What must a lawyer do who is asked to document a corporate merger involving an illegal unregistered securities issuance, when the lawyer is also an officer and house counsel of an affiliated company?

Plain-English summary

An attorney was documenting a merger of a real estate company with a 20%-owned affiliate. The affiliate's management insisted the securities to be issued in the merger would not be registered, despite the attorney's advice that registration was necessary under the Securities Act of 1933. The attorney was secretary and director of the company and house counsel and assistant secretary of its publicly owned parent.

The committee identified four points. First, the attorney should initially attempt to persuade the executives that the proposed course is illegal, constitutes a crime, and is ill-advised, specifying the damaging consequences (rescission rights, defective financial statements, possible fraud, derivative claims). Relying on ABA Opinion 202 and EC 5-18, it identified that a lawyer for a corporation owes allegiance to the entity, and if persuasion fails should formally report the violation, with the probable consequences, to the boards of directors of the corporations.

Second, the committee concluded that continuing to document the illegal transaction, or providing any further legal representation in connection with it, would violate the prohibition on assisting a client in conduct known to be illegal (ABA Code DR 7-102(A)(7) and, implicitly, Rule 2-111(C)). It identified that withdrawal where a client seeks to pursue an illegal course is permitted under Rule 2-111(C), and that Rule 2-111(A)(2) requires reasonable steps to avoid foreseeable prejudice before withdrawal.

Third, the committee identified Business and Professions Code section 6068(e)'s strongly protected duty of confidentiality, with narrowly construed exceptions. It identified the future-crime exception (citing People v. Singh, its Opinions 264 and 274, and ABA DR 4-101(C)(3)), but concluded the attorney should avoid disclosure outside the client corporations unless convinced the violation would be a very serious crime (one likely to cause significant injury to the public) and satisfied beyond substantial doubt that its commission is imminent; willful failure to register could, in some cases, be such a crime, but not in every case. It noted Tarasoff as recognizing duties to warn outside specific ethical rules.

Fourth, the committee identified that the attorney's positions suggest representation of both the company and the affiliate in a transaction in which their interests are adverse, which would be improper under Rule 5-102(B) absent the written consent of both clients, and noted the difficulty of obtaining fully informed consent where jointly represented parties are on opposite sides (referencing Evidence Code section 962's loss of privilege between them). A minority of the committee would have found disclosure of any intended crime improper here even if imminent.

Currency note

This opinion was issued in 1976, before California's adoption of later revisions to the Rules of Professional Conduct (including the May 27, 1989 renumbering and the November 1, 2018 renumbering), and before the ABA's 1983 Model Rules. It interprets the former Rules 2-111, 5-102, and 6-101 then in effect, along with the ABA Model Code; these correspond generally to current Rules 1.6, 1.13, and 1.7. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule mentioned here.

View original opinion

Common questions

Q: Can a lawyer keep documenting a securities issuance the lawyer believes is illegal?

A: Per the opinion, no. The committee concluded that continuing to document or represent the client in the illegal transaction would violate the prohibition on assisting illegal conduct, and that withdrawal is permitted under Rule 2-111(C).

Q: Should the lawyer report the problem above the officers' heads?

A: Per the opinion, yes, if persuasion fails. The committee concluded the attorney should formally report the violation, with its probable consequences, to the boards of directors of the corporations.

Q: Can the lawyer disclose the planned violation to outsiders, such as regulators or investors?

A: Per the opinion, the attorney should avoid disclosure outside the client corporation unless convinced the violation would be a very serious crime likely to seriously damage the public and satisfied beyond substantial doubt that it is imminent.

Background and rules framework

The opinion interprets the former California Rules 2-111 (withdrawal), 5-102 (conflicting interests), and 6-101, together with the ABA Model Code (DR 4-101, DR 5-101, DR 7-102, EC 5-18) and Business and Professions Code section 6068(e). These correspond generally to current Rules 1.6 (confidentiality), 1.13 (organization as client), and 1.7 (conflicts).

Citations and references

Rules of Professional Conduct (former):

• California Rules 2-111, 5-102(B), 6-101

Statutes:

• California Business and Professions Code section 6068(e)
• California Evidence Code sections 958, 962

Cases:

• People v. Singh, 123 Cal.App. 365 (1932)
• Abbott v. Superior Court, 78 Cal.App.2d 19 (1947)
• Tarasoff v. Regents of the University of California, 13 Cal.3d 177 (1974)

Other opinions cited:

• LACBA Formal Opinions 22, 108, 264, 274
• ABA Opinions 202, 335; ABA Model Code DR 4-101(C)(3) and (4), DR 5-101(A), DR 7-102(A)(7) and (B)

See also

• LACBA Ethics Op. 463: Disclosing a Former Client's Securities Fraud to a Current Client
• LACBA Ethics Op. 466: Cash Paid as a Fee That Is Evidence of a Crime
• LACBA Ethics Op. 519: No Self-Defense Exception to Confidentiality for Third-Party Claims

Source

• Landing page: https://lacba.org/?pg=ethics-opinions
• Original PDF: https://lacba.org/docDownload/2011007