Hostname: page-component-7c8c6479df-995ml Total loading time: 0 Render date: 2024-03-19T07:22:42.945Z Has data issue: false hasContentIssue false

The Kaye Scholer Affair: The Lawyer's Duty of Candor and the Bar's Temptations of Evasion and Apology

Published online by Cambridge University Press:  27 December 2018

Abstract

The charges brought by the Office of Thrift Supervision against the law firm of Kaye, Scholer, Fierman, Hays, and Handler, in 1992 generated the most prominent legal ethics controversy of the decade. Despite massive attention to the case, the substance of the OTS charges has received little analysis and has been often mischaracterized. This article analyzes the charges and the bar's response to them. It concludes that the charges were plausible prima facie. It argues, further, that the response by bar organizations and leaders has been pervasively disingenuous and irresponsible. It also identifies and analyzes some broad ethical issues raised by the case about the participation of lawyers in financial scandals. The article concludes with an appendix reporting and assessing Kaye Scholer's response to the charges.

Type
“From the Trenches and Towers”
Copyright
Copyright © American Bar Foundation, 1998 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

References

Adams, Edward. 1992. Panel Condemns Kaye Scholer Asset Freeze. New York Law Journal , 1 April, p. 1.Google Scholar
American Bar Association (ABA). 1969. Model Code of Professional Responsibility. Chicago: American Bar Association.Google Scholar
American Bar Association (ABA). 1983. Model Rules of Professional Conduct. Chicago: American Bar Association.Google Scholar
American Bar Association Standing Committee on Legal Ethics and Professional Responsibility (ABA Standing Committee). 1993. Formal Opinion 93–375: The Lawyer's Obligation to Disclose Information Adverse to the Client in the Context of a Bank Examination, 6 August.Google Scholar
American Bar Association Working Group on Lawyers' Representation of Regulated Clients (ABA Working Group). 1993. Laborers in Different Vineyards? The Banking Regulators and the Legal Profession. Chicago: American Bar Association.Google Scholar
American Law Institute. 1958. Restatement of Agency 2d. St. Paul, Minn.: American Law Institute.Google Scholar
American Law Institute. 1977. Restatement of Torts 2d. St. Paul, Minn.: American Law Institute.Google Scholar
American Law Institute-American Bar Association (ALI-ABA). 1994. Reforming Legal Ethics in a Regulated Environment. Chicago: ALI-ABA.Google Scholar
Association of the Bar of the City of New York (ABCNY). 1992. Attachment of Law Firm Assets by Federal Regulatory Agencies. The Record of the Association of the Bar of the City of New York 47:116128.Google Scholar
Baxter, Lawrence. 1993. Fiduciary Issues in Federal Banking Regulation. Law and Contemporary Problems 65:744.Google Scholar
Beck, Susan. 1990. Keating's Bouncer. American Lawyer , January-February, 4048.Google Scholar
Beck, Susan, and Orey, Michael. 1992. They Got What They Deserved. American Lawyer , May, 6781.Google Scholar
Binstein, Michael, and Bowden, Charles. 1993. Trust Me: Charles Keating and the Missing Billions. New York: Random House.Google Scholar
BNA Banking Report. 1993. Kaye Scholer Lawyers Cleared by New York Disciplinary Panel. BNA Banking Report , 6 December, 902.Google Scholar
Breyer, Stephen, and Stewart, Richard. 1992. Administrative Law and Regulatory Policy. Boston: Little, Brown.Google Scholar
Brown, George. 1994 Financial Institution Lawyers as Quasi-Public Enforcers. Georgetown Journal of Legal Ethics 7:637724.Google Scholar
Coombs, Nancy Amoury. 1994 Understanding Kaye Scholer: The Autonomous Citizen, the Managed Subject, and the Role of the Lawyer. California Law Review 82:63716.Google Scholar
