October 05, 2011

Written Comments of Lawrence J.Fox

Dear Commissioners:

Laboring in a quiet vineyard far from the glowing lights that have illuminated your work is a hearty band of ethics oenephiles, the members of the Ethics 2000 Commission. Our charge from the ABA House of Delegates is to review the Model Rules of Professional Conduct, almost twenty years since their passage, to determine whether our experience with the Rules warrants any changes. One of the first Rules we addressed was Rule 1.7, the primary conflict of interest rule which states the fundamental measure of our loyalty to our clients, and its follow-on Rules 1.8, 1.9 and 1.10.

After more than a year of deliberations and solicitation of comments from hundreds, informed in large part by the literally thousands of hours the American Law Institute Restatement of the Law Governing Lawyers project spent on this same issue, we have circulated a discussion draft which we believe not only clarifies the old rules but also perpetuates our profession's commitment of loyalty to our clients.

These are not rules designed to protect lawyers. These are not rules designed to protect our lawyer's turf. They were crafted only with the interests of our clients in mind.

As I look back on our Commission's discussions, the key issues we addressed remain etched in my memory. What conflicts are not waiveable? What conflicts should be imputed to all lawyers in a law firm? What should be the formulation of the prohibition on directly adverse conflicts and those that represent material limitations? Should the standard for the rule be objective or subjective?

The latest version of our work is annexed. These rules bear your careful study. This draft is not our final work product and of course it has not been adopted by the ABA House of Delegates to which it is unlikely to be submitted for final vote before 2001. Yet it clearly reflects the virtually unanimous view of a Commission whose members, I assert with no fear of contradiction, have the background and experience to make judgments as to what our rules should provide.

You will note how the Commission answered many of these fundamental questions. Non-waiveable conflicts include those no reasonable lawyer would undertake, as well as the simultaneous representation of clients directly adverse to each other in the same proceeding. All conflicts identified under Rule 1.7 are imputed under Rule 1.10 to every lawyer practicing together in a firm or other organization. The standard of conduct under the rule is objective, not subjective, i.e., would a reasonable lawyer undertake the conflicting representation. Except in the case of those moving from government service to the private sector or those who engage in prospective client discussions that end without any retention, no screening of personally conflicted lawyers is permitted without prior client consent. Client consent to a waiveable conflict may only occur after full disclosure of the nature of the conflict and the receipt of informed consent, which consent must be secured in writing.

The net result, in my view, is a series of rules whose proscriptions embody the fundamental values of our profession, whose required analysis is clear to the lawyer who must apply the rules everyday in practice, and whose purpose is to maintain our profession's commitment to the highest ethical ideals.

You also have before you now the extraordinary presentation by Sam DiPiazza, Jr. who presents what he says is a demonstration, depending on which sentence you read, of how the accountants' rules on conflicts of interest are the "same," "virtually the same," or "very similar" to the legal profession's. In Mr. Piazza's words "the differences are minor in my view."

I know the members of this Commission must recognize how incorrect these statements are, so incorrect it is hard to believe they would be made in a public forum. Indeed, to me they demonstrate how dangerous it would be to have lawyers come under the custody and control of those who are both uninformed about and insensitive to the legal profession's ethical obligations. Lest the record of this Commission be read by those less sophisticated who might be misled by Mr. DiPiazza's soothing references to loyalty, permit me to share a few observations.

First, the only conflict that the accounting firms recognize is the situation in which one firm represents two clients "on opposite sides of the same matter." But the accounting firms, don't even treat this conflict as we would. While the Big 5 apparently concede that this conflict should be imputed to the other members of the firm, the accounting firms, nonetheless, assert that this conflict may be waived. This you will recognize, of course, is the very conflict of interest that our profession concludes is non-waiveable.

But this one-profession wrecking crew does not stop there. Having eviscerated our concept of non-waiveable conflicts in one of the conflict of interest situations our profession has determined should never be permitted to arise, the accounting profession then destroys the rest of our conflict of interest rules in two paragraphs uttered by Mr. DiPiazza without apology or even the slightest recognition of the destruction they cause.

