Academic journal article Washington and Lee Law Review

"Up the Ladder" and Over: Regulating Securities Lawyers-Past, Present & Future

Academic journal article Washington and Lee Law Review

"Up the Ladder" and Over: Regulating Securities Lawyers-Past, Present & Future

Article excerpt

I. Introduction

Over thirty years ago the securities and Exchange Commission (SEC or the Commission) filed a complaint against two major law firms and charged them with violating the securities laws. Since that time, the legal profession, in one form or another, has tried to deny its responsibilities for client conduct that may be fraudulent or worse. At the same time, the profession has disputed the authority of the SEC to discipline its members when they violate the securities laws or assist their clients in doing so.1

Fast forward to summer 2002. In the face of a growing scandal of arguably unprecedented dimensions in the corporate and securities world, Congress made clear that both lawyers and accountants have duties beyond those owing to their immediate clients, and have obligations to their so-called "true clients," to borrow a phrase from the former Chairman of the SEC, Harvey Pitt.2 In the law popularly known as "Sarbanes-Oxley," named for its primary sponsors, Congress further made clear that the SEC has both the power and the duty to police lawyers and accountants who practice before it.3 In an effort to illuminate the broader historical context in which this most recent regulation arose, this Article briefly reviews the events that have led the legal profession to become the subject of regulation by Congress and the SEC.

In late 2002, the Commission issued its proposed rules implementing Section 307 of the Sarbanes-Oxley bill.4 The release caused an uproar in the legal community, with the rules as drafted threatening to revolutionize the contours of the attorney-client privilege, as well as the general corporate environment to which issuer-clients and securities lawyers had become accustomed. The comments that the Commission received were numerous and impassioned. Whether the rules were wise or prudent-and whether the statute even authorized all of them-were addressed at length. Those comments, the additional coverage that the proposed rules attracted in the public sphere, and the changes made (and not made) to the adopted rules5-released in January 2003, and taking effect this summer-are the latest development in a long struggle of wills between the Commission and the organized Bar. They confirm that, at this critical time, the dialogue is as robust as ever.

The authors do not necessarily applaud regulation of the legal profession by any government entity, much less the national government, when historically (and for good reason) the legal profession has not been subject to regulation at any official level. Clearly, lawyers often stand to protect the rights of many people and institutions whose freedom and property are threatened by the government; sometimes that threat is for good reasons, sometimes for bad reasons. However, as will be apparent from our discussion, there are times when the profession itself has failed to act responsibly and, as a result, arguably bad law has filled the void. This is not to justify the result. Rather, we hope to provide some insight into the events that led to this regulation of the legal profession not only by the SEC, but also by other governmental entities that can likewise act when members of the profession fail to act as they should.6

II. How We Got Here: Some History

The legislative history of the securities laws demonstrates that the legal profession has long been at the forefront of helping clients commit securities fraud. As justice Douglas (a former Chairman of the SEC) noted in 1934, quoting a popular columnist of the day:

But just as a fine, natural football player needs coaching in the fundamentals and schooling in the wiles of the sport, so, too, it takes a corporation lawyer with a heart for the game to organize a great stock swindle or income tax dodge and drill the financiers in all the precise details of their play.

Otherwise, in their natural enthusiasm to rush in and grab everything that happens not to be nailed down and guarded with shotguns they would soon be caught offside and penalized, and some of the noted financiers who are now immortalized as all-time all-American larcenists never would have risen beyond the level of the petty thief or short-change man. …

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