Friday, December 17, 2010

The Banality of Fraud: Re-Situating the Inside Counsel as Gatekeeper

Must Read! By Sung Hui Kim (T/Y The Situationist). 

In this article, the author provides a social-psychological explanation for why inside counsel (in-house or corporate counsel) may compromise their ethical obligations or professional duties and acquiesce in managerial misconduct, sometimes amounting to fraud. This social-psychological explanation focuses on the situation that inside counsel finds herself in (as mere employee, as faithful agent, and as team-player), as well as the cognition, incorporating recent psychology studies and recent theories (e.g., dual processing model of cognition) on how the human mind might resolve ethical dilemmas. It also critiques the Sarbanes-Oxley Act of 2002 and the 2003 amendments to the Model Rules of Professional Conduct in their attempts to address this problem. Finally, it provides a possible solution to this problem based closely on its social-psychological diagnosis.
The proposed solution includes: (i) public companies transferring the oversight of the corporate legal department to a committee of independent board members, (ii) the law guaranteeing whistleblower protection to inside counsel under Sarbanes-Oxley and, accordingly, permitting the disclosure of client confidences under any claim of retaliatory discharge; and (iii) public companies limiting ex ante the amount of equity investments that an inside lawyer may accept as compensation or, in the alternative, fashioning equity compensation in a manner that minimizes potential conflicts of interest. In analyzing the problem, it employs a narrative of the experience of Mark Belnick, former general counsel of Tyco, who was prosecuted and finally acquitted in New York on charges of falsification of business records.

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