Crawford, Patrick. 1993. Inefficiency and Abuse of Process in Banking Regulation. Virginia Law Review 79:205–42.Google Scholar
Cushman, John H. Jr. 1992. $400 Million Paid by S & L Auditors, Settling U.S. Case. New York Times, 26 November, A1, col. 6.Google Scholar
Davis, B. J. 1986. Letter to Peter Fishbein, 8 August. Copy on file with author.Google Scholar
Day, Kathleen. 1993. S & L. Hell: The People and Politics Behind the $1 Trillion Savings and Loan Scandal. New York: Norton.Google Scholar
Day, Robert G. 1993. Administrative Watchdogs or Zealous Advocates? Implications for Legal Ethics in the Face of Expanded Attorney Liability. Stanford Law Review. 45:645–86.Google Scholar
DeBenedictis, Don J. 1992. The Big Freeze. ABA Journal , July, 5761.Google Scholar
Douglas, John L., and Train, John K. 1992. Kaye-Scholer Case: Lessons for Banking Lawyers and Clients. Banking Policy Reporter , 4 May, p. 1.Google Scholar
Fischel, Daniel. 1995. Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution. New York: HarperCollins.Google Scholar
Fishbein, Peter. 1996. Letter to William Simon, 9 December. Letter on file with author.Google Scholar
Fox, Lawrence J. 1993. OTS v. Kaye Scholer: An Assault on the Citadel. Business Lawyer 48:1521–42.Google Scholar
France, Steve. 1992. Just Deserts: Don't Cry for Kaye, Scholer. Legal Times , April, p. 8.Google Scholar
Frankel, Marvin. 1975. The Search for Truth: An Umpireal View. University of Pennsylvania Law Review 123:1031–59.Google Scholar
Frankel, Marvin. 1992. Lawyers Can't Be Stool Pigeons. New York Times, 14 March, A25, col. 6.Google Scholar
Freedman, Monroe. 1994 Kaye Scholer—Overzealous or Overblown South Texas Law Review 35:577–83.Google Scholar
Gillers, Stephen, and Simon, Roy Jr. 1992. Regulation of Lawyers: Statutes and Standards. Boston, Little, Brown.Google Scholar
Goldberg, Stephanie. 1992. Welcome to the New Uncertainty. ABA Journal , July, 5152.Google Scholar
Granelli, James. 1992. Keating Trial Turns on Questions of Credibility. Los Angeles Times , 14 December, D2, col. 3.Google Scholar
Hazard, Geoffrey C. Jr. 1993a. Lawyers and Client Fraud: They Still Don't Get It. Georgetown Journal of Legal Ethics 6:701–36.Google Scholar
Hazard, Geoffrey C. Jr. 1993b. Lawyer Liability in Third Party Situations: The Meaning of the Kaye Scholer Case. Akron Law Review 26:394406.Google Scholar
Hazard, Geoffrey C. Jr., Koniak, Susan, and Cramton, Roger. 1994. The Law and Ethics of Lawyering. 2d ed. Mineola, N.Y.: Foundation Press.Google Scholar
Holmes, Oliver Wendell Jr. 1931. Codes, and the Arrangement of the Law. Harvard Law Review 44:725–54 Reprint of 1870 article.Google Scholar
Jackson, Howell. 1993. Reflections on Kaye, Scholer: Enlisting Lawyers to Improve the Regulation of the Financial System. 1993. Southern California Law Review 66:1019–74.Google Scholar
Jennings, Richard, Marsh, Harold Jr., and Coffee, John C. Jr. 1992. Securities Regulation. 7th ed. Mineola, N.Y.: Foundation Press.Google Scholar
Kostant, Peter C. 1993. When Zeal Boils Over: Disclosure Obligations and the Duty of Candor of Legal Counsel in Regulatory Proceedings After the Kaye Scholer Settlement. Arizona State Law Review 25:487546.Google Scholar
Langevoort, Donald C. 1993. Where Were the Lawyers? A Behavioral Inquiry Into Lawyers' Responsibility for Clients' Fraud. Vanderbilt Law Review 46:75120.Google Scholar
Lieberman, Hal. 1993. Letter to Peter Fishbein, 9 August. Copy on file with author.Google Scholar
Lieberman, Carolyn B., Smith, Dwight W. III, and Segall, Lewis A. 1995. Professional Conduct in Representing a Regulated Industry: The OTS Experience. South Texas Law Review 35:607–37.Google Scholar
