12 Nov The Complex Role of Securities Counsel

Posted at 10:58h in Congress, SEC, The Legal Industry and Cool Legal Cases by

A series of questions comes with the news last week that for the third time in the last year a well-known microcap securities lawyer has been arrested and charged with securities fraud. What is the responsibility of an attorney representing a public company or investors in or advisors to these companies? The Sarbanes-Oxley Act of 2002, and rules the SEC adopted under it, made it clear that these attorneys cannot stand by in the face of wrongdoing. They must report up the line within their client’s public company any “evidence of a material violation.”  What is this? If they have, as the SEC puts it, “credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing or is about to occur.” No legalese there! If the company or its board do not respond when you report, you must resign as counsel.

The SEC did not adopt a requirement of “noisy withdrawal,” which they were considering, which would have required these attorneys to report the wrongdoing to the SEC if the company did not respond. Attorney-client privilege ultimately won over that, which I agree with. I guess the question becomes what is required of a “prudent and competent attorney.” In some cases, fraudster companies deftly hide their misdeeds from advisors and even their attorneys. Assuming the lawyers are not purposely looking the other way, where do we draw these lines? We want to be active advocates and protectors of our clients, and in the case of alleged wrongdoing we more become (arguably rightfully so given that we are ultimately officers of the court) their adversaries.

The SEC has acknowledged it is going after “gatekeepers” such as attorneys and accountants who know or should know when bad things are happening. In addition some of the service providers are accused of being active participants in pump and dump and other fraudulent schemes, or knowingly removing legends off their own stock to allow trading when it was allegedly unlawful to do so. I just hope, in each case, the SEC looks very carefully at what a service provider is accused of, and ensure that stamping out fraud avoids becoming a witch hunt.

 

3 Comments
  • tom russo
    Posted at 13:25h, 12 November

    Striking analysis as usual David. The issue for me is the culture of enforcement has changed, and, with overnight subpoena power, which hunts and fishing expeditions are happening. The Money has become the target, and, when you have a rules as opposed to principles based system like the FSA in London, low hanging fruit is brutalized by goal line moving regulators.

    Ah, but what to expect when a prosecutor runs a regulator..

    no wonder no one has embraced RegA+: handful of filings, I check every day.

    Thanks

    Tom Russo

    • Roland Rick Perry
      Posted at 11:02h, 16 November

      So how do check daily filings for RA+.

      Do you have a link ?

  • David Feldman
    Posted at 13:45h, 12 November

    Thanks very much Tom. As to Reg A+, there are a number of reasons many are choosing “wait and see.” First, the two states that have sued to invalidate the rules create real risk for companies filing now, and some simply wish to wait until that is resolved. Investment banks also are treading carefully, many waiting to see who “goes first” (one respected name already has). We are also carefully working to educate the Street on all the advantages and challenges of moving their deals to Reg A+, and that education with respect to a 400+ page release also will take a little time. I remain very optimistic about the long-term benefit of a streamlined investor-protective, blue-sky preempted smaller IPO market developing and thriving through Reg A+.

    David

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