Sleeping is the Enemy: What the BNP case reminds us about lawyers’ ethics

A Litigation Daily piece by Susan Beck in the New York Law Journal takes a look at the role of lawyers in the events leading to BNP Paribas’s $8.9 billion settlement with the US Justice Department. The DOJ’s statement of facts filed with the plea deals discusses law firm opinions: one set from Law Firm 1 (Beck indicates this is probably Cleary, Gottlieb, Steen & Hamilton) and one opinion from Law Firm 2 (identified by Beck as Skadden, Arps, Slate, Meagher & Flom by the NYLJ but Clifford Chance by Bloomberg); neither firm has commented). The case is redolent of Standard Chartered Bank (where it is probably the role of General Counsel not outside counsel which gives rise to most concern).

Beck puts it like this:

In an attempt to evade U.S. enforcement actions, BNP executives avoided using BNP New York to process prohibited payments and used an unaffiliated U.S. bank instead. According to the government, the French bank relied on incorrect advice in an October 2004 legal memo from Law Firm 1. This memo “suggested that BNPP may have been able to protect itself from being penalized by U.S. authorities if it conducted these prohibited transactions through another U.S. bank.”

The nature of the advice in Law Firm 1’s memo cannot be concluded based on a few excerpts selected by the government. The memo warned of other possible problems with this plan: While BNP might not be penalized, the memo said that U.S. law would require the payments to be frozen or blocked by the U.S. bank.

Still, BNP employees latched onto this legal opinion to justify processing banned transactions through an unaffiliated U.S. bank, which is not identified.

This they did for three years or so, clearing large sums from sanctioned entities in Sudan. Beck carefully states, “It’s unclear from the government’s filing if Law Firm 1 knew about that concealment.”

Part way through those three years the picture changed. ABN AMRO Bank was fined $80 million (those were the days, sigh the banks) for violating sanctions laws. Law Firm 2 advised BNP that:

it could face criminal charges if it omitted identifying details from payments sent to the U.S…. Law Firm 1 wrote two more opinions reversing its earlier stance. The firm now stated that BNP could face sanctions even if transactions were routed through the U.S. bank, and that U.S. authorities had become sensitive to the use of “cover payments” that omitted identifying details.

BNP continued to process prohibited payments. Beck also says this:

The government’s filing also notes the complicity of BNP’s senior in-house legal and compliance staff. “[They] repeatedly recognized BNPP’s role in circumventing U.S. sanctions against Sudan, and yet allowed these transactions to continue in part because of their importance to BNPP’s business relationships and ‘goodwill’ in Sudan,” prosecutors asserted. Lawyers who expressed concern about the bank’s actions were rebuffed, according to the Justice Department.

As well as the fine:

The bank is expected to plead guilty in federal court on July 9 for conspiring to violate the International Emergency Economic Powers Act and the Trading With the Enemy Act.

It has also agreed to fire multiple senior executives and will lose for one year its ability to process certain transactions in U.S. dollars. No individual BNP executives were charged.

It is not indicated whether any of those executives were lawyers or almost as interestingly what happened to the lawyers who had previously expressed concern about the transactions (were they managed out at the time, left alone, were their careers affected?).

I have spent a lot of time recently researching how in-house and private practice lawyers think about ethics and their red-lines. The case is an interesting example of several phenomena.

Many lawyers will say they are merely technicians who advise their clients on their options. Clients take responsibility for any moral concerns. This principle of non-accountability has some merit in it, in certain circumstances, but also a great deal of danger. The lawyer’s advice is, “You could try this scheme. It is risky, I would not recommend it.” The client hears (or can say they hear), “You can try this scheme.” Each blames the other in the accountability game. It is particularly dangerous where lawyers give advice that something is probably, or more likely than not, defensible. To quote from Confidence Games on tax lawyers, this can be a ‘Get out of jail free card’ and lawyers have been willing to so advise where they do not believe their own advice. The claim to non-accountability is particularly weak where it is the lawyer who dreams up the scheme in the first place.