Liebold, Arthur Jr. 1993. Lawyers at Risk: Lawyer Asset Freezes and Other Chilling Experiences. Review of Litigation 12:573618.Google Scholar
Lin, Laura. 1994 Shifting Fiduciary Duty upon Corporate Insolvency. Vanderbilt Law Review 46:14851524.Google Scholar
Loss, Louis, and Seligman, Joel. 1989. Securities Regulation. 3d ed. Vol. 2. Boston: Little, Brown.Google Scholar
Luban, David. 1995. The Social Responsibilities of Lawyers: A Green Perspective. George Washington Law Review 63:955–83.Google Scholar
Macey, Jonathan. 1989. The Political Science of Regulating Bank Risk. Ohio State Law Journal 49:1277–98.Google Scholar
Macey, Jonathan R., and Miller, Geoffrey R. 1993. Kaye, Scholer, FIRREA, and the Desirability of Early Closure: A View of the Kaye, Scholer Case from the Perspective of Bank Regulatory Policy. Southern California Law Review 66:1115–44.Google Scholar
Margolick, David. 1992. Lawyers Under Fire: With US Willing to Go After Law Firms: More Whistle Blowing Is Likely. New York Times, 10 March, A1, col. 1.Google Scholar
Margolick, David. 1993. At the Bar: Last Year the Government Brought a Law Firm to its Knees: Should It Have? New York Times, 26 November, D10, col. 1.Google Scholar
Moore, W. John. 1992. Clubbing Counsel. National Law Journal , 5 July, p. 1714.Google Scholar
Nussbaum, Andrew J. 1992. Like Money in the Bank? An Economic Analysis of Fiduciary Duties to Protect the S & L Insurance Fund. Administrative Law Review 44:355401.Google Scholar
Office of Thrift Supervision (OTS). 1992. Matter of Fishbein et al. AP 92–19, 1 March. Reprinted in Practicing Law Institute 1992, 239–322, and (slightly abridged) Gillers and Simon 1992, 734–72.Google Scholar
Pogoda, Kevin. 1994. The Lawyer's Proper Role in the Examination of Financial Institutions: Defining the Duty to Disclose After Kaye Scholer. Santa Clara Law Review 34:135–78.Google Scholar
Painter, Richard. 1998. Letter to William Simon, 4 January.Google Scholar
Painter, Richard W., and Duggan, Jennifer E. 1996. Lawyer Disclosure of Corporate Fraud: Establishing a Firm Foundation. SMU Law Review 50:225–76.Google Scholar
Podgers, James. 1992. Changing the Rules. ABA Journal , July, 5356.Google Scholar
Practising Law Institute (PLI). 1992. The Attorney-Client Relationship After Kaye, Scholer. New York: Practising Law Institute.Google Scholar
Resolution Trust Corporation, Office of Investigations. 1994. Semi-Annual Report: June 30, 1993-December 31, 1993. Washington, D.C.: Government Printing Office.Google Scholar
Schneyer, Ted. 1994. From Self-Regulation to Bar Corporatism: What the S & L Crisis Means for the Regulation of Lawyers. Southern Texas Law Review 35:639–76.Google Scholar
Scott, Kenneth E. 1990. Never Again: The Savings and Loan Bailout Bill. Essays in Public Policy No. 17. Stanford, Calif.: Hoover Institution.Google Scholar
Securities and Exchange Commission (SEC). 1991. Litigation Release No. 13118, 1991 SEC Lexis 2788, 12 December.Google Scholar
Southern California Law Review (SC). 1993. Introduction: Kaye, Scholer and the OTS: Did Anyone Go Too Far Southern California Law Review 66:9771220.Google Scholar
Spencer, Gary. 1992. Bar Urges Courts Oversee Asset Freezes. New York Law Journal , 7 April, p. 4.Google Scholar
Sterngold, James. 1996. Judge Throws Out S & L Conviction. New York Times, 3 December, A1, col. 5.Google Scholar
Thompson, Dennis. 1990. Ethics in Congress. Washington, D.C.: Brookings Institution.Google Scholar
Weinstein, Harris. 1993. Attorney Liability in the Savings and Loan Crisis. University of Illinois Law Review 1993:5365.Google Scholar
Wilkins, David. 1992. Who Should Regulate Lawyers Harvard Law Review 105:799887.Google Scholar
Zagorin, Adam. 1997. Charlie's An Angel Newsweek 3 , February, p. 36.Google Scholar

