Different Roles of the Lawyer · 4-10% of the exam
19.4.2External Reporting and Sarbanes-Oxley (Rule 1.13(c)–(e) / SOX)
On this page
- Rule 1.13(c) — External reporting (permissive)
- Rule 1.13(e) and the dual director-lawyer role — back to the Model Rules
Why
Internal escalation works only while someone inside is still willing to act. When the top of the organization is itself the problem, a lawyer bound to silence becomes the last thing standing between a fraud and the people it will hurt. Congress and the ABA answered that dead end differently, which is why two regimes sit over one set of facts.
Plain English
Where the lawyer's own efforts come up short — the highest authority presses ahead with, or fails to respond timely and properly to, an action or refusal to act plainly amounting to a violation of law — and the lawyer reasonably believes substantial injury to the organization is reasonably certain, the lawyer may reveal information, only so far as needed to prevent it, and not where engaged to investigate or defend the allegation.
SOX instead requires escalation once the CLO's response falls short.
Context. The Model Rules give the organizational lawyer a permissive option to report outside when the highest authority fails. SOX is stricter: when the chief legal officer (CLO) fails, escalation to the board is mandatory for qualifying securities lawyers.
Rule
Rule 1.13(c) — External reporting (permissive)
Where the lawyer's own efforts come up short —
the highest authority either presses ahead with, or does not timely and properly respond to, an action or refusal to act that plainly amounts to a violation of law — and
the lawyer holds a reasonable belief that substantial injury to the organization is reasonably certain to follow,
the lawyer is permitted to reveal information tied to the representation, even where Rule 1.6 would otherwise protect it, but only so far as disclosure is needed to head off the injury. This permission falls away where the lawyer's engagement was specifically to investigate or mount a defense against the alleged violation.
Sarbanes-Oxley (SOX) — Mandatory duties for securities lawyers
Who qualifies: Lawyers representing a securities issuer who practice before the SEC or advise on SEC filings or on whether filing is required.
Mandatory initial report: Once the lawyer has credible evidence pointing to a material violation of securities law — or to company personnel having breached a fiduciary duty or having engaged in any similar material violation — reporting to the CLO — or to both the CLO and the CEO — is required.
CLO's duty: The CLO then investigates and reports back to the securities lawyer with either
(1) a finding that no violation took place, or
(2) an account of the reasonable steps taken to secure an appropriate response from the client.
Mandatory escalation when CLO fails: Should the lawyer reasonably conclude that no appropriate response was obtained by the CLO, the lawyer must carry the report further — to the board, the audit committee, or a committee of outside directors.
Discretionary SEC disclosure: Client consent is not required for the lawyer to share confidential information with the SEC, so far as the lawyer reasonably believes necessary:
to prevent a material violation likely to cause substantial injury to the financial interest or property of the issuer or its investors;
to prevent the issuer from committing or suborning perjury, or from perpetrating a fraud, in a Commission investigation or administrative proceeding; or
to rectify the consequences of a material violation that caused or may cause that substantial injury and in furtherance of which the lawyer's services were used.
Protection: A securities lawyer who complies in good faith with SOX is shielded from civil liability and is not subject to discipline or otherwise liable under inconsistent standards imposed by any state. A lawyer fired for complying may bring the discharge to the board's attention.
Rule
Rule 1.13(e) and the dual director-lawyer role — back to the Model Rules
Rule 1.13(e) — Discharge and withdrawal. Where the lawyer reasonably believes the discharge followed from Rule 1.13 actions — or where the lawyer withdraws in those circumstances — the lawyer must see to it that the organization's highest authority is put on notice. A noisy withdrawal under Rule 4.1 Comment [3] remains available: the withdrawal itself can signal disassociation from the representation without confidential information leaving the lawyer.
Dual director-lawyer role: When the lawyer is acting in the director capacity rather than the lawyer capacity, attorney-client privilege does not attach. If the two roles carry a substantial conflict risk together, the fitting response is to step down as director or to stop serving as the organization's lawyer.
Example 1
Ex. 1
Kim served as general counsel of a public company. She received credible evidence that the CFO had been inflating revenue figures in SEC filings for the prior year. Kim reported the matter to the CEO, who also held the title of CLO. The CEO acknowledged the issue and took no remedial steps for three weeks; Kim had no reason to believe an investigation had begun. Kim must now escalate. She qualified as a securities lawyer, made the required initial report to the CLO, and reasonably believed no appropriate response was obtained. Escalation to the board of directors, the audit committee, or a committee of outside directors is mandatory under SOX — the Model Rules' permissive language doesn't govern this step. Complying with SOX in good faith shields Kim from civil liability and from discipline under inconsistent state standards. Name the failure in Kim's facts before you pick the verb: it is the CLO's, not the board's.
ABA: board inaction permits outside reporting (permissive). SOX: CLO inaction requires escalation to the board (mandatory). The two directions are opposite. SOX's trigger is credible evidence of a material violation, not confirmed harm.
Trap
Questions · 2
Q 01ch19-e09
Question 1 of 2 · Rule 1.13(c)
A company that operates a chain of storage yards retained Attorney for one purpose, to look into a whistleblower's claim that the company's officers had been billing customers for insurance coverage the company never bought. Attorney found the claim true and reported it to the board of directors. The board heard the evidence, said the practice would continue, and refused to address it. Attorney reasonably believes the practice plainly violates law and is reasonably certain to cost the company far more in restitution and penalties than the billing has ever earned. May Attorney reveal information relating to the representation to prevent that loss?
Keys 1 to 4 choose.