Lawyers will also say they have red-lines, where being asked to advise on something uncomfortable shifts into territory that they will not stray. Those red-lines are described in different ways but typically centre on something that is “criminal” or (worryingly) “clearly criminal”. Territory short of criminality often gives them some discomfort but is tolerated. What the advice from Firm One shows is the permeability of that boundary between criminal and civil breaches of the law. Lawyers who are too comfortable with advising on how to breach the law without it being enforceable or being likely to be enforced risk breaching their obligations to the rule of law, to say nothing of actions in fraud or dishonest assistance which might also result if the circumstances are right or they put a foot wrong.

The banking cases suggest that some lawyers need to wake up to the notion of accountability, have a proper discussion about their public interest obligations and formulate some useful guidance to keep their brethren out of trouble. The profession’s reputation depends upon it, but there are also more prosaic concerns. There are already arguments being made that corporations should not have advice privilege (see link for Andrew Higgins’ work) and limitations on privilege for in-house lawyers at the EU/competition law level. Legal professional privilege is granted on the assumption that lawyers counsel their clients towards legality. The more examples of lawyers doing the opposite, the harder it will be to justify that privilege.

Update: this Bloomberg story has a bit more detail on Firm 1’s second legal advice and how the French in-house attorney reacted to the advice.  The story indicates about a year and a half later Cuban payments, which had not been stripped of their identifiers (part of the process of avoiding detection) were stopped by the Bank.  These were unlawful under US sanctions laws and were blocked by the Bank because they had identified as Cuban transactions on the transfers.  They were reportedly then stripped of those Cuban identifiers, re-submitted and accepted.  The story then goes on to say:

a senior BNP Paribas attorney in Paris, wondering whether a U.S. investigation could be triggered, asked Cleary Gottlieb for advice. Cleary Gottlieb answered in a March 6, 2006 memo, saying the transactions violated U.S. sanctions — regardless of whether they were processed by JPMorgan or BNP Paribas’s New York facility. Cleary Gottlieb advised BNP Paribas to “consider discontinuing participation in any such U.S. dollar facility,” the statements of facts said.

A subordinate of the senior BNP Paribas attorney forwarded the Cleary Gottlieb memo to a bank compliance officer, drawing a reprimand from his boss who said “we now no longer have control,” according to the document.

The senior attorney then wrote to Cleary Gottlieb: “please suspend any further work on this file.”

So here’s the first question.  Has the client been informed, at the appropriate level of seniority and responsibility, of the relevant wrongdoing?

Posted in Uncategorized | Leave a comment

Independence Day? SRA Risk Outlook Sends Signals to the City

The SRA has issued its now annual report on risk in the solicitors’ profession, SRA Risk Outlook 2014/15: The key risks to the regulatory objectives. The report contains a league table of risks:

  • Misuse of money or assets
  • Money laundering: inadequate systems and controls
  • Bogus firms
  • Lack of a diverse and representative profession
  • Failure to provide a proper standard of service (especially quality to vulnerable clients)
  • Breach of confidentiality: information security and cybercrime
  • Lack of independence

Alongside bogus firms in breach of confidentiality, lack of independence are “new entries” into the professions risk outlook. It is the latter which caught my eye. It suggests a renewed interest in regulating the professional obligations to uphold the rule of law and the proper administration of justice and to behave independently.

The SRA reports that, “we have seen cases where pressure from influential clients has compromised firms’ prioritisation of the public interest.” The report goes into greater detail:

 Lack of independence

Promotion of a client’s interests, or a desire to maximise commercial return, should not override wider obligations to the public interest and the proper administration of justice We acknowledge that the professional principles can, and do, come into conflict with each other However, when professional principles come into conflict, the one that best serves the public interest, in the particular circumstances, prevails There is an increasing trend towards corporate buyers of legal services, such as financial institutions and large multinational businesses, having sophisticated in-house legal departments This can change the balance of power between the client and their legal advisor Those we regulate must ensure they prioritise their obligations to act in the public interest, in accordance with their duties to court, and must resist client pressure which may adversely compromise their professional independence