As to all other conflicts, except that in which two clients represented by the same firm are directly adverse to each other, "there is a more fundamental difference," Mr. DiPiazza starts. "Unlike the ABA's Model Rules, the AICPA Code does not impute conflicts to the entire firm where an individual CPA seeks to represent a client in one matter where another client, advised by a different CPA within the firm, may have an indirect adverse interest." Mr. DiPiazza tells us that in these "indirect" situations a broad prohibition is "not appropriate." He argues that it is "the individual who owes the duty of loyalty to the client."

A mere two paragraphs and the present Model Rules governing conflicts, as well as the Ethics 2000 Commission's proposed reformulation of those rules to say nothing of all of the hard work of the American Law Institute, lie bleeding on the ground, all of our deliberations wasted, all of our principles sacrificed on the altar of the eat-what-you-kill economics of the omnivorous accounting firms. Let me ask you, Commissioners, if the following situations reflect client loyalty.

  1. Arthur Andersen Legal is representing Ford Motor Company in a proposed sale of its finance subsidiary to Big Bank. Without asking (or even talking to Ford), six weeks into the intense negotiations Arthur Anderson Law undertakes the representation of Big Bank in a proposed purchase of the Bank of Boston.
  1. Cardiologists Inc. hires KPMG Law to represent its physicians in negotiations with Mt. Sinai Hospital. Unbeknownst to Cardiologists, Inc., Mt. Sinai Hospital has retained KPMG Law to sell its HMO subsidiary to Aetna Health Care.
  1. PricewaterhouseCoopers Law Colossus undertakes the representation of General Motors. Three weeks later PWCLC initiates an arbitration by Volvo against Saab, General Motor's wholly owned subsidiary, alleging predatory pricing.

Of course the legion of what they call indirect conflicts, as defined by the accountants, is so vast I could fill pages with examples. But you get the idea from just these three. Fundamental conflicts of interest, conflicts that would destroy client loyalty, conflicts that we say violate Rule 1.7(a), because they are not "indirect" but rather are directly adverse to a client of the firm, are systematically ignored by the accounting firms who solve this "little problem" by saying all conflicts are personal to the individuals who are working on the matter and that the "fire walls" that are erected between my office, where we are working to represent GM, and the office next door, where my partner, (with whom I share fees, expertise, training, supervision and to whom I might even report) is working to destroy Saab, will solve all questions of client loyalty.

This may be good enough for the accountants. It certainly is a necessity if they are going to represent the entire public company world. But, members of the Commission, it is not good enough for lawyers, it is not good enough for our clients, it creates justifiable client apprehension and fear and, as I have already argued to you in my earlier letter, absent client control and consent, it leaves clients no choice but to accept the breach in loyalty or fire the Big 5 firm, an unlikely result given the accounting firm*s hold on the auditing function.

The fact that the accountants would actually have the temerity to argue that their rules governing loyalty exist on the same planet as ours simply demonstrates how lawyers will lose their independence if these insensitive practitioners become our masters.

Since I have distracted you this far, permit me to respond to a few other matters that have been presented to you. Mr. DiPiazza badly misstates any similarity between our professional independence and that of the accountants. Their "independence" is independence from the client. When we read that Arthur Andersen has opined on the financial statements of some company, we want to know that Arthur Andersen was free of influence from its client, able to bring healthy skepticism to its work to protect the public from relying upon financial statements that have not been prepared in accordance with generally accepted accounting principles after an audit conducted in accordance with generally accepted auditing standards. Like the Chief Accountant of the SEC, we want no advocates here, but rather professional distance and objectivity.

For lawyers, professional independence is a completely different concept. Yes, it means we give our clients our best advice, even if it is not what the client wants to hear. But it also means that we are free from outside influences -- especially the government, other clients, third party payers and our own self-interest -- to permit us to exercise unbridled loyalty and zealous advocacy on behalf of our clients. Mr. DiPiazza betrays his (and undoubtedly his entire profession's) misunderstanding when he asserts "To suggest that the threat to independent judgment is unacceptably higher when a non-lawyer has an economic interest in a law firm than when a lawyer is under pressure from a long-standing client to take a particular position or is encouraged by a senior partner in his own firm to accommodate a client's interests, strikes me as a doubtful proposition."

