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Reputation as Ethical Consideration

Reputation as Ethical Consideration. Christopher T. Hines Faculty Development Presentation Northern Illinois University College of Law November 17, 2011. I. Introduction.

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Reputation as Ethical Consideration

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  1. Reputation as Ethical Consideration Christopher T. Hines Faculty Development Presentation Northern Illinois University College of Law November 17, 2011

  2. I. Introduction • Reputation as Ethical Consideration – Second article in a series that explores the intersection of corporate law and legal ethics • First article – Returning to First Principles of Privilege Law: Focusing on the Facts in Internal Corporate Investigations, 60 Kan. L. Rev. 33 (2011) (“facts-communication” model for the corporate attorney-client privilege in selective waiver cases) • Third article (work-in-progress) – In Search of Corporate Legal Ethics; primary research to begin during Spring Term 2012

  3. I. Introduction • Framework for conflicts of interest scenarios • Activity Rules • Liability Rules • Disclosure Rules • Ethical Rules • Thesis: cases involving conflicts of interest in the area of corporate and securities law may be viewed, as a matter of legal theory, as cases calling into question the substantial depletion of reputational capital, or a reputational theory of conflicts of interest

  4. II. Categories of Conflicts Rules • Activity Rules • Definition: rules of law that prescribe the permitted activity that the corporate gatekeeper may engage in as part of her professional representation of her chosen client • Primarily negative rules that prohibit identified activity that the corporate gatekeeper may undertake • Sarbanes Oxley § 201 (Services Outside the Scope of Practice of Auditors) • Glass-Steagall (separation of commercial and investment banking) • Volcker rule (limitations on proprietary trading)

  5. II. Categories of Conflicts Rules • Liability Rules • Definition: rules of law that attach liability to the actions (or lack thereof) of the corporate gatekeeper • A method of compensating an aggrieved party for the damages caused by another • Aiding-and-abetting liability under Section 10(b) of the Securities Act • Central Bank v. First Interstate Bank of Denver, 511 U.S. 164 (1994) (no implied private cause of action) • Stoneridge Investment Partners v. Scientific Atlanta, 552 U.S. 148 (2008) (no “scheme liability” due to lack of reliance)

  6. II. Categories of Conflicts Rules • Disclosure Rules • Definition: rules of law concerning the registration and reporting process for publicly traded companies under federal securities law and regulation • Justice Brandeis – “sunlight is said to be the best of disinfectants” and the federal securities law system • Sarbanes-Oxley § 406: Code of Ethics for Senior Financial Officers • Dodd-Frank § 952: Compensation Committee Independence Standards

  7. II. Categories of Conflicts Rules • Ethical Rules • Distinction between first-order and second-order ethical rules, as a matter of logic • First-Order Ethical Rule: a rule of ethics as may be prescribed by the relevant profession • 1908 Canons of Professional Ethics • 1969 Model Code of Professional Responsibility • 1983 Model Rules of Professional Conduct • Second-Order Ethical Rule: a rule of ethics as may be prescribed by the competent authority • Attorney Conduct Rules as mandated by Sarbanes-Oxley § 307; “up the ladder” reporting process

  8. III. The Substantial Depletion of Reputational Capital • What is reputation? • Reputatio: the action of thinking about, consideration; a subject of thought, reflection • Comparing the Categories of Conflicts Rules • Gatekeeper Positive Interest: matters that fall within the self interest of such gatekeeper as a member of her chosen profession • Negative interest as logical opposite • Corporation Positive Interest: matters that fall within the self interest of the corporate enterprise, broadly considered • Again, negative interest as logical opposite

  9. Corporation Negative Interest Positive Interest Gatekeeper Gatekeeper Negative / Corporation Negative Gatekeeper Negative / Corporation Positive Negative Interest Gatekeeper Positive/ Corporation Negative Gatekeeper Positive/ Corporation Positive Positive Interest

  10. Corporation Negative Interest Positive Interest Gatekeeper Activity Rules Gatekeeper Negative / Corporation Negative Liability Rules Gatekeeper Negative / Corporation Positive Negative Interest Disclosure Rules Gatekeeper Positive/ Corporation Negative Ethical Rules Gatekeeper Positive/ Corporation Positive Positive Interest

  11. Corporation Negative Interest Positive Interest Gatekeeper Activity Rules Liability Rules Negative Interest Disclosure Rules Ethical Rules Positive Interest

  12. III. The Substantial Depletion of Reputational Capital • Dodd-Frank § 952 – Compensation Committee Independence Standards • Disclosure rule, inclusion of language to highlight the reputation of the corporate gatekeeper • Potential benefits of a Reputational Theory • Relevant profession more proactively addresses matters of conflict of interest • Gatekeeper reminded of the importance of preserving her reputational capital • Collective action problem addressed through universal application to the gatekeepers in question • Normative ends of justice may be more fully achieved

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