Failure to act with integrity or ethics: improper or abusive litigation

Improper or abusive litigation is the misuse of legal proceedings (or the threat to bring proceedings) for unethical gains, either for the law firm, its clients or both. This is done by exploiting a client or third party’s lack of knowledge of the law or the lack of resources available to them. We have seen several cases where the justice system has been manipulated so that a firm can increase its financial return. This type of litigation is contrary to a solicitor’s duty to act in the public interest and has a significant negative effect on the public’s perception of the profession

The report argues that:

This risk is widespread, but is most relevant to firms engaged in corporate or city-based legal work. It may also be significant when a firm is reliant on a single or limited number of clients. Maintaining independence is also relevant to in-house solicitors, who may come under pressure from their employers.

It warns that, “sophisticated in-house legal departments,” exert greater scrutiny of, and pressure on, external law firms. “This can lead to law firms being presented with ‘take it or leave it’ contracts or prescriptive or onerous terms of engagement.”

Pressures law firms must manage include:

  • pressure to breach ethical or professional obligations – for example, to use a firm client account to provide a personal banking facility, or to mislead the court, or to breach duties of confidentiality to other clients
  • control over which clients the firm can and cannot act for – this could erode access to justice, particularly if the firm is one of few specialists in the area
  • being clear about who constitutes ‘the client’ – for example, when acting for a corporate client this may mean distinguishing between the interests of the client’s shareholders, its management and the individual who commissioned the legal advice These interests are not always aligned

The proposal appears to be to mainly pursue this through supervision relationships (the report is silent on enforcement in relation to the cases it has seen):

Through our supervision of firms we will explore how these risk are managed by law firms and aim to understand better the challenges firms face. We will share best practice on how firms manage these issues and balance their ethical responsibilities with commercial success

On abusive litigation the report emphasises:

  • firms being criticised by judges for aggressive correspondence in corporate litigation or accused of unethical conduct towards witnesses or their statements
  • judges highlighting serious concerns that ‘frivolous’ litigation was being brought forward by lawyers
  • he High Court warning that immigration solicitors face referral to the SRA if they make ‘abusive’ judicial review applications which fail to follow proper procedure
  • a number of cases where judges have dramatically reduced excessive costs claimed in litigation by over 90%

The SRA does not name names but it is not difficult to think of examples of the kinds of thing they might mean. I have expressed concerns or raised questions about cases involving Standard Chartered Bank, the Times, Clifford Chance, News International/NOTW, Harbottle and Lewis, Farrers, Allen & Overy, Stewart Law and Jeffrey Green Russell. Some of these cases have been investigated. Some may yet. Evidence given in the recent trial of News of the World employees suggests further concerns may yet be revealed.

On the cybercrime front of the following alarming case study is offered:

Large law firm loses data to hackers

A solicitor at a large law firm received an email which looked like a message from the firm’s answering machine service He opened it, and this activated software to install a program called CryptoLocker

Once CryptoLocker had downloaded, it encrypted all the client and office files held by the firm, and a message came through that if the firm wanted the files decrypted, they would have to pay a £1000 ransom within 40 hours If they did not pay the ransom by the stated deadline, the encryption would become permanent and the firm would never be able to retrieve their files.

The firm’s IT department tried unsuccessfully for 2 days to break the encryption At this point, the firm tried to pay the ransom. However, the deadline had expired and so the files could not be recovered. The firm had to explain what had happened to all their clients A number of clients’ cases were severely affected, with court deadlines being missed

This could have been prevented relatively easily CryptoLocker does not spread across networks, and the only files it can encrypt are those that the user who opens the email can access Therefore, the only reason it affected all of the firm’s files was because the member of staff who opened the email had access to them all. In addition, the firm did not have remote backup of any of their files. If they had done, they would have been able to access the files from the backup and the attack would have failed

The report is silent on the identity of the firm. I do not know if it is emerged elsewhere. One can understand the SRA’s reticence, but also note in passing the broader regulatory emphasis on disclosing quality and ethics relevant material to clients (such as consumer complaints). Whether the SRA should disclose the name of the firm or not, I imagine this sort of information is being sought by sophisticated clients as part of their due diligence and taking firms on. I certainly hope so. What will happen where such breaches occur in firms serving less sophisticated clients? Will the SRA act? Would that be fair if they have allowed City firms anonymity?

