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As a wave of financial scandals washes over corporate boardrooms, a growing number of in-house lawyers find themselves swept up in the surge. In recent months, a lawyer’s memo was the key evidence jurors pointed to in convicting Enron’s auditing firm, Arthur Andersen, of obstruction of justice. The top lawyer at Rite Aid was indicted on multiple counts of fraud. And Tyco’s general counsel was fired and sued by the company for allegedly siphoning millions into personal accounts. The scandals have revived a question lawyers have been debating for more than two decades: What should they do when they uncover a client’s fraud? The U.S. Senate incorporated a partial answer in legislation passed earlier this month, directing the SEC to require lawyers who uncover wrongdoing to take their concerns up the corporate ladder, if necessary. ABA committees have suggested expanding ethical rules to allow a lawyer to breach confidentiality when a client is using the lawyer’s services to perpetrate a crime or fraud that is likely to cause substantial economic injury. This proposal has been repeatedly rejected by the ABA’s House of Delegates. The debate has also made its way into courtrooms, where in-house lawyers who claim they were fired for fulfilling their ethical duties have sued their former companies for retaliatory discharge. Some of the issues are not controversial. The ABA’s Model Rules of Professional Conduct plainly state that an in-house lawyer’s client is the company. The rules are equally clear that lawyers may waive confidentiality and reveal client information “to prevent reasonably certain death or substantial bodily harm,” to secure legal advice or to comply with the law or a court order. When lawyers are involved in controversies with clients, they may reveal information to establish a claim or defense. And 41 states already have rules at least as expansive as the one the ABA has debated for so long. It’s also well established that a lawyer must withdraw rather than engage in conduct that is illegal or unethical, and a lawyer who uncovers wrongdoing may take his concerns up the corporate ladder to the company’s executives and, if necessary, its board. (The Senate legislation makes it a requirement that lawyers do so and creates a federal rule in a realm previously governed by states.) Though the rules apply equally to in-house and outside counsel, the burden isn’t equal. For in-house lawyers, the stakes are much higher. “I can withdraw from representing a client, and I may lose money,” says Lucian Pera, a partner at Memphis, Tenn.’s Armstrong Allen who has written extensively on legal ethics. “My firm may lose money. But I’m not going to lose my job.” Even taking a problem to the board may have dire consequences. “When a lawyer goes around his or her superiors, effectively your career is over at that company,” says H. Lowell Brown, a solo practitioner in Falmouth, Maine, who advises companies on compliance issues and worked in-house for a decade at Northrop Grumman. “In real terms, if you go to the board of directors and take on the senior management of the company, virtue may be its own reward, but that’s all you have to look forward to.” COUNSELING ENRON A lawyer who has struggled with this issue firsthand is also one of the few to emerge from the headlines with not only his job but his reputation intact. Jordan Mintz, Enron’s vice president and general counsel for corporate development, testified last February before a congressional committee about his efforts to resolve conflicts of interest in the company’s partnership agreements. Mintz described what he called the “dysfunctionality” he discovered in late 2000 when he began working for Enron’s chief financial officer, Andrew Fastow. As he reviewed documents, he shared his concerns with an Andersen partner and the company’s chief accounting officer. Later, when he realized CEO Jeffrey Skilling had failed to sign approval sheets for one of the partnership agreements, he sent memos and tried to see him — to no avail. Eventually, Mintz decided to hire an outside law firm for advice. Without telling James Derrick, Enron’s general counsel, or talking to Vinson & Elkins, its long-time outside firm, he hired lawyers in the Washington, D.C., office of New York’s Fried, Frank, Harris, Shriver & Jacobson. “I wanted somebody that had no linkage, no connections with the company, just to take a fresh look at everything,” Mintz told the committee. Asked whether he ever took his concerns to Enron’s board, Mintz acknowledged he did not: “In an organization like Enron, I try to work within the system and report to people who are senior to me who I felt had the direct responsibilities with the board.” Several lawyers interviewed praise Mintz’s handling of the situation. “He went outside and hired his own compliance officer,” says Stephen Meagher, a partner at San Francisco’s Phillips & Cohen, a firm that specializes in representing whistleblowers. “Lawyers can put themselves in a great position to have protection because lawyers can bring in outside counsel, which is something the chief financial officer really can’t do.” Lawrence Fox, a partner at Philadelphia’s Drinker Biddle & Reath, also lauds Mintz’s decision: “I think that’s a great idea. Get a second opinion.” Mintz declined to be interviewed. Patricia Watras Dana