1. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N SOX, the ABA Model Rules, & the Nevada Rules of Professional Conduct: Legal and Ethical Duties of Nevada Lawyers John S. Delikanakis Snell & Wilmer LLP 3883 Howard Hughes Parkway, Suite 1100 Las Vegas, NV 89169 (702) 784-5259 (direct) (702) 784-5252 (fax) jdelikanakis@swlaw.com June 26, 2007

2. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N SOX, the ABA Model Rules, and the Nevada Rules of Professional Conduct

3. ©2007 Snell & Wilmer L.L.P. SOX 205 Required reporting up the ladder  SOX 205 requires a lawyer "to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company"

4. ©2007 Snell & Wilmer L.L.P. ABA Model Rule / Nev.R.P.C. 1.13 (b) Shared Language  (b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act, or refuses to act in a matter related to the representation; that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization; and that is likely to result in substantial injury to the organization then the lawyer shall proceed as is reasonably necessary in the best interest of the organization…  [ABA Model rule and Nevada rule are identical to this point]

5. ©2007 Snell & Wilmer L.L.P. ABA Model Rule 1.13 (b) Eventual required reporting up the ladder  Model Rule 1.13(b) (cont’)….  Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so; the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances to the highest authority that can act on behalf of the organization as determined by applicable law

6. ©2007 Snell & Wilmer L.L.P. Nev. R.P.C 1.13(b) –Discretion to proceed in the best interest of the organization  Nev. R.P.C 1.13(b) (cont’) …  In determining how to proceed, the lawyer shall give due consideration to:  the seriousness of the violation and its consequences;  the scope and nature of the lawyer’s representation;  the responsibility in the organization and the apparent motivation of the person involved;  the policies of the organization concerning such matters; and  any other relevant considerations.  Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization.

7. ©2007 Snell & Wilmer L.L.P. Nev. R.P.C 1.13(b) –Discretion to proceed in the best interest of the organization  Nev. R.P.C 1.13(b) (cont’)  Such measures may include among others:  (1) Asking reconsideration of the matter;  (2) Advising that a separate legal opinion on the matter be sought for presentation to appropriate authority in the organization; and  (3) Referring the matter to higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest authority that can act in behalf of the organization as determined by applicable law.

8. ©2007 Snell & Wilmer L.L.P. Rule Comparison  SOX 205  Required reporting to the Chief Legal Officer or CEO  ABA Model Rule 1.13(b)  Some discretion allowed initially  Eventual requirement to report to the highest authority  Nev.R.P.C. 1.13(b)  Required to proceed in the best interest of the organization;  Suggested factors to weigh in deciding how to proceed  Suggested options as to how to proceed  Eventual permission to report up the ladder

9. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N

10. ©2007 Snell & Wilmer L.L.P. SOX - What Triggers the Lawyer's Initial Duty to Report Up the Ladder?  In 307, Congress abandoned the "subjective" approach of Model Rule 1.13(b), which imposes no obligations on a lawyer unless she "knows" that illegal activity is occurring, or will occur.  Congress mandated an objective trigger, while at the same time lowering the triggering standard from one of definitive violation to "evidence" of a violation.

11. ©2007 Snell & Wilmer L.L.P. SOX - What Triggers the Lawyer's Initial Duty to Report Up the Ladder?  The SEC rules define "evidence of a material violation" in Section 205.2(e) as "credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is occurring, or is about to occur."

12. ©2007 Snell & Wilmer L.L.P. SOX - What Triggers the Lawyer's Initial Duty to Report Up the Ladder?  Deficiencies in the SEC triggering standard:  Double-negative formulation in the definition of "evidence of a material violation" (Unreasonable not to conclude)  Ambiguity of the "reasonably likely" standard  Uncertain meaning of "becomes aware"  Failure to address imputed knowledge.

