As the disaster in the financial markets continues to unfold, greed and avarice – the usual suspects – are being overshadowed by pervasive fraud as a prime mover. We have, of course, the infamous Bernie Madoff and now the “mini-Madoffs” upon whom we can heap large helpings of blame, but deceit, misrepresentations, and fraud seemingly resonate throughout the markets, as illustrated by the subprime scandal, the mortgage mess, and the flood of worthless consumer debt. And what was the role of lawyers in all this? Financial transactions of this sort inevitably involve lawyers at some stage. Investigations and lawsuits may soon give us a clearer picture of the role lawyers may have played in exacerbating the nightmare, but the question for today is whether lawyers could have, or should have, acted to prevent any of this. And my focus is not Sarbanes-Oxley or securities regulations, but on the fundamentals of lawyers’ professional responsibility.
Lawyers are not permitted to “assist” or “further” crimes or frauds committed by their clients. To do so – provided anyone finds out – eviscerates the venerable lawyer-client privilege and exposes both lawyer and client to civil and criminal remedies. This is comfortably familiar and uncontroversial. But what of the lawyer who is aware of a client’s fraud but who arguably has done nothing to assist or further it? Assume further that the fraud is on-going and not a past act. What is the lawyer’s duty or professional responsibility, especially considering that lawyers are enjoined not to disclose client confidences or privileged communications without client consent (and the reality is that few clients will approve of their lawyer’s whistle-blowing)?
Wisconsin is one of just two states (New Jersey is the other) that impose a mandatory duty on lawyers to prevent continuing fraud by a client. Specifically, SCR 20:1.6(b) provides as follows: “A lawyer shall reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary to prevent the client from committing a criminal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm or in substantial injury to the financial interest or property of another” (emphasis added). One authoritative legal source that discriminates between “criminal” and “noncriminal” fraud (an interesting distinction itself), reports the following: only 2 jurisdictions (Wis and NJ) require mandatory reports, 24 leave it to counsel’s discretion, 23 forbid disclosures, and 2 require the lawyer resign! (The tally for “criminal fraud” is equally enlightening: only 4 require disclosure, 40 permit it at counsel’s discretion, and 7 forbid it.)
The scope of the Wisconsin lawyer’s mandatory duty to prevent client fraud is uncharted. The rule has been part of Wisconsin law since the adoption of the present rules. Several years ago the supreme court and a distinguished committee implemented a number of significant revisions but left SCR 20:1.6(b) untouched. Unclear is when the duty is triggered. When does a “risky investment” become a fraud? What exactly must the lawyer know, or be aware of, before she is required to act? How much monetary damage constitutes a “substantial injury” to a “financial interest”? Does a violation expose the lawyer only to professional discipline, or might it open the way to a tort claim against both the lawyer and the law firm?
Case law is sparse, which may be a good or bad thing. SCR 20:16(b) reared its head – sort of – several years ago in a case out of LaCrosse. Lawyer K represented “Randy,” a tavern owner, on several ordinance violations involving Randy’s bar. One day Randy’s bar burned down. When Lawyer K commiserated with Randy about this misfortune, Randy disclosed that he had intentionally set the fire in order to collect on the insurance policy. Lawyer K promptly told Randy that he could not collect the insurance because this would constitute still another crime – past arson + future insurance fraud = big trouble for Randy. Shortly thereafter, Lawyer K memorialized this same information in his “Dear Randy” letter, which also warned Randy that SCR 20:1.6(b) obligated Lawyer K to notify others to prevent any future fraud from occurring. The letter ended by terminating Lawyer K’s representation of Randy. Sometime later, Lawyer K learned that Randy had disregarded his advice and collected part of the insurance proceeds. To protect against further fraud, Lawyer K notified the police and prosecutors of Randy’s crimes. The disclosure included the “Dear Randy” letter which recounted Randy’s confessions. Randy moved to suppress the evidence on grounds that (former) Lawyer K had breached Randy’s privilege and disclosed confidences without Randy’s consent. The trial court disagreed and refused to suppress the evidence. In a terse, poorly crafted, one page unpublished per curiam opinion, the court of appeals affirmed. Without analyzing (or citing) SCR 20:1.6(b), the court validated the disclosure instead under the crime-fraud exception to the lawyer-client privilege, which is silent as to disclosure. For the curious reader, the opinion appears here.
In some respects, Randy’s case was an easy one. Randy clearly intended to commit insurance fraud; this was not just a risky or murky transaction. But remember that Lawyer K “fired” Randy at the end of the “Dear Randy” letter. Does SCR 20:1.6(b) apply to former clients? (Here it should be mentioned that lawyers have “discretion” to disclose client misconduct, but that’s a different story.) And even where disclosure is mandatory, how precisely does the rule regulate the scope of disclosure? What is “too much”? Should it monitored by a court? As the far more complex tale of financial misconduct unfolds, there may be provocative issues of what lawyers may have known of their clients’ actions and whether they should have acted to protect investors or third parties under SCR 20:1.6(b). One suspects that there may be other, far more mendacious “Randys” out there.