There is perhaps less an emphasis in the report on changes in the market which are now seen as drivers of risks in and of themselves. Some hints of the extent of market change are indicated by the following statistical nuggets from the report:

  • the market share of the top ten conveyancing firms increased from five percent in 2010 to ten percent in 2012 17
  • in 2006 sole practitioners made up 41 percent of the profession; in 2013 this had reduced to 29 percent
  • there were 60 percent more law firm mergers in 2012 than in 2008
Posted in Uncategorized | 2 Comments

Snake Hall II (or) Tax Avoidance and the Sex Lives of the Potato Men

Ok, so you all seemed to like the Snake Hall post and several of you wondered out loud whether there was something similar going on in the UK (I issue here the obligatory *innocent face*).  I am not qualified to comment, but a very interesting tax barrister Jolyon Maugham (follow him on twitter folks) has written this blog post which suggests that the role of some at the tax bar (and, although he does not seem to say this, he may mean also solicitors’ firms) may bear scrutiny as not as independent or professional as others.  He points to some of the same issues that the Confidence Games book points to, and he neatly identifies the importance of the role of advisor as gatekeeper in such circumstances – he refers to it as policing.

He cautions too about being too simplistic about labelling tax avoidance good or bad: it can be either, or it can be ambiguous.  See here and here.  As he notes, and this is clear too from the Confidence Games book, the devil is in the detail, along with lots of numbers and the sex lives of the potato men.  One might be tempted to say here as someone called Dave apparently does in aforementioned film, “I think you’re focusing too much on the crazy aspect, and not enough on the paving side of it.”* but Jolyon moves on from the little pictures to the bigger one with something important to say.

The kinds of problems he canvasses are similar too, but less egregious than the US examples: high fees, relationships of *ahem* mutual advantage.  The US examples are strengthened by a great deal of evidence about how and why schemes were developed and the way in which they were executed which rendered ambiguous tax arrangements clearly abusive. These were prompted by prosecutions and investigative journalists looking hard at the professionals.  I’ve not seen similar evidence here, but that may just be my failing.

He indicates too – particularly interestingly – that there are ‘powerful structural forces’ at work.  He is not generally talking of the kinds of specific collusion that make Rostain and Regan’s book so interesting, though there may well be a bit of that lurking in the background, but he does provide an important indication that regulators may need to pay greater attention to the incentives which help structure ethical decision making in tax and elsewhere.  Both Maugham, Rostain and Regan would agree, I think, that bad tax avoidance is not all about a few bad apples. There are ways in which the barrels may be, or are, bad. He puts it like this:

So there are ‘powerful forces’ – to put the matter politely – operating in favour of saying ‘yes’. There are also powerful internal and external controls on saying ‘yes’: not least, your reputation and the inclination of insurers to indemnify you against the consequences of giving poor advice. I think most barristers at the tax bar get the balance right. But several do not.

This aspect of the tax industry has, rightly, exercised Margaret Hodge (although you should not rely on as accurate the particular individuals she has named as offenders under cover of parliamentary privilege). But, more importantly, the account given above should spark further ideas as to how one might tackle tax avoidance. In a quiet, but effective, and pro-growth sort of way. I’ll come on to those another day.

I am looking forward to it.


* I should point out that I just googled the quote.  I have not seen the film.  I don’t like the Inbetweeners either.

Posted in Uncategorized | Leave a comment

Snake Hall: the games tax lawyers have played

I recently finished Wolf Hall by Hilary Mantel, a truly brilliant novel about the ascent of Thomas Cromwell to political and legal power in Tudor England.  There is something of the intrigue and drama of that in Confidence Games: Lawyers, Accountants, and the Tax Shelter Industry  by Tanina Rostain and Milton C. Regan.  The book is a detailed investigation of a series of abusive tax shelters in the US between 1994 and 2004 whereby Rostain and Regan say, “law firms, accounting firms, and financial institutions involved in the shelter industry…  perpetrated fraud not only on the government but also on their own clients.”