13. ©2007 Snell & Wilmer L.L.P. ABA / Nev.R.P.C - What Triggers the Lawyer's Initial Duty to Report Up the Ladder?  ABA Model Rule and Nev.R.P.C 1.13(b), despite their mandatory language, contain limitations and qualifications that give lawyers some discretion:  Actual knowledge standard as the trigger for the lawyer's duty  A definitive "violation" rather than evidence of a violation or a potential violation  Requirement that the violation be “related to the representation”  Requirement that the violation “is likely to result in substantial injury” rather than simply being “material”

14. ©2007 Snell & Wilmer L.L.P. ABA / Nev.R.P.C - What Triggers the Lawyer's Initial Duty to Report Up the Ladder?  ABA Model Rule and Nev.R.P.C 1.13(b), require that the substantial injury be “to the organization,” ignoring the situations in which only third persons are harmed by the illegality  ABA Model Rule 1.13(b) exception to the reporting up duty if the lawyer “reasonably believes that it is not necessary in the best interests of the organization to do so”  ABA Model Rule 1.13(b) limitation that lawyers need to report to the “highest authority” only “if warranted by the seriousness of the matter”

15. ©2007 Snell & Wilmer L.L.P. Nevada – What Triggers the Lawyer's Duty to Report Up?  Before reporting, lawyer shall weigh:  Seriousness of the violation and its consequences  Scope and nature of the lawyer’s representation  Responsibility in the organization and the apparent motivation of the person involved  Policies of the organization concerning such matters and any other relevant considerations  Further, the lawyer is directed to modify his actions, so that any actions “minimize disruption of the organization”

16. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N What are the lawyer’s responsibilities after the report is filed?

17. ©2007 Snell & Wilmer L.L.P. SOX - Qualified Legal Compliance Committee  Under the SEC rules, if the corporation has previously formed a Qualified Legal Compliance Committee (QLCC), and the lawyer reports to the QLCC, the lawyer’s obligation to monitor the response to the report and to report further “up the ladder” vanishes  Creates safe harbor for the reporting lawyer, at least for SEC actions

18. ©2007 Snell & Wilmer L.L.P. SOX 205.3(b)(3) - Obligations of the Reporting Lawyer After the Initial Report  Reporting lawyer “shall report the evidence of a material violation" to the board or relevant board committee, unless the lawyer "reasonably believes that the chief legal officer or the chief executive officer... has provided an appropriate response within a reasonable time."  The lawyer who reports up to the board must also "explain his or her reasons" for believing that the issuer has not made an appropriate response to the CLO, CEO, and the Directors

19. ©2007 Snell & Wilmer L.L.P. SOX - Obligations of the Reporting Lawyer After the Initial Report  205.2(b) defines "appropriate response" as "a response to an attorney regarding reported evidence of a material violation as a result of which the attorney reasonably believes" any one of three things:  (1) There is no problem; that is, "no material violation... has occurred, is ongoing, or is about to occur."  (2) The issuer is fixing whatever problem exists by adopting "appropriate remedial measures."  The difficulties in determining what counts as "appropriate measures" creates significant interpretive question

20. ©2007 Snell & Wilmer L.L.P. SOX - Obligations of the Reporting Lawyer After the Initial Report  (3) “The issuer, with the consent of the issuer's board of directors” or relevant board committee “has retained or directed an attorney to review the reported evidence of a material violation,” as a result of which one of two further things must happen.  Either the “investigatory lawyer” must conduct “a reasonable investigation and evaluation of the reported evidence,” make “remedial recommendations” and have those recommendations “substantially implemented” by the issuer, or  The “investigatory lawyer” must advise the issuer that he or she “may, consistent with his or her professional obligations, assert a colorable defense on behalf of the issuer in any investigation or judicial or administrative proceeding relating to the reported evidence of a material violation.”

21. ©2007 Snell & Wilmer L.L.P. ABA and Nevada  ABA Model Rules and Nevada Rules of Professional Conduct do not explicitly require post-report monitoring, but implicitly require monitoring, as seen in the next section.

22. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N

23. ©2007 Snell & Wilmer L.L.P. SOX 205(d)(2) - Permissive Disclosure  An attorney...may reveal to the Commission, without the issuer's consent, confidential information related to the representation to the extent the attorney reasonably believes necessary:  (i) To prevent the issuer from committing a material violation that is likely to cause substantial injury to the financial interest or property of the issuer or investors;  (ii) To prevent the issuer, in a Commission investigation or administrative proceeding from committing... [or] suborning perjury... or committing any act... that is likely to perpetrate a fraud upon the Commission; or  (iii) To rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury to the financial interest or property of the issuer or investors in the furtherance of which the attorney's services have been used.

24. ©2007 Snell & Wilmer L.L.P. ABA Model Rule 1.6(b) Permissive Reporting Out  (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:  (2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer's services;  (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

25. ©2007 Snell & Wilmer L.L.P. ABA Model Rule 1.13(c) Permissive Disclosure  (c) Except as provided in paragraph (d), if  (1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law; and  (2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization,  then the lawyer may reveal information relating to the representation whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization

26. ©2007 Snell & Wilmer L.L.P. ABA Model Rule 1.13(c) Advisory Comment  Rule 1.13 (c) supplements Rule 1.6(b) by providing an additional basis upon which the lawyer may reveal information relating to the representation, but does not modify, restrict, or limit the provisions of Rule 1.6(b)  The lawyer may reveal such information only when the organization's highest authority insists upon or fails to address threatened or ongoing action that is clearly a violation of law, and then only to the extent the lawyer reasonably believes necessary to prevent reasonably certain substantial injury to the organization.  It is not necessary that the lawyer's services be used in furtherance of the violation, but it is required that the matter be related to the lawyer's representation of the organization.  If the lawyer's services are being used by an organization to further a crime or fraud by the organization, Rules 1.6(b)(2) and 1.6(b)(3) may permit the lawyer to disclose confidential information.

27. ©2007 Snell & Wilmer L.L.P. Nev.R.P.C. 1.6(b) Permissive Reporting Out  (b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:  (2) To prevent the client from committing a criminal or fraudulent act in furtherance of which the client has used or is using the lawyer’s services, but the lawyer shall, where practicable, first make reasonable effort to persuade the client to take suitable action;  (3) To prevent, mitigate, or rectify the consequences of a client’s criminal or fraudulent act in the commission of which the lawyer’s services have been or are being used, but the lawyer shall, where practicable, first make reasonable effort to persuade the client to take corrective action;

28. ©2007 Snell & Wilmer L.L.P. Nev.R.P.C 1.13(c) Permitted Withdrawal, Not Disclosure  If…the highest authority that can act on behalf of the organization insists upon action, or a refusal to act, that is  clearly a violation of law and  is likely to result in substantial injury to the organization,  the lawyer may resign in accordance with Rule 1.16.

29. ©2007 Snell & Wilmer L.L.P. Comparison  SOX – Permits a lawyer in some circumstances to disclose client fraud to the SEC without the issuer's consent  ABA Model Rules permit the lawyer to reveal confidential information in certain circumstances whether or not Rule 1.6 permits the disclosure  Nevada Rules stress that if the highest internal authority refuses to act on behalf of the corporation, the attorney may do nothing but exercise his right to resign  Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests  The Nevada lawyer would still only be permitted to make disclosures allowed by Rule 1.6 

30. D E N V E R L A S V E G A S O R A N G E C O U N T Y P H O E N I X S A L T L A K E C I T Y T U C S O N State Bar Associations have not adopted revised ABA rules, leading to jurisdiction battle between the states and the SEC

31. ©2007 Snell & Wilmer L.L.P. Which Set of Rules Governs?  ABA Model Rules never govern  Not self-effectuating. Must be adopted by states.  For SEC actions, SOX governs  The SEC can sanction by precluding the lawyer from appearing and practicing before the SEC  In State Court Ethics Prosecutions  State Bar Association ethics rules normally govern  But, SEC claims to immunize attorneys who use "good faith" efforts to comply with part 205  State Bar Associations warn lawyers against relying on safe harbor

32. ©2007 Snell & Wilmer L.L.P. State Bar Associations v. SEC  Some states argue that, to the extent SOX 205 contradicts individual state Rules of Professional Conduct, the state rules must prevail  These states claim that, because there is not yet case law specifically upholding these SEC regulations, state bars are under no legal obligation to honor them, and therefore attorneys practicing in their jurisdictions may obey the SEC rules only at their peril  States claim the right to prosecute such violations of rules of professional conduct even though 205 immunizes attorneys against such prosecutions of "good faith" efforts to comply with SOX 205

33. ©2007 Snell & Wilmer L.L.P. State Bar Associations v. SEC  In the absence of specific case law, states claim that there is no evidence that Congress intended to give the SEC the power to effect such a massive intrusion into the affairs of the legal profession  Courts have struck down other SEC regulations because there was no evidence of Congressional intent.  The SEC, an administrative agency, only has the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.

34. ©2007 Snell & Wilmer L.L.P. State Bar Associations v. SEC  Historically, when Congress does not specifically address the preemptive effect of a new law on existing state laws, that silence is taken to evidence a lack of intent to supersede existing laws.  However, although Congress did not mention any intent to supersede existing laws, the SEC wrote regulations which claimed this preemptive power.  States’ rights advocates see this as an unwarranted inflation of power by an administrative agency.  When challenged in courts, the SEC rules may be struck down under the mandate of the Administrative Procedure Act, which holds that a reviewing court must invalidate any agency rule which exceeds that agency's authority.

35. ©2007 Snell & Wilmer L.L.P. State Bar Associations v. SEC  Whether most states follow the ABA's lead and concede all but the most onerous SEC requirement --"noisy withdrawal"-- may well depend on the outcome of this legal fight.  Since attorneys may be forced to choose between obeying SEC 205 or obeying local Rules of Professional Conduct, this fight may begin when an attorney makes a choice that results in his prosecution by a state bar association.

36. ©2007 Snell & Wilmer L.L.P. Discussion

37. ©2007 Snell & Wilmer L.L.P. SEC Strikes Back  SEC has responded to these state challenges by outlining legal precedents that suggest that the Commission does indeed have the authority to supersede state laws, even though specific case law on these regulations has not yet been established.  SEC emphasizes that the Supreme Court has consistently affirmed that, when a federal agency enacts rules of conduct which conflict with existing state rules of conduct, the federal agency's rules prevail.

38. ©2007 Snell & Wilmer L.L.P. SEC Strikes Back  In response to state attacks on the SEC's grant of immunity from state prosecution to attorneys who comply with part 205, the Commission cites several other legal precedents.  Barnhart v. Walton holds that a federal agency's interpretation of its own regulation is afforded judicial deference.  Since the issue of whether an attorney has acted in a "good faith" effort to comply with part 205 requires an interpretation of an SEC regulation, the SEC maintains that its definition of "good faith" must be accepted by states that wish to prosecute attorneys for violating state bar rules in an effort to comply with part 205.

39. ©2007 Snell & Wilmer L.L.P. SEC Strikes Back  Further, the SEC warns that state attempts to define "good faith" differently from the SEC to justify prosecution of complying attorneys will fail, since City of New York v. FCC holds that federal agency regulations preempt any state regulation that "frustrates the purposes" of the regulation.  Consequently, any prosecution of a complying attorney will be construed as an attempt to thwart the purpose of a preemptive federal regulation.

40. ©2007 Snell & Wilmer L.L.P. SEC Strikes Back  Assuming that the SEC can demonstrate in the impending court battles that Congress intended to empower the Commission to narrow the reach of attorney-client privilege, the SEC will most likely prevail in this legal battle because of the extensive precedent for federal preemption of state laws.

41. ©2007 Snell & Wilmer L.L.P. SEC Strikes Back  However if states revise their local ethics rules to mirror the ABA's revised rules, attorneys who do not practice before the SEC will also have increased latitude to reveal client confidences since the ABA Rules do not limit this permission to attorneys practicing before the SEC.