Cases

Azreilli v. Cohen Law Offices, 21 F.3d 512 (2d Cir. 1993).Google Scholar
Cenco v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459 U.S. 880 (1982).Google Scholar
DeLeo v. Ernst & Young, 901 F. 2d 624 (7th Cir. 1990).Google Scholar
Dollar v. Long Mfg., 561 F. 2d 613 (5th Cir. 1977).Google Scholar
FDIC v. Clark, 978 F.2d 1541 (10th Cir.1992).Google Scholar
FDIC v. O’Melveny & Myers, 969 F.2d 744 (9th Cir. 1992), rev'd on other grounds, 114 S. Ct. 2048 (1994).Google Scholar
Franchard Corp., 42 SEC 163 (1964).Google Scholar
Francis v. United Jersey Bank, 87 N.J. 15, 432 A.2d 814 (1981).Google Scholar
Garcia v. Rodey, Dickinson, Sloan, Akin, & Robb, 106 N.M. 757, 750 P.2d 118 (1988).Google Scholar
In re American Continental/Lincoln S&L Sec. Ling., 794 F. Supp. 1424 (D. Ariz. 1992).Google Scholar
In re Carter and Johnson, [1981 Transfer Binder] Federal Securities Law Reporter (CCH) ¶ 82,847 (SEC 1981).Google Scholar
In re Gutfreund, [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85, 067 (Dec. 3, 1992).Google Scholar
Leardi v. Brown, 394 Mass. 151 (1985).Google Scholar
Lincoln Sav. & Loan Ass'n v. Wall, 743 F. Supp. 901 (1990).Google Scholar
Matter of Estate of Lecic, 104 Wis. 2d 592, 312 N.W.2d 773 (1981).Google Scholar
Matter of Kern, [1988 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,342 (Nov. 14, 1988), aff'd [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 997 (June 21, 1991).Google Scholar
Matter of Kielty, 1994 SEC Lexis 881 (Order of March 24, 1994).Google Scholar
Matter of Lincoln Sav. & Loan Ass'n, No. 86–1262, Fed. Home Loan Bank Bd. (April 1, 1986).Google Scholar
Miller v. Doctor's Gen. Hosp., 76 F.R.D. 136 (D. Okla. 1977).Google Scholar
Molecular Technology Corp. v. Valentine, 925 F.2d 910 (6th Cir. 1991).Google Scholar
Pilling v. General Motors, 45 F.R.D. 366 (D. Utah 1968).Google Scholar
Reeves v. Ernst & Young, 507 U.S. 170 (1993).Google Scholar
Rubin v. Schottenstein, 120 F.3d 603 (6th Cir. 1997).Google Scholar
Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991).Google Scholar
SEC v. Frank, 388 F.2d 486 (2d Cir. 1968).Google Scholar
SEC v. National Student Mktg. Corp., 457 F. Supp. 682 (D.DC. 1978).Google Scholar
The T. J. Hooper, 60 F.2d 737 (1932).Google Scholar
Washington State Physicians Ins. Exch. & Ass'n v. Fisons Corp., 122 Wash. 2d 299, 858 P.2d 1054 (1993).Google Scholar