Between a Rock and a Hard Place: The Erosion of Privilege and the Duty of Confidentiality

A possible flaw of Sarbanes-Oxley is it failed to put up any resistance in thwarting the financial crisis. While the degree to which fraudulent behavior can be traced to the roots of the Great Panic of 2007 will likely be up for eternal debate, it might be telling that Sarbanes-Oxley effectively did nothing. It seems this could indicate that stronger incentives for whistleblowers (such as Dodd-Frank and perhaps other whistleblower protection regimes) are very necessary given the extreme social costs. This conclusion may be hasty, however, given the short time period between the enactment of Sarbanes-Oxley and the crash. Not only is the status of Sarbanes-Oxley still in flux over a decade later, but one has to consider the substantial learning and switching costs associated with a regime with such a substantial ruach. Certainly, this is not to say that additional protections may in fact be necessary given the putative reluctance of lawyers to report fraud, but Sarbanes-Oxley likely needed more time to really crystalize and provide some level of predictability before it can be declared a bust.
Another substantial problem with Sarbanes-Oxley and Dodd-Frank reform efforts are the misplaced ethical incentives it places on attorneys in advice on the structure of their clients. Since Sarbanes-Oxley only applies to companies traded on public markets, it substantially raises the cost of being public, and creates strong incentives to go-private for management and directors as well as a company’s legal advisors. Lawyers stand to gain substantially not only from the reduced pressures of reporting and monitoring obligations, but additionally from the substantial fees garnered in advising large-scale, multibillion dollar buy-outs. Th...

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...f-regulate? A reasonable case for increased regulation can be made given the massive cost of recent financial turmoil and attorneys’ ostensible role in these crises. Moreover, as lawyers effectively operate as gatekeepers and rubberstamps for much of business decsionmaking, they may serve as the most efficient risk bearer to reduce externalized costs, whether through a division of ethical responsibilities between in-house attorneys and independent firms or simply staying the drastic course of Lawson. This modification of the role of attorneys does present a difficult contradiction as the exact value added by lawyers is leveraged into a social duty and it’s not obvious whether the two can co-exist. Given the relative lack of traction and progress, however, it seems the stickiness of established behavior may present too much value, for attorneys and clients alike.