Rostain and Regan set out the role of a number of factors in the scandals: profit per partner metrics (e.g. one firm took a too good to be true partner into their fold for the income he extracted out tax schemes through ‘value billing’); legal professional privilege (notably, but not solely, its extension to accountants – coming to an ABS near you); confidentiality agreements (clients sometimes had to pay to entering into tax avoidance discussions which were then subject to confidentiality and tax litigation was often compromised on a confidential basis); mis-selling to clients; and so on.

The main role of the lawyers was in the design of dubious structures (either in-house at accountants firms or in collaboration with accountants from ‘prestigious firms’ in private practice) and in the provision of independent opinions that tax shelters ‘more likely than not’ met tax rules.  These opinions were highly remunerative, and were designed to induce clients into purchasing the tax deals and then protecting them from liability should the deals turn sour.  They were also fictions: based on facts which did not exist.

If a lawyer gave an opinion that it was ‘more likely than not’ that a deal met tax rules, then that provided clients with a ‘get out of jail card’.  They could say they were advised it was legal.  Interestingly, counterparties in the deals sometimes advised on different bits of the transaction: each sought to rely on the other’s assertions that part of the deal was ‘more likely than not’ legitimate to build the case that they could give an opinion.  Each slightly de-responsibilised the other.  Often ‘Cookie cutter’ opinions were given by private practitioner firms that lacked any semblance of independence.  The opinion givers were influenced by their own roles in the design of schemes and the hefty fees they were granted.  One firm became known as ‘Opinions R Us’. Business imperatives for purely tax motivated transactions were invented.  Clients were coached on these imperatives after the event to try and push back on IRS (the US inland revenue service) scrutiny.  Aggressive, sometimes rogue, tax lawyers were allowed to grow significant practices on the back of this approach by firms who lacked the expertise to scrutinise, or perhaps inclination given the amount of money rolling into partnership coffers.

Lawyers and accountants also designed and managed processes to reduce the likelihood of tax shelters being audited (and so challenged) and helped massage client files in the hope that tax shelters looked like real investments not shonky deals.  Incriminating documents were shredded.  Marketing documents, making plain the motivation of tax schemes, were spirited away.  These deals were sometime supported by loans from banks that were loans, “in name only, since the funds were not permitted to leave the bank.”

Entertainingly, acronyms used in the businesses promoting this kind of work were often built around snake machismo: Cobra and Viper and ‘Tax $ell$’.  If culture eats strategy for lunch, as Drucker says, then the culture was cash and getting the deal done quick. Lunch was billions of dollars on the US deficit and millions in professional service fees charged on a percentage basis.

The authors emphasise:

Spanning the decade between 1994 and 2004, the abusive tax shelter crisis likely represents the most serious episode of lawyer wrongdoing in the history of the American bar….

Among the factors that contributed to the emergence of the abusive shelter market were a lax regulatory environment and a highly competitive market for professional services…

By charging a percentage of the supposed tax savings on a high volume of shelters, firms could escape the constraints on growth imposed by the hourly fee structure….

The accounting firms that were most deeply involved implemented organizational incentives that encouraged tax shelter development and marketing. Tax leaders at these firms also created organizational structures and cultures that celebrated tax shelter activities and channeled specialized expertise into devising transactions that involved hypertechnical interpretations of the tax code in order to help clients evade billions of dollars in taxes….

At law firms, tax shelter work was not institutionalized to the same degree. Loose partnership structures allowed tax shelter lawyers to work semiautonomously with little or no oversight by the rest of the firm….

