The outside counsel to a firm charged with securities fraud was barred from practicing before the SEC and faces criminal charges for issuing fraudulent opinion letters. The SEC alleges that the lawyer knowingly omitted material facts in order to opine that his client’s note offering did not constitute a securities offering. The lawyer rendered the opinion letters even though two other law firms came to a different conclusion. The SEC further asserts that the lawyer rendered the fraudulent letters because he received commission on the sales of the notes. The SEC charges the lawyer with aiding and abetting securities fraud.
The SEC (and the U.S. Attorney) will take action against securities markets gatekeepers such as outside lawyers for aiding and abetting securities violations even though the defendant is not directly registered with the SEC. Serving as outside counsel does not allow a lawyer to further a client’s fraud.
The SEC has sued a lawyer for aiding and abetting securities fraud by preparing a registration statement that failed to disclose that the principal was a convicted felon that controlled the issuer. According to the SEC, the principal instructed the lawyer that he should not be named as an officer or director of the issuer because of his prior conviction. Nevertheless, according to the SEC, the lawyer knew that the principal fully controlled the issuer and failed to include such disclosure in the Form S-1. The SEC also charges that the lawyer knew or was severely reckless in not knowing that the three persons listed as officers and directors had not agreed to serve.
OUR TAKE: The SEC will hold gatekeepers, including lawyers, accountable for their bad clients. This case goes further than prior enforcement cases by prosecuting a lawyer for reckless conduct rather than knowingly furthering a specific fraud.
The SEC barred from the industry a purported lawyer that failed to investigate red flags arising in municipal bond offerings for which he served as underwriter’s counsel. The sponsor of the offerings previously settled an SEC enforcement action pursuant to which he agreed to repay over $86 Million to investors because of misleading disclosures about compliance with municipal disclosure requirements. The SEC faults the lawyer for engaging in a weak due diligence that failed to investigate disclosure red flags that were raised by several parties involved in the transaction. Additionally, the respondent claimed to be a lawyer even though he was not actively admitted to the bar in any jurisdiction. The SEC charges the respondent with fraud in the offer and sale of securities as well as causing the issuer’s legal violations.
OUR TAKE: The SEC will hold gatekeepers such as lawyers accountable for the bad acts of their clients. This case expands gatekeeper liability by charging securities fraud even though the lawyer is not a registrant.
The SEC charged two lawyers with securities fraud for providing legal opinions and other assistance to fraudulent blank check company schemes. One of the lawyers also faces criminal charges brought by the U.S. Attorney’s Office. The lawyers are accused of issuing due authorization and Rule 144 opinions, prerequisites to the public offering and sale of the shell companies, as well as other substantial assistance including moving assets through their lawyer trust accounts. The Director of the SEC’s Miami Regional Office warned that “Lawyers are critical gatekeepers when it comes to protecting the integrity of our capital markets.”
OUR TAKE: Lawyers and other securities markets gatekeepers cannot plead ignorance when red flags indicate that they knew or should have known about their clients’ wrongdoing. Firms must conduct significant due diligence both before accepting a client and during representation. It is also noteworthy that the SEC charged the lawyers with securities fraud and not just aiding/abetting.
The SEC fined and barred an attorney from practicing before the Commission for failing to conduct proper due diligence as underwriter’s counsel for misleading municipal bond offerings. According to the SEC, the lawyer prepared disclosure documents that contained erroneous statements that the issuer would comply, and had complied, with certain continuing disclosure obligations. The SEC faults the lawyer for failing to conduct proper due diligence and relying solely on statements from the issuer. The SEC also alleges that the lawyer ignored red flags that the disclosure was inaccurate. The SEC separately prosecuted the issuer and the underwriter.
OUR TAKE: We have previously predicted that the SEC would target lawyers as a class of gatekeepers responsible for policing securities markets. Counsel cannot ignore wrongdoing by claiming to have relied solely on client representations.