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 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.