At Jenkens & Gilchrist [a Texas based law firm who took on an aggressive lawyer, gave him a culture busting eat what you kill deal and marginalised the doubters ], repeated failure to appreciate the risks of a tax shelter practice led eventually to the demise of the firm. Other law firms survived but ended up paying substantial penalties

One of the interesting themes of the book is how a traditional ethos of professionalism, client focused but with restraint out of respect for the law, was undone by the profit motive of individual lawyers and, in particular, the large accounting firms.  With a debate currently breaking out about the ethicality of reporting PEP it is a salutary to note that Jenkins & Gilchrist were partly undone by a desire to get their Am Law 100 rating to improve sufficiently for them to be able to open a New York office.

The traditional view is expressed in this way:

The value to clients of a lawyer’s advice rested on the lawyer’s capacity to provide independent judgment about how a court would treat the tax benefits claimed for a transaction. This judgment was informed by a sense of the internal coherence of the provisions at issue, the salience of judicially created standards, and an understanding of at least a general set of basic principles that animated the Internal Revenue Code.

Elite practitioners regarded the exercise of such professional judgment as the feature of their practice that distinguished them from mere technocrats who provided advice based simply on the literal terms of the tax code. The lawyer’s aim was for the client to take a position that didn’t raise concerns with tax authorities, rather than a position that on balance would be financially advantageous even if challenged by the government.

That view was challenged by accountants (or perhaps it might be more accurate to add by lawyers within accountants) with a more technocratic view; and incentives which saw tax work as a revenue generator rather than the icing on the cake at the end of a deal.  Plus, “If lawyers in elite firms failed to give their blessing to a transaction, clients were prepared to shop around to find a lawyer who would.”

Rostain and Regan are careful to acknowledge that the ‘traditional’ tax bar was not uniform or to naively over-claim public spiritedness by the traditionalists.  They plausibly argue for a constellation of factors which pushed tax practice significantly towards a client zeal model which violated professional and legal norms.  In fact their client zeal was a masquerade: they put their businesses first and risked their clients’ interests.  It’s a book which also gives a fascinating insight into how groups of professionals work together; pressurise each other; and let unethical practice slide under their radars.  People within these organisations spoke out and were ignored, pressured or subverted.  The money rolled in.  And then it didn’t.  And after that came a rather large storm cloud… luckily for of them, it was not Tudor-style.

Posted in Uncategorized | Leave a comment

Is sustainability improving corporate and professional ethics?

The ethical dimensions of in-house practice are a significant source of academic and practical interest, as the recent investigation of GM suggests.  I have the pleasure of doing two projects where I engage with in-house lawers on ethical questins: one on the ethics of legal practice and the other on legal risk.  So it was with great interest that I read Bond Dickinson report Beyond Responsibility:The emerging role of legal counsel in sustainable business.

It is a recent contribution to the idea that, “sustainability presents real opportunities for in-house lawyers to make a valuable commercial contribution beyond purely legal [and envrionmental] issues,” Says Victor Tettmar, BD’s Executive Partner.  Based predominantly on a  survey of 51 senior in-house lawyers the report states:

  •  Three quarters (75%) of the senior legal counsel we asked in the course of this project said that sustainable business goals are seen as an important or integral part of value creation for their organisation.  As one respondent put it, “I am of the absolute conviction that sustainability is inextricably linked to business performance.”
  • 72% believed that over the next five years sustainability will be integrated into organisational strategy with commercial decision making rather than regulatory pressure seen as the main driver.
  • 66% of respondents said that the sustainable business agenda of their organisation has impacted on their own role, and/or the work of the legal team.

Quite what is meant by sustainabilty is a little less clear but:

 “For some, the focus may be on corporate governance and resource security in the supply chain. For others it may be service or product innovation to meet future customer needs. For others still it may be ensuring a resilient, skilled and motivated workforce in the face of changing social norms. All these endeavours have significant legal dimensions.”

And the way in which the legal role is changing may be seen as subtle:

 “This could be through contracts and transactions, corporate structures and policies, promoting a culture of best practice in sustainability, advising on ethical as well as legal considerations, and giving forward-looking commentary on legal developments to business units.”

Somewhat contrarily to the idea that sustainability is a positive, “Lawyers are approaching sustainability first and foremost as an organisational risk factor.”  They may also ‘system engineer’ alignment between sustainability aims and other corporate policies and processes” and seek to contribute to strategic evolution of sustainability within the company, it is said. There is also the not uncontroversial claim that:

“Many in-house lawyers recognise a need to create and protect ‘moral capital’ for their organisations, as increasingly well-informed stakeholders expect businesses to not only do what is ‘legal’ but what is ‘right’. Lawyers’ training and skills in dealing with ‘the rules’ make them well equipped to help their organisations make wise decisions in the context of these changing ethical dynamics.”

An interesting question for me is the extent to which agendas such as sustainability open up a space within which lawyers can explore public interest dimensions to their work or whether this is a form of reputation management (with both positive and cynical dimensions to that).  Public interest dimensions are an aspect of their professional code, but rarely recognized by lawyers as such.  Do lawyers’ prefer to look to the client or the business for ethical leadership?  A client first mentality tends to suggest to me – with exceptins, this is a generalisation – that they do.  Sustainability agendas (similarly business and human rights initiatives, such as the Law Society;s work on the Ruggie principles) may prove to be tentative steps towards a fuller engagement professionally.

Reports like this are often couched in terms of how sustainability presents a career opportunity for in-housers (this report plays that tune but lightly).  And if one subscribes to the importance of believing in doing something because it is right, rather than because it is remunerative, there are moments of rather despairing ‘business case-ism’.  I noticed this not so subtle reversal of priorities:

 He’d just realised that climate change was not just about ethics. It was a business imperative.

But it is a commercial world, and one may have to live with occasional crassness to see the opportunities for ethical improvement in the corporate and professional world.

The report can be read here.

Posted in Uncategorized | Leave a comment

Moral banks and moral lawyers: US regulator singles out the ethics of lawyers…

I attended and spoke at an interesting event yesterday, hosted by BACFI and the Commerce and Industry Group.  Sharon Bowles MEP spoke of her concern that the way outside advisers (lawyers and accountants) marketed and provided their services were part of a matrix of factors contributing to ethical decline in finance.  She’s tried to get some law introduced at the EU level to inhibit what she calls aggressive regulatory arbitrage.

David Kershaw and I have set out in our piece on Lehman Brothers some reasons for our anxiety and I have developed some related themes in my Precarious Professionalism piece.  That anxiety was underlined by a piece in the FT recently alleging a US firm had been pressured by Lehman into changing its legal advice to support unlawfully inhibited disclosure.  The recent events at GM (see also here) are a reminder that ethical issues around lawyers are not confined to banks (or newspapers).  It was against that backdrop that I note (h/t Bryon Fong) with interest the following passage in a speech by Kara Stein an SEC Commissioner to a compliance conference where she talks about the gatekeeping role of many professionals associated with, or working within corporations:

But one gatekeeper that often is absent from the list of cases I see every week are the lawyers.  Lawyers often serve as trusted advisers, and they give advice on almost every corporate transaction.  They prepare and review disclosures that investors rely upon – disclosures that are at the core of the Commission’s regulatory program.  And in most cases, they do a good job.  But when lawyers provide bad advice or effectively assist in a fraud, sometimes their involvement is used as a shield against liability for both themselves, and for others.

Are we treating lawyers differently from other gatekeepers, such as accountants?  I think we should carefully review the role that lawyers play in our markets, with a view towards how they can better help deter misconduct and prevent fraud.

One way lawyers are treated differently in this country is privilege.  The accountants lost the battle to gain it through the Supreme Court.  They will now take up that battle more subtly in the context of ABSs.  Interestingly, a new book by Tanina Rostain and Mitt  Regan alleges that giving accountants something akin to professional privilege in the US accelerated the abusive (and unlawful) tax work.

The US has a stronger history of scrutinising and investigating lawyers than the UK does.  Are they moving towards ratcheting up that scrutiny or is Ms Stein flying her own kite?  Might regulators here take a similarly heightened interest?  Whether the lawyers duties are framed as a failure to competently promote the proper (long term) interests of the Company or as a failure to properly uphold the rule of law and the proper administration of justice (as per the Solicitors Code of Conduct), there appears to be a growing recognition that ethics is not just the client’s problem.

