Financial Reporting, Taxation, & Accounting

• Not Every Error Should Compel Restatement

• Likely No More US GAAP Reconciliation For Foreign Companies

• Lessons From The First Years Of Sarbanes-Oxley Reporting

Corporate Governance & Directors' Duties

• How Sarbanes-Oxley Changed Directors' Duties On The State Court Level

• Distinguishing Between The Independent, Outside, And Disinterested Director

Securities Enforcement & Fraud

• Option Backdating And Springloading Under Recent Delaware Case Law

• Overzealous SEC May Be Overcharging Corporate Gatekeepers

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Strait is the gate. Noted securities lawyers and scholars Lewis Lowenfels, Alan Bromberg, and Michael Sullivan have analyzed the cases brought by the SEC against lawyers since enactment of the Sarbanes-Oxley Act. They are trying to discern the SEC's intentions underlying its pronouncements on a lawyer's duty to be a gatekeeper in securities matters. While the Commission occasionally pays lip service to the lawyer's role as an advocate for the client, it has never in practice sought to balance that function against the duty it seeks to impose: securing, regardless of cost, the SEC's idea of compliance. Those costs are extremely high for the lawyer, whose reputation and career can be ruined simply by having the SEC bring an action, valid or not. Significantly, only one of the reported actions resulted in a decision; the rest were settled, usually with consents to an injunction and sometimes with payment of a fine.

They did nothing wrong but wait. The SEC has charged lawyers on various grounds. For example, defendant/lawyers allegedly participated in a fraud directly by concealing or falsifying material information; filed a false notice on Form 12b-25 concerning a registrant's failure to file periodic 1934 Act reports; participated in filing the false periodic reports themselves; sought to evade 1933 Act registration requirements; or issued false opinions in connection with a securities sale or registration. While some of the actions in the first and third categories seem straightforward, closer examination suggests the defendant did nothing wrong other than wait for solid information before pressing for greater disclosure. In SEC v. Isselmann, for example, an in-house general counsel gave proper advice concerning the disclosure of pension costs for certain foreign employees. He then accepted—until he obtained evidence to the contrary—a statement from an executive about outside counsel's opinion on the pension accounts' status under foreign law. In SEC v. Spiegel Inc., a Form 12b-25 case, outside counsel pressed as far as possible its advice to file a Form 10K with a highly damaging qualified auditors' opinion. Counsel then filed Form 12b-25, using a technically correct but arguably misleading rationale for the failure to file the 10K. The authors contend that under the circumstances, which involve an uncooperative controlling stockholder, a blunter statement on the form would have done nothing to protect other shareholders.

Good advice, bad outcome. In a case involving registration exemptions under the 1933 Act, the SEC sought to discipline Google's general counsel. It alleged that counsel had failed to inform the Google board that it had issued too many options to employees, thereby exceeding its private placement limit under Regulation D. The authors disagree, praising the attorney's analysis of the exemptions and the quality of his advice, including his conclusion that even if too many options were issued, a rescission offer could cure the defect without voiding the entire option program. The parties settled the case, perhaps to facilitate Google's subsequent IPO. The one contested case in the review involved counsel who issued a tax exemption opinion in a municipal bond offering. The client/school district decided after the bond sale had closed to change its use of the bond proceeds. The SEC argued that the lawyer should have compelled the district to revise its bond prospectus, since the change could affect the bonds' