When accounting giant Arthur Andersen agreed to pay $ 217 million last May to settle civil charges concerning its work for the Baptist Foundation of Arizona, heads turned. The foundation, it had been alleged, was nothing but a huge Ponzi scheme. The settlement was the second-largest ever by an accounting firm.

But what about the lawyers? In this case, they were quietly settling too. Jennings, Strouss & Salmon, the established, Phoenix-based corporate law firm that advised the so-called charity, ponied up $ 21 million to settle negligence claims even before it was formally sued. Such cases are unusual. In fact, so far only two law firms have been named in shareholder lawsuits filed in connection with the major corporate scandals of the past year, and one internal general counsel has been implicated. But a certain momentum is now building to hold lawyers accountable. U.S. News has learned that during the past 15 months, the Securities and Exchange Commission has made 11 disciplinary referrals to state bars, compared with one or two annually in years past. "One of the biggest disappointments for me since I came to the SEC has been observing the way lawyers are often involved in violations of securities laws," SEC Chairman Harvey Pitt told a conference in September in an unguarded moment. "It's horrendous." And last week, securities lawyers began drafting comments to the SEC's proposed new rule--required by the Sarbanes-Oxley Act--that would require corporate attorneys to report wrongdoing up the corporate ladder. The idea is that the rule would provide one more defense against incipient corporate outrages.

New muscle. Reform advocates hope that throwing the enforcement muscle of the SEC behind the rule will give it legs. "If the Baptist Foundation of Arizona had occurred post Sarbanes-Oxley, the SEC would have named the law firm as one of the defendants," says Lawrence Cunningham, professor of law and business at Boston College. The foundation was shut down in 1999 after authorities accused it of swindling nearly $ 600 million from thousands of mostly elderly church members. Although the securities were not federally insured, its investors took comfort that Arthur Andersen signed off on the charity's books and Jennings Strouss provided legal opinions on its investment offerings. It seems, however, they were investing in securities whose collateral did not exist.

Attorneys for Jennings Strouss say they cooperated in the investigation and were unaware of any wrongdoing at the foundation during their decade-long relationship. The firm was named as a defendant in a complaint filed by a victim, the Verde Baptist Church, intervening in the class action lawsuit. The church claimed that "Jennings Strouss either knew, or should have known, or recklessly disregarded" evidence that the BFA was engaged in a Ponzi scheme. Before the victims filed a formal suit against Jennings Strouss, the firm quietly paid $ 21 million to make sure they wouldn't.

Earlier this year in Florida, the national law firm of Baker & Hostetler settled charges it had helped a company raise $ 50 million for a fraudulent leasing operation. Among other things, investors said the firm failed to "undertake any meaningful due diligence" of its client and said it blatantly ignored the fraud as it continued to provide assistance to the company. The law firm paid $ 2.5 million to settle the class action.

A grander bill of particulars can be found in class action suits filed by creditors of bankrupt energy giant Enron against two of its law firms. In the suits, Vinson & Elkins is accused of structuring deals it knew were intended to hide debt and allow Enron to book falsified revenue. Then it drafted and approved SEC documents containing information it knew was false, according to the complaints. To top it off, when the firm was asked to investigate some of the dubious accounting after a whistleblower surfaced, it allegedly conducted a "whitewash investigation." A Vinson & Elkins senior partner has said the firm does not play a role in determining accounting treatment for its clients. More directly, however, Vinson and Elkins is trying to dismiss the case, relying on a 1994 Supreme Court ruling that limits when lawyers can be held liable for helping their clients commit securities fraud.

In the BFA and Florida cases, neither firm admitted any wrongdoing. Even though the law appeared to be in their favor, settling a case can often be less costly than litigating. But law firms are clearly bracing for more battles to come: Many of the large national firms are restructuring to protect the personal assets of the individual partners in the event of a guilty verdict.

So who polices lawyers, anyway? Lawyers are regulated by state bar associations, each of which has its own set of disciplinary rules. But limited resources and weak oversight have plagued many state bars for decades. HALT, an organization for legal reform, recently rated each state's attorney discipline agency using data from the American Bar Association and the state bars. The results were dismal. Using a report card rating, 39 states earned below a C, two failed, and none received an A. Most discipline amounted to little more than concealed scoldings. Nationwide, just over 3 percent of investigations result in public sanctions of lawyers, and only 1 percent end in disbarment. A majority of complaints in many states go entirely unchecked. "[T]he state bars as a whole have failed," said Sen. Michael Enzi, a Wyoming Republican, during the Sarbanes-Oxley debate. "They have provided no specific ethical rule of conduct to remedy this situation. Even if they do have a general rule that applies, it often goes unenforced."

At the very least, states could act on the 11 referrals sent them by the SEC. But Charles Plattsmier, chief disciplinary counsel for the Louisiana State Bar Association, which received at least one referral, says the SEC was really not much help. While he won't discuss the specifics of the case, Plattsmier says the SEC simply forwarded a copy of its consent order against an attorney for violating securities laws, without the evidence used to reach it. Under the state's rules, the bar will have to conduct its own investigation of the lawyer before it can bring disciplinary action. Plattsmier voiced his frustrations with the SEC's reluctance to share details of its case in a detailed letter to Pitt. "I think it came as a surprise to them," he said.

Still practicing. Meanwhile, although the lawyer in question was suspended from practicing before the SEC, he is still allowed to practice law under the state's rules. The lawyers involved in the Baptist Foundation of Arizona and the Florida leasing operation are also still practicing law--indeed, it's not clear that any discliplinary complaints were ever filed against them. In fact, none of the lawyers involved in the savings and loans scandals in the 1980s were disciplined by state bars. Law firms paid $ 180 million in settlements to federal agencies to put that crisis behind them.

Pitt's election night resignation from the SEC leaves many questions unanswered, including whether his determination to clean up the legal profession will continue after he is replaced. "Many of Pitt's ideas are now radioactive," says financial consultant Bert Ely. "I can't see this as a front-burner issue." An expected round of technical revisions to the Sarbanes-Oxley Act adds to the uncertainty. The American Bar Association's lobbying efforts to thwart the attorney discipline rule failed initially, but any tinkering with the law exposes new possibilities to have it removed. SEC Commissioner Roel Campos thinks lawyers should be held accountable for their actions, but he stops short of pushing the state bars into action. "We as a commission don't want to get into the business of what the individual state bars should do," he says.

Meanwhile, the legal nonprofit National Organization of Bar Counsel is trying to work through the state bar issues with the SEC's Office of Ethics Counsel. "Most states take pride in their work," says its president, Barbara Margolis. "We're not breathing a sigh of relief because the chairman is losing his job."