Posted in Uncategorized | 2 Comments

We set up a Public Defender by mistake…

For those of a certain age, and I suspect gender, the script of Withnail and I is engraved on their forever-a-student tender hearts.  The eponymous out of work actors stand on a Lake District* hillside in the pouring rain having escaped London for a few days.  They are without food or a plan, wretched in their own predicament.  “We’ve gone on holiday by mistake,” says Withnail, as he begs the farmer for help with food.  So it may prove that the Bar, in the pouring rain that is legal aid cuts, may be forced to reflect that they have helped set up a Public Defender advocacy service by mistake.

The President of the QBD, Sir Brian Leveson, handed down the court’s judgment on the Operation Cotton stay, reversing that decision and giving the first instance judge a bit of a ticking off in the process.  You can read the judgment here.  Reading between the lines a bit the judge was criticised for deciding the case on a basis not put, on a basis that was illogical, stating the importance of rising above the politics of industrial action by the Bar when he could be more accurately seen as supporting it and straying beyond the proper role of the judiciary.  Leveson could have been gentler if he’d chosen to. It is signifcant that he was not.

More significantly still is Leveson’s finding that if the PDS are the only suitable advocates willing to take the case then the defence are obliged to instruct them in time for trial. HHJ Leonard’s finessing of the choice arguments around Article 6 of the ECHR got short shrift (which do not require  a choice for those defendants being state funded).  A crucial passage is this:

Mr Cameron Q.C rightly did not argue that this court should make any qualitative distinction between advocates recruited to the PDS and advocates in private practice; neither did he demur from the proposition that Article 6(3)(c) of the ECHR does not
permit the legally aided respondents to hold out for independent counsel of their choice to become available. In relation to the QCs, the advocates concerned will have achieved that rank whilst in private practice, and the appointment to that rank is taken to carry with it the recognition that its holder is especially competent to take the lead in criminal cases of particular gravity and complexity. Further, it is a reasonable inference that, in recruiting advocates as a response to the impasse which had arisen between the Bar and the Lord Chancellor, the PDS was recruiting those of sufficient competence and experience properly to perform their roles in a VHCC case.

I thought a point about conflicts of interest might have some traction.  A PDS is one service, more like a solicitors firm than a barristers chambers.  Leveson appears to give this short shrift:

in any event, there was a concern about potential conflicts of interest. This last issue has since been resolved on the basis that the approach to be adopted by those employed by the PDS reflects the approach taken by independent members of chambers (who frequently act in the same case for those with conflicting interests): before us, Alexander Cameron Q.C. for the respondents accepted that the point had little value.

Little value, not no value – and I wonder if the issue of confidential information has been thought through – but one can easily see how a court would maintain Leveson’s line.  An interesting question, if it does, is what that means for conflicts of interest rules in solicitors practices in crime and elsewhere.

It may have been with Jeffreyian irony that the President issued a homily to the virtues of the private bar at the end of the judgment.  A more likely interpretation is that it is the grieving that accompanies his realism.  This judgment says pretty clearly (and subject to any appeal to the Supreme Court) that the PDS can take the Cotton cases.  It is still raining though.  There are other VHCC waiting in the wings: the likelihood is that the PDS will have to run to catch up; the Bar will back down; or, a fresh deal will be struck between the Bar and Grayling.  In the face of an expanding PDS, the senior bar now has a difficult decision to make, can it really take VHCCs after all?  If it starts accepting instructions then the PDS advocates may be starved of work, but the Bar’s claims not to have been able to take VHCCs as uneconomic will look a little opportunistic and – though no one will take the point – a breach of our old friend the Cab Rank Rule.


*I have to confess to an earlier version of this post which placed the crucial action from Withnail in Wales.  Mea culpa, and thanks to David Allen Green for spotting the fatal error.

Posted in Uncategorized | 6 Comments