The Ethics Corner: Avoiding Fraudulent Conduct

Langford.CarolWhat is most important—what you say, how you say it or whether you should say it at all? That is, what should an attorney tell a client who may want more than advice—perhaps active assistance— in what may be fraudulent conduct? And when does a lawyer know for certain that a client is using advice for a fraudulent purpose? This issue comes up from time to time in a bankruptcy lawyer’s practice where the client wants asset protection that may cross the line.

Interestingly enough, each recent decade seems to have had its own scandal involving a client using a lawyer—sometimes with his active assistance—in defrauding people. In the early 2000s, it was Enron. In the 1990s, it was the Lincoln Savings and Loan debacle where the lawyers actively mislead the Office of Thrift Supervision. In the 1980s, it was the Kaye Scholer matter and the OPM Leasing case, where the Singer, Hunter lawyers turned a blind eye to the company accountant and his lawyer, who gave Singer a memo outlining the fraud. Why did Singer ignore the memo? Because they “didn’t want it and didn’t want to know what was in it.”[1]

We start with Rule of Professional Conduct 3-210, which states that “A member shall not advise the violation of any law, rule or ruling of a tribunal unless the member believes in good faith that such law, rule or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule or ruling of a tribunal.”

But that Rule begs the question because it does not actually address the practical issue involved in providing legal advice; i.e. the difference between “presenting an analysis of legal aspects of questionable conduct” and “recommending the means by which a crime or fraud might be committed with impunity” (ABA Model Rule 1.2 comment 9).

We also have Business & Professions Code section 6068 (d), which broadly states that a lawyer must “employ, for the purpose of maintaining the causes confided to him or her those means only as are consistent with truth, and never to seek to mislead the judge, or any judicial officer by an artifice or false statement of fact or law.”

ABA Rule 1.2 does give more guidance; it states that “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”

It also says in comment 10 that “A lawyer may not continue assisting a client in conduct the lawyer originally supposed was legally proper but then discovers is criminal or fraudulent. The lawyer must, therefore, withdraw from representation of the client in the matter.” It’s true that the ABA Rules are not the Rules that govern California lawyers. However, courts can look to them for guidance where the California Rules do not specifically address a particular issue.

I was the lead drafter of California Formal Opinion 1996-146, which addresses the issue of making misrepresentations to the public (and it could apply to the court). The Opinion asked the following question: May a lawyer for a subdivision developer, knowing that substandard plumbing materials have been used by a subcontractor, write a letter to homeowners saying “The warranty in your contract means that [developer] has promised that all materials, including plumbing lines, meet plans and specifications, including all code requirements. The warranty speaks for itself.”

While strictly true, and while the lawyer does not represent the original malfeasant, the letter clearly seems to mislead. The Opinion concludes that the lawyer may not write such a letter: “A lawyer acts unethically where she assists in a commission of a fraud by implying facts or circumstances that are not true in a context that is likely to be misleading.” 

What should a bankruptcy lawyer be required to do to verify the legitimacy of the client’s statements and position? Should some investigation be required, such as one might do before filing a complaint to avoid a Rule 11 attack? If the lawyer takes what the client says at face value, when is that not enough?

In ABA Revised Formal Opinion 346, the ABA analyzed the role of a lawyer in rendering an opinion on the propriety of a tax shelter. It stated that: “The lawyer who accepts as true the facts which the promoter tells him, when the lawyer should know that a future inquiry would disclose that the facts are untrue, also gives a false opinion. It has been said that lawyer cannot escape criminal liability on a plea of ignorance when they have shut their eyes to what was plainly to be seen.”

Similarly, in FDIC v. O’Melveny & Myers, (9th Cir. 1992) 969 F.2d 744, the FDIC sued O’Melveny for its willful blindness after they had done the due diligence to confirm the accuracy of a savings and loan’s private placement statements. The 9th Circuit held that while a law firm had no obligation to “ferret out fraud,” it did have to undertake a “reasonable independent investigation” into whether the fraud existed.[2] While the Supreme Court reversed the case on other grounds, the law on law firm fraud is still sound.

Bottom line, bankruptcy lawyers? If you lie down with dogs, you get up with fleas.

Carol M. Langford is lawyer who specializes in ethics and attorney conduct matters including representing clients before the State Bar. She is also a lecturer in law at U.C. Berkeley Boalt Hall School of Law and the past Chair of the California State Bar ethics committee.

[1] Ethics and the Law: A Case History, N.Y. Times, Jan. 9th 1983, Stuart Taylor Jr.

[2] Id. at 756.

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