Between a Rock and a Hard Place: The Erosion of Privilege and the Duty of Confidentiality

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Despite the longstanding acceptance and promotion for the crime-fraud exception, it appears that the use of the exception to report fraud has been relatively scant and use of ethical rules to sanction lawyers is similarly rare. For those that may favor private regulation or the ability of the market to dictate its own terms it seems that the equilibrium reached was one without lawyers disclosing of their own accord. This could be just viewed as an information failure problem—even if the ability to report fraud up the ladder was technically already available, lack of knowledge may have prevented lawyers from reporting fraud when they otherwise would have done so. Whatever the reason, state rules seem to have been ill-equipped to stave off Enron. As a result, the ABA commissioned a task force to recommend changes rules to 1.6 and 1.13. State model rules differ significantly and offer little guidance to rectify the overall situation. In most states disclosure is now allowed, but not required to prevent a client from committing a fraud that may result from financial injury to others. Additionally, fraud may be reported up the latter when an organization is represented. Attorneys must reveal fraud if committed on a tribunal. Further, disclosure is required when a client’s purpose to commit fraud is manifest and the attorney is unable to talk him out of it. In some states disclosure is states for financial crimes: Wisconsin and Virginia’s model rules ostensibly require attorneys to report securities fraud through the broad obligation to report crimes likely to cause harm to another. New Jersey has the strongest explicit reporting duties, modifying the standard model clause’s optional “may” report language to “shall” r... ... middle of paper ... ... of it in the courts and to the extent that whistleblowers would take into account probable success in the courts ex ante—there certainly seem to be high information costs here that might lead us to believe individuals probably are not aware enough of the success of other whistleblowers to really effect their behavior at the margins, though lawyers, if any group, would seem at least decently likely take this into account in their decision-making process—this would raise the costs of whistleblowing even higher than its current lofty bar. Moreover, although the SEC takes a pretty broad definition of appearing before the commission in its rules for attorneys, the risk of being outside this uncertain range likely deters whistleblowing. Of course, there is additionally a large body of potentially fraudulent behavior entirely outside the scope of federal securities law.

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