected by the House. In the end, however, most states that subsequently adopted the rules did so with the Kutak formulation or a minor variation thereof. Now the issue reappears, and denunciations are already forthcoming, although they are fewer. The same rhetorical strategy also reappears — i.e., the suggestion that disclosure of client fraud will be mandatory. Thus the Los Angeles County Bar Update, announcing the Ethics 2000 report, says that “in Model Rules states, lawyers can and should disclose client confidences to prevent serious bodily (and sometimes economic) harm.” This is not a correct statement of what Model Rules states have done. Everywhere, except in New Jersey, disclosure to prevent bodily harm or financial fraud is a matter of the lawyer’s judgment. It should be noted that the sky has not fallen, even in New Jersey. Lawyers are sensitive about protecting client confidences. The rule proposed by Ethics 2000 requires a lawyer to use means other than disclosure when reasonably possible. Remonstrating with the client and explaining about the law of mail fraud has been the rule or the understanding everywhere. Opponents of the permissive disclosure rule also make the following argument: If there is a total prohibition on disclosure, lawyers can defend themselves against subsequent charges of complicity by saying that, although they may have known, they were duty-bound not to say anything. Hence, it is said, they will be absolved. FACING MALPRACTICE But, friends, this is naive. The claims of complicity are almost always against transaction lawyers, not the litigators who howl against the permissive disclosure rule. A lawyer involved in such a mess will face an allegation, not that he was an innocent, but that he knew about the fraud and gave help in furthering it. By now, the former client will be in jail (perhaps aiming at a plea bargain) or bankrupt — or both. The victims of the fraud will be after the lawyer’s malpractice insurance. The jury will be invited to find that the reason the lawyer did not blow the whistle is not that he could not do so. It was because he was recklessly indifferent to the fact that the client was committing fraud. (“Reckless indifference” will keep access to the insurance coverage.) The transaction lawyer will have fingerprints all over the papers in the deal. Jurors are not ordinarily sympathetic to lawyers. There being circumstantial evidence that the lawyer knew the deal was fishy, the lawyer will have to persuade the jury that he was honor-bound to keep silence. BEVY OF SUPPORTERS It is noteworthy that the “loss prevention” people from the legal malpractice insurance companies consider the Ethics 2000 recommendation necessary. It is also noteworthy that the ABA Business Law Section (made up of transaction lawyers) has expressed support for the recommendation. As a matter of fact, permissive disclosure is authorized under the Model Rules as adopted by the ABA in 1983, but through small print that requires careful reading. As I said before, the sky has not fallen, but many lawyers still have to fight off ugly lawsuits charging them with complicity in client fraud. A friend of mine observed the other day that transaction lawyers, along with accountants, have become virtually insurers of the bona fides of transactions. Being sued is extremely unpleasant, as the transaction lawyers will explain. The best way to avoid that kind of exposure is to abort the fraud in the first place, if that can be done. If the lawyer did not know about the fraud, as is properly the case, that will be the line of subsequent defense. A lawyer defending on the ground that he knew about the fraud, but had his lips sealed, has a tough row. Fraudulent clients are not entitled to that kind of indulgence, and most honest clients would be surprised that a lawyer could not blow the whistle in such circumstances. Geoffrey C. Hazard Jr., a law professor at the University of Pennsylvania, is one of the nation’s leading experts on legal ethics.

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