Legal Ethics Forum

No Loopholes for Me, Thanks

A Legal Times report notes that one proposal for making up the revenue shortfall that would accompany partial privatization of Social Security is to require limited partners, shareholders in LLC’s, and subchaper S corporations to pay employment taxes.  Because of the increasing popularity of limited-liability entities this change would be felt by many law firms.  While there is no rule expressly prohibiting a law firm organized as an LLP from not treating "limited partners" as general partners for the purposes of employment taxes, it should be clear to any fair-minded lawyer that compensation paid to these partners should be treated as subject to employment taxes.

This is the classic structure of a loophole:  The formal rule does not expressly subject compensation of limited partners in professional service firms to employment taxes, but that treatment would be "contrary to the spirit and intent of the employment tax rules."  As a matter of legal ethics, I think lawyers must advise clients, and take positions before the IRS, on the basis of "spirit and intent," not simply the form of legal rules.  (Long jurisprudential argument omitted, but interested readers can find it here.)  Apparently taxpayers and their lawyers think otherwise, to the tune of $6 billion in unpaid employment taxes.  But the interesting thing about the article is the statement that lawyers have by and large avoided exploiting loopholes created by the rules on taxation of these entities.  "Any analysis by a tax lawyer or accountant will conclude that in a professional services firm, all or virtually all compensation is subject to [employment taxes]."  When applying the law to themselves, lawyers apparently adhere to its spirit and purpose, but are more willing to exploit loopholes on behalf of their clients. 

The old saying goes that a lawyer who represents herself has a fool for a client.  This case suggests the opposite conclusion, that lawyers take care not to subject themselves to potential liability for underreporting taxes, but are willing to let clients roll the dice.  As some of the late 1990's tax shelters continue to unravel, creating huge liabilities for firms and their clients, maybe clients will start to ask lawyers what they would do if they were in the position of the taxpayer.

Thoughts on Arthur Andersen's Criminal Case

Amon Burton and I have developed a case study on the Arthur Anderson (AA) criminal case, and we have had one of the prosecutors visit our class at Texas.  (Study now published in book)  When you examine the posturing in this criminal proceeding, it is clear that AA pushed the government to try them or let them go because its corporate clients were jumping ship to the other large accounting firms.  Without this pressure, AA would never have been the subject of the first trial in the Enron debacle.  In fact, one wonders if a more favorable plea might not have been worked out with some distance from the bankruptcy crisis.  But AA refused to follow a path to downsize quickly and try to keep some business to stay afloat as a viable, but smaller, accounting firm.  Perhaps, financial obligations made a downsizing move impossible so pushing the government was its only hope. 

Many observers were surprised to see the Supreme Court take the appeal of a defunct entity on whether the judge’s jury instructions properly stated the law of witness tampering in a case where the penalty was limited to $500,000.  After all, Congress has strengthened financial disclosure and related laws in light of Enron, Worldcom, and AA.  However, the AA brief to the Supreme Court does shed some light on this question.  One must remember that corporate counsel, in-house and outside, were horrified to see the prosecutor’s use of Nancy Temple’s memos to the Houston AA office to prove “corrupt influence” as part of the mens rea of the statute.  The AA brief lays our a picture of prosecutor’s attempt to fit the AA conduct into the witness tampering statute rather than document destruction because they could not prove the elements of criminal document destruction.  It also argues that routine document maintenance is permissible and AA stopped the destruction when it received notice of the subpoenas. 

The Supreme Court decision may have implications on the proper scope of corporate advice on document destruction policies and when the witness tampering statute may be used by prosecutors to pursue a corporation or its lawyers.  AA waived the attorney-client privilege to obtain leniency under the federal sentencing guidelines and later found itself in a situation where Nancy Temple, the in-house lawyer, asserted her Fifth Amendment rights and was not available to explain her memos to the jury.  I would like to know whether this appeal continues to be funded with AA money or whether it is supported by other non-parties.

Hat tip to White Collar Crime blog and Houston Clear Thinkers blog.

