February 2009


In this issue:
Ethical Conflicts and In-House Counsel
OLSC Web/On-Line Surveys
Recent Papers - Legal Education and the 21st Century Law Graduate and Implementing Anti-Money Laundering Legislation and the Professions


Ethical Conflicts and In-House Counsel
The global financial crisis has prompted much discussion over the past few months, and as the community engages in debate about how to cope with the growing debt corresponding discussions have been taking place about who is to blame. Fingers are being pointed everywhere and everyone is talking but the discussions took a controversial turn on 26 January this year when a UK newspaper, The Guardian, published an article entitled “25 people at the heart of the meltdown.” The article identified, as the title suggests, 25 individuals that caused the crisis, for the first time publicly named and blamed. Since being published the article has sparked an array of comment and blogging about who really is to blame – and as the discussions have developed the list of people facing condemnation has expanded considerably and now includes the lawyers. As Richard Ackland recently stated, “every other professional and quasi-professional group is in the frame….why not toss lawyers in as well?”

Ackland’s comment may not be as facetious as it suggests. The legal profession is more than indirectly involved in the financial crisis. The lawyers were the ones who advised on the deals, approved the paperwork and facilitated sometimes questionable transactions. Commentators have estimated that by the end of this year over 630 lawsuits related to the sub-prime meltdown will have been filed in federal courts in the United States alone since the crisis arose. Similar lawsuits will invariably be filed in Australian courts. Allegations against lawyers may include failure to disclose, unfair and deceptive trade practices, discrimination, fraud, insider trading, failure to monitor, misrepresentation, negligence and breaches of fiduciary duties. A large number of these may include claims against in-house counsel, who will attract much greater scrutiny of their role. This is not surprising especially when one considers the proliferation of the use of in-house counsel and the difficult position they hold.

Over the past decade there has been a considerable increase in the size and sophistication of the modern in-house legal department. This increase is, according to commentators, the result of the proliferation of transnational legal practice, the rising costs of legal services, an increasing number of claims against lawyers and complex professional regulation. Today some in-house counsel sit on the board of directors and are considered among the top officers of the company. Chairman have much greater expectations of in-house counsel in helping them to discharge their duties than ever before. As a result in-house counsel are expected to have business acumen and maintain current awareness regarding corporate governance and risk issues. They are also expected to maintain open communications with other business units and be “in the know.” In-house counsel today have become, in effect, gatekeepers of the corporate community.
The Office The Legal Services Commissioner
The term “gatekeeper” was first used by Professor Reiner Kraakman to describe the role of professionals in corporate reporting and the capital markets. Kraakman used the term to describe the function of outside directors, accountants, lawyers and underwriters in using their good reputation to prevent corporate misconduct. As third parties they are uniquely placed to act as private party monitors on behalf of the market, by withholding a specialized good, service or certification needed for the misconduct to be permitted. The concept was revitalised in the Enron debacle, with some concluding that the failure of Enron was more a failure of “gatekeepers” than the Enron Board. Since Enron, the use of in-house counsel as gatekeepers has increased considerably, particularly in the United States since the passing of the
Sarbanes-Oxley Act 2000.

Section 307 of the Sarbanes-Oxley Act requires counsel who discover credible evidence of a material violation on the part of an issuer or its agent to report the evidence “up the ladder” within the issuer to determine whether an “appropriate response” has been undertaken. These rules can act as a “safe harbour”, permitting counsel who follow them to equate them with the due diligence standard to which they will be held. Inhouse counsel can face a wide array of penalties if they fail to carry out their compliance duties. The American Bar Association has further defined the duties of the in-house counsel, instructing them to act in the best interest of their employer when dealing with illegal conduct by executive officers.

As gatekeepers, in-house counsel today represent the moral conscience of their organisation. This is not a role that inhouse counsel have readily embraced. It is a demanding and challenging role especially if one’s continued employment may be in jeopardy. In assuming the gatekeeper role in-house counsel are however in a position to ask questions that are rarely asked like – just because it’s legal, should it be allowed here? How is the public served by our behaviour? How would this look on the front page of the newspaper? If allowed, will other employees see it as an excuse to go farther? Is there any reason preventing us from erring on the side of caution and taking the high road? Asking such questions can however become difficult if there is tension between the desired ethical behaviour of employees and the commercial and business goals and objectives set by senior management.¹

In-house counsel can experience situations where they are asked by both junior and senior employees to do
something that raises an ethical dilemma. A common source of conflict is when employees ask in-house counsel for advice about an issue personal to them (e.g. reviewing an employment contract). Other common dilemmas include a CEO who is reluctant to disclose information relevant to an upcoming vote by the board and asks in-house counsel not to disclose the information; or a CEO’s request that the in-house counsel generate business or garner political favour by using his/her legal contacts. Another common dilemma is a CEO’s request that in-house counsel serve on a committee tasked with the responsibility of overseeing or governing an activity, which the in-house counsel, had helped design or implement. Similarly what about the situation where in-house counsel is asked to draft a document in a way that achieves a successful outcome for the corporation. Knowing that the obligation of an in-house counsel is to the organisation as “the client” but that there is a higher duty to the administration of justice – what should the in-house counsel do in each of these instances?

Notwithstanding the fiduciary obligation of loyalty that stems from the lawyer/ client relationship, in-house counsel must reject the corporation’s requests if they undermine their primary duty to the administration of justice and the rule of law. With this in mind there are questions in-house counsel should ask to ensure that they are not putting their position in jeopardy:

1. Who is your client?
2. Am I being asked to give advice to someone other than my actual employer?
3. Do I have a personal interest in the matter I am being asked to give advice on?
4. Am I being asked to give advice that is against the law?
5. Is the communication subject to legal professional privilege?
6. Where do my duties lie?
7. Is it appropriate for me to give advice on this matter or should I obtain independent advice?

In-house counsel should also recall the best practice guidelines “Ethics for In-House Counsel” published by the Australian Corporate Lawyers Association in conjunction with the St James Ethics Centre.