was also a lawyer at a company that slid into bankruptcy, though one less momentous than Enron’s. But her experience was undoubtedly more typical. Back in the early 1980s, she worked for Midland Capital Corp., a public business-development company that went out of business in the early 1990s. In 1985, when the company was near collapse, executives wanted a subsidiary to file for bankruptcy. Dana was a director of this subsidiary and was told how to vote. The problem, she says, was that the subsidiary was not really bankrupt. The executives wanted to file to benefit the parent company. “When I went to work that morning, I had no intention of leaving my job,” Dana recalls. But she felt she had no choice. “They wanted me to do as I was told without thinking.” If resigning on principle is ever convenient, this wasn’t. “I had no job. I had no prospects. I was getting married to a man who was a student in business school.” She has no regrets. “I was physically sick at the thought of having to spend another day in that environment.” (The former CEO of Midland Capital didn’t respond to requests for comment.) SUING THE CLIENT In recent years, lawyers have sued their employers under similar circumstances. Dana doesn’t believe in that. She advocates going up the ladder: “And I think any diligent board member in today’s climate would sit up and take notice if the in-house lawyer said there was a problem.” When Julia Beth Crews was an in-house lawyer in Tennessee, she tried to work within the system as well. But she couldn’t resolve an unusual ethical problem and was fired, she says, for doing her duty. Though she, too, had qualms, she sued her former employer. Crews went to work for Buckman Laboratories International, a Memphis-based manufacturer of specialty chemicals, in 1995. She was hired, she says, by Katherine Buckman Davis, the company’s general counsel, and Robert Buckman, Davis’ father and the company’s CEO and chairman. In 1996, Crews learned Davis didn’t have a law license. According to her lawsuit, Crews expressed her dismay to a Buckman board member. The board member talked to GC Davis, who promised to take care of it. In July 1997, Davis took the Tennessee bar exam and, later that year, announced she’d passed. Crews was relieved — until she discovered in 1999 that Davis hadn’t taken another required test and still was unlicensed. Following several confrontations during which Crews and Davis clashed over this issue, Crews was negotiating her eventual departure with company executives when Davis abruptly fired her. Crews filed suit in April 2000. Recently laid off from a job at Lucent Technologies, Crews says she hasn’t found a job as a lawyer since she was fired. A lawyer for Buckman Labs declines to comment. A Tennessee circuit court dismissed Crews’ complaint for failing to state a claim. The appellate court affirmed. But in May, the Tennessee Supreme Court, in a case of first impression, unanimously held that “in-house counsel may indeed bring a common-law action of retaliatory discharge resulting from counsel’s compliance with an ethical duty that represents a clear and definitive statement of public policy.” Crews v. Buckman Laboratories International Inc., No. W2000-01834-SC-R11-CV. The court noted an evolution among the relatively few cases involving in-house attorneys. In the 1980s and early 1990s, courts rejected claims. The Illinois Supreme Court, in Balla v. Gambro Inc., 584 N.E.2d 104 (1991), laid out the rationale, arguing that lawyers don’t need a cause of action to encourage ethical behavior and that recognizing one would harm the attorney-client relationship. More recently, courts have followed the California Supreme Court’s lead in General Dynamics Corp. v. Rose, 876 P.2d 487 (1994), which asserted that lawyers may sue if they don’t breach client confidences in establishing their claims. The Montana Supreme Court went a step further in Burkhart v. Semitool Inc., 5 P.3d 1031 (2000), permitting lawyers to disclose confidential information when necessary to make their cases. Some lawyers are troubled by this trend. Robert Cummins of Chicago’s Cummins & Cronin co-authored an amicus curiae brief for the American Corporate Counsel Association (ACCA) in the Balla case, arguing against the cause of action. “A lawyer is a lawyer is a lawyer,” Cummins says. “We don’t have two classes of lawyers: those who work for private entities and those who work for companies or the government.” Yet, even ACCA’s position has changed. A brief it filed in 1995 in a Massachusetts case argued only that client confidences shouldn’t be breached. The Tennessee Supreme Court agreed with Montana and adopted a new provision in the state’s disciplinary code permitting in-house lawyers to reveal confidences “necessary to establish a claim or defense” in controversies between lawyers and clients. The court remanded the case for trial. Crews’ attorney, Donald Donati of Memphis’ Donati Law Firm, sees a connection between his case and the recent scandals: “I think the environment we’re currently in, with corporate scandals, influenced our court in that most of the scandals could not have occurred without the cooperation of in-house lawyers.” And the court’s decision, in turn, “gives a lawyer who finds himself or herself in this situation a little more impetus to do the right thing.”

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