It may be doubtful to him, but it is anything but to us. Being "under pressure" from a long time client is exactly where the pressure should be. Being "encouraged" by a senior partner is exactly who should be doing the encouraging. We are beholden to our clients (so long as the suggested conduct is lawful and ethical) and we are supervised by other lawyers (whose guidance we follow unless the ethical or legal violation is clear). The former is our client to whom we are ethically committed and the latter is a lawyer, similarly conversant with our values, subject to our rules and liable to the same disciplinary sanctions as we. It is pressure from non-client, non-lawyers that we must be ever vigilant to guard against and it is precisely those influences that compromise our professional independence. The irony that Mr. DiPiazza's quoted statement proves this point, I trust, is not lost on the Commission.

Mr. Page's presentation is no less troubling and equally unpersuasive. The great advantage that the accounting firms assert justifies their extraordinary distortion of our rules of client protection is, we are told, one stop shopping. Then when the inherent conflict between confidentiality and the attest function is held up to public scrutiny, Mr. Page beats a hasty retreat by observing that we shouldn't be concerned because the situation "would only arise where a public company received both its audit and legal services from the same multidisciplinary firm." Didn't we think this was precisely the situation "where one client could receive auditing and law services from the same firm" that all of the Big 5 were touting?

More fundamentally, Mr. Page reiterates the old saw that the accountants disclose nothing and it is up to the client to disclose the confidential information. Therefore, the fact that when one hires lawyers who work for accounting firms these lawyers will be obliged to disclose confidential information to their auditing colleagues, does not really violate Rule 1.6 because the public disclosure, if any, will not come from the auditors but from the client. I am sure the Commission recognizes that the client would not be in this impossible situation if it had hired a lawyer who did not work for an accounting firm in the first place.

But, of course, all of this sophistry is totally irrelevant since Mr. Page is forced to admit that there is a loophole to the accountant's obligation of confidentiality, one so large it swallows any confidentiality protection his earlier discussion would suggest might exist. Starting off with classic understatement, -- "there is one instance" -- (just one but it's really, really tiny, he seems to say), Mr. Page then explains the ill-advised disclosure obligations imposed by the Private Securities Litigation Reform Act of 1995, obligations to disclose within twenty four hours that destroy Rule 1.6's confidentiality commitment for any lawyer who works for an accounting firm.

Mr. Page then aggravates this "minor" concession, by arguing that lawyers are obliged to make a noisy withdrawal when a client rejects the lawyer's advice regarding disclosure. Yet again he demonstrates how the accounting firms systematically misstate our ethical obligations in order to attempt to prove that we are really twin professions, separated at birth, both committed to the same ethical rules. In fact, as the Commission knows, lawyers have no noisy withdrawal obligation in the situation he posits.

Finally, Mr. Page seeks to respond to my concern about pro bono service. Let me start by commending the accounting firms for their charitable endeavors. I have no doubt that accountants are great museum, symphony and hospital supporters. But, that is not pro bono. What I have in mind is our profession's commitment to representing the poor, the unpopular, those on death row. Whatever United Way campaigns Mr. Page and his partners may chair, I remain convinced that we will not be able to rely on Arthur Andersen to be fulfilling that unpopular but important need.

In closing, let me reiterate one other point. Every presentation I have read demonstrates that the Big 5 accounting firms want special rules for themselves. Nowhere do they address the fact that we cannot take such an unprincipled approach. If imputation dies, it dies for all clients. If fees can be shared with non-lawyers, most of those non-lawyers will be non-CPAs as well. If screens can be erected at PricewaterhouseCoopers, they will be erected in thousands of practice settings. If confidentiality is abrogated for some lawyers because they work for those with a duty to disclose, it will disappear for all of our clients. Our core values will not just be compromised by the Big 5 accounting firms, they will disappear entirely.

Very truly yours,

 Lawrence J. Fox