NYT on the Politics and Economics of Malpractice Practice

Great article, I thought, in Sunday's NYT on medical malpractice.  It contains plenty of hard evidence, informed speculation, and diverse views.  The GOP's current dominance at the federal level will presumably result in some curbs on malpractice cases.  The recently introduced Senate bill is based on the curbs that California adopted thirty years ago.

Quick Hits (2/26)

Judicial mis-steps raise the perennial question of whether judges need to above even the appearance of impropriety.  Professor Steven Lubet, of Northwestern, opines, "There is a desire to want to be judged by people who are less blameworthy than we are, that's an ancient invocation.  Every time you pull the curtain back and realize it's just human beings, it's troubling.''  I agree with Lubet, but some argue that "pulling back the curtain" is all for the good.  . . .   The acquittal of Tyco's General Counsel, Mark Belnick, of grand larceny charges was named one of 2004's Top Ten Cases by the National Law Journal -- and come to think of it, should have made my Top Ten Legal Ethics Stories of 2004.  Pulling off a flat acquittal of a lawyer -- especially a lavishly paid lawyer -- ain't easy.  But Belnick had been wise enough to retain Steptoe & Johnson's Reid Weingarten, who has to be on everyone's short list for that kind of case.  . . .  Although the legal battles appear nearly done regarding the removal of feeding tubes for Terri Schiavo, a lawyer for her parents vows to fight on, saying that Schiavo herself has never been represented by counsel during the seven year dispute.  Promising to continue to fight removal of the tubes, the parents' lawyers says, "I believe if Ted Bundy got a lawyer, Terri Schiavo should get a lawyer."  There's something to be said for that, isn't there?  Can any Florida lawyers out there explain what Florida law says about Schiavo having her own lawyer appointed?  . . .   "You are [a] mean-spirited, vicious witch and I don't like your face and I don't like your voice."  Is that anyway for a lawyer to speak to a deposition witness?  Not in South Carolina (and not anywhere else, I hope.)  That incident and others led the S.C. Supreme Court to require lawyers there to watch a one-hour video tape on civility.  The NYT reports (reg req'd) that so many lawyers have failed to meet the deadline that the high court is extending the deadline.    The article quotes Professor John Freeman, who teaches legal ethics at U.S.C. (the Gamecocks, not the Trojans), as saying that the civility problem is not unique to South Carolina.

Texas Supreme Court Adopts New Forwarding Fee Rules

For several years, the Justices of the Texas Supreme Court have wanted to change the rules regarding forwarding or pure referral fees in the state.  The Justices believed that Texas, one of the few states permitting forwarding fees, had become a haven for case brokers for personal injury lawsuits.  The Texas Supreme Court first enacted and then suspended a rule of civil procedure to prohibit pure forwarding fees. An uproar from members of the bar led to the formation of a committee to study the issue.  Proposed amendments were put on a referendum to the members of the bar in the fall of 2004, and the proposals passed 54.29% to 45.71%.  A new referral fee rule goes into effect March 1, 2005.  The bar has drafted sample language for inclusion in a fee contract that complies with the new rule.   

Texas Disciplinary Rule 1.04 eliminates pure referral fees and requires either joint responsibility or services performed to the client.  The rule provides that lawyers who fail to comply with its requirements will usually forfeit their referral fee.  Although much of the text is similar to the ABA Model Rule 1.5, the comments to the Texas rule contain significant variations.  Perhaps this signals the end of Texas as the Wild West corral for referral fee battles.  Or maybe lawyers who refer cases will craft their legal work and contracts to meet the requirements of the new rule. 

VLG's 2003 Merger with Heller Ehrman Raises Doubts About the Viability of VLG's Unique Law Firm Model

In 1993, Craig Johnson and 13 other lawyers left Wilson Sonsini to begin a new type of law firm for start up companies.  This firm, Venture Law Group, would study hundreds of business plans and then decide to back the worthy few startups with legal work and liaisons to the VC world. (HBS Study)  In exchange for this legal and nonlegal work, VLG would receive equity ownership in the startup and from that point would turn the work over to another law firm (usually Orrick Herrington) to permit VLG to concentrate on management and financial issues directing the company to a path of success.  Over the years, VLG was responsible for working on many successful startup concepts including Yahoo, Hotmail, and WebTV. 

A decade later in the fall of 2003, Craig Johnson began talks of merging the 60 person firm (VLG) with Orrick Herrington, but they eventually merged with Heller Ehrman.  VLG was the quintessential multidisciplinary practice (MDP) firm for startups – a new way of delivering legal and nonlegal services to clients with dreams of placing their ideas and inventions into a public company.  This model compensated the VLG lawyers directly in line with the value delivered to the public shareholders of the startups.

This merger of VLG into the Heller firm raises two interesting sets of questions.  First, is the VLG business model for a startup law firm viable in the long run?  Some have claimed that this business model does not permit sufficient diversification for a law firm to survive.  Bob Peroni and I have argued that law firms that trade legal services for equity incur significant ethics and liability risks that are often overlooked.  Perhaps, VLG is only viable in a bull stock market.  Second, it would be fascinating to know how the Heller firm has handled the conflicts of interest (current and former conflicts) when it merged VLG as a separate and distinct department of their 600 person law firm.  One would surmise that VLG brought with it many financial, business, and legal positions and connections that present some fascinating conflicts of interest questions.

I raise these issues in light of the February 2005 news of 5 former VLG lawyers departing Heller for Orrick after a little more than a year at the new firm. 

Given that this blog has been in the works for a while before we actually put it online, we have a few belated postings that will be made in the first two months of our operation.

Big News: 2nd Circuit Bucks Trend, Recognizes Strong A/C Privilege in Government Context

I'll return to this later, but here's news that the Second Circuit zigged where other courts have zagged.  It recognized a strong version of the attorney client privilege within the government, even in the face of a criminal investigation.  The matter arose from the criminal investigation into Connecticut's Governor John Rowland.

Acknowledging that its decision varied from other courts' rulings, the court declared,

"It is crucial that government officials, who are expected to uphold and execute the law and who may face criminal prosecution for failing to do so, be encouraged to seek out and receive fully informed legal advice"  ...  "Upholding the privilege furthers a culture in which consultation with government lawyers is accepted as a normal, desirable, and even indispensable part of conducting public business."

This new holding bucks the current trend of nibbling away at the privilege.  For example, you may recall that in the case arising from the Monica Lewinsky scandal, the DC Circuit had rejected a privilege assertion as to Deputy White House Counsel Bruce Lindsey.

I should add that one of our upcoming inteviews will be with Professor Kathleen Clark, of the Washington University in St. Louis, who's an expert on legal ethics within the government context.  We will no doubt ask her about this new case.

Interview: Robert Vischer Discusses the Religious Lawyering Movement

Our first interview, focusing on the religious lawyering movement, is with Robert Vischer, who is an Assistant Professor at St. John's University School of Law and Fellow of the Vincentian Center for Church and Society.  He's also a participant in the Mirror of Justice blawg. 

Legal ethics encompasses more than mere technical rules and "pitfalls for the unwary."   But to what extent can (and should) religious commitment provide a deeper foundation for a practicing lawyer's ethics?  Quite a few scholars and lawyers have recently been exploring that question.  So, today we interview Rob Vischer, who's an active participant in that movement. 

MPRE Test for 2005 Includes Ten Non-scored Pretest Questions

Beginning with the March 2005 administration of the Multistate Professional Responsibility Examination (MPRE), the test will include ten non-scored pretest questions. These non-scored items are not separately identified from the scored items; therefore, examinees will be answering sixty questions in the two hour and five minute time limit. 

What Interviews Would You Like to Read Here?

Tomorrow we will publish our first interview -- one with Professor Rober Vischer regarding the religious lawyering movement.  Let us know what interviews you'd like to read here.  You can suggest people, topics, whatever.