Whistle-Blowers Tapped to Clean Up Corporate Crimes ; New Law Taking Effect in January Forces Lawyers to Expose Corrupt Business Practices. Will It Do Any Good?

Article excerpt

Uncle Sam is looking for a few good whistle-blowers.

No, it's not part of the Justice Department's war on terrorism. Rather it is a centerpiece of the government's corporate reforms to prevent the kinds of bookkeeping excesses that led to the downfall of business giants like Enron and WorldCom.

If only someone - an auditor, executive, outside director - had come forward and "blown the whistle" sooner, investors would have been better able to gauge the value of certain corporations. And the market, rather than bankruptcy judges, would sort out the good from the bad.

But how does one break a corporate code of silence that can be as intimidating as one imposed by Mafia dons?

The answer from Congress: lean on the lawyers.

The latest wrinkle in the government's attempt to restore investor confidence in American stocks hinges on the idea that corporate lawyers can - and should - be dragooned into service as whistle-blowers.

Unlike Time Magazine's "Persons of the Year," three whistle- blowers who voluntarily exposed questionable activities at Enron, WorldCom, and the FBI, corporate lawyers would be forced to take action or face professional and other sanctions.

The idea has sparked sharp debate within the legal community.

"This is really a revolutionary innovation - for good or bad - in legal ethics," says Geoffrey Miller, legal ethics professor at New York University. "It puts the attorney in the position of ratting out the client."

The new regulation was approved by the Securities and Exchange Commission (SEC) and is set to take effect on Jan. 26.

It requires corporate lawyers who suspect wrongdoing to report their concerns to senior management and, potentially, to the board of directors. The regulations require that if the firm fails to take sufficient steps to resolve the questionable activity the lawyer must end his legal representation and notify the SEC of any documents containing false or misleading information. The procedure is known as a "noisy withdrawal."

Legal experts say there is nothing new about requiring lawyers to fulfill their ethical obligations to report suspected wrongdoing to senior managers. But what is new is the mandate that lawyers must resign and notify the SEC of their resignation if suspected corporate misdeeds are not rectified.

Although not required to disclose to the SEC precise details, any resignation by a lawyer will serve as a red flag for investigators, legal experts say.

Supporters of the new regulation say it creates a powerful deterrent against corporate wrongdoing by putting executives on notice that they may no longer rely on a lawyer's silence.

Opponents say it undermines the principle behind the attorney- client privilege.

"It could drive a wedge between lawyers and clients," says M. Peter Moser, chairman of an American Bar Association (ABA) task force on the issue. …