When Enron filed for Chapter 11 bankruptcy protection, attention was focused on political implications and not corporate governance concerns. Then as fraud and corruption involving numerous other corporate entities surfaced, the focus swung from politicians to companies' top management, accountants, and brokers. WorldCom took Enron's title as the largest Chapter 11 bankruptcy filing in history on July 21, 2002. These companies were attractive to the investing public as officers allegedly concealed or misstated financial information to make profits appear larger.

     Tyco's scandal added to the mix by implicating blatant misuse of corporate funds for personal use; the former CEO and CFO allegedly took $170 million for personal use through improper bonuses and forgiven company loans.

     Yet the lying and stealing does not stop at the companies' suspected misstatement and misuse of funds. Also involved in widespread fraud were large brokerage firms and accounting firms. On May 21st the SEC required structural reform, a statement of contrition, and a $100 mil fine for mishandling of investor accounts by Merrill Lynch. Then, Arthur Anderson, one of the Big Five Accounting Firms, was found guilty on June 15th of obstruction of justice for its involvement with Enron, becoming the first accounting firm ever to be convicted of a felony.

     The purpose behind the suspected fraud and corruption is simply to make corporations appear more profitable than they are in order to raise investor confidence to purchase stock.

     Congress responded with a call for broad reforms; the Act is the most extreme reform of federal securities laws since the 1930s. Its reforms are aimed at alerting shareholders to a company's financial vulnerabilities so that investors are not fraudulently induced to purchase stock. The Act completely overhauls corporate governance through reform provisions such as disclosure requirements and officer, auditor, and attorney rules of conduct.

     Two prominent issues raised by the Act are new professional responsibility rules for attorneys (§307) and whistle-blower protections (§806, §1107).

Edwards Amendment May Harm Attorney-Client Privilege

     The Edwards Amendment, Section 307, places a "duty to report" improper activity on corporate counsel. This Amendment raises questions as to the proper role of counsel in reference to the attorney-client privilege. The attorney-client privilege mandates that a lawyer cannot reveal any information relating to the representation of a client without the client's consent. As clients affected by the Edwards Amendment are corporations, the privilege covers communications between the lawyer and a high-ranking corporate official.

     Section 307 of the Act dictates new "Rules of Professional Responsibility for Attorneys." It requires an attorney to report to the CLO or CEO evidence of a corporation's violation of the law. If the CLO and CEO do not respond appropriately (through remedial measures or sanctions), the attorney must then report the violation to the audit committee, the board of directors, or other committee of directors not employed by the issuer.

     The Amendment requires the violation of the attorney-client privilege as the attorney may be required to report things learned in confidence from the corporation. It also could prevent employees and management from looking to counsel for information. Lower-level management may not know how to respond to the law and be wary of seeking the attorney's advice in fear of being reported to higher-ups.

     Further, Section 307 enables the SEC to regulate corporate attorneys. The October 2002 ABA Journal quoted the Commission's Chairman, Harvey L. Pitt, as saying:

     Pitt balances this issue with the opinion that the Act shows skepticism about whether the legal profession can self-regulate to an adequate degree. Allowing the SEC to establish rules of professional conduct for attorneys sets a dangerous precedent of allowing governmental entities to regulate attorneys. As addressed by Pitt, it would be hazardous to allow entities to regulate the same attorneys who oppose them in court.

     The Act provides "whistle-blower" protections for corporate employees who have been demoted, fired, or harassed because of reporting alleged financial wrongdoing. This is another milestone for the Act as it enacts federal measures for employees of all public companies as opposed to the former system forcing employees to file claims under state law or a variety of federal statutes. The Act authorizes both a civil cause of action for retaliation (§806) and criminal penalties for knowing and intentional retaliation (§1107).

     One foreseeable problem is that these protections do not prevent workers from waiving their right to sue. Although the Act creates a civil cause of action for retaliation, this protection is nullified by an employer requiring an employee to sign a waiver. Employers can, and will, simply have as part of their hiring process the employee signing a waiver of her right to sue.

     If an employee does escape signing this waiver, she has a very limited time to file suit. The Act allows employees only 90 days from the alleged retaliation to file a complaint with the Labor Department. Employees will have to be much more informed for this protection to have any meaning.

     The Labor Department may give OSHA the responsibility of taking care of the complaints. Because OSHA has traditionally enforced whistle-blower protections involving safety and health issues, they are not adequately qualified to handle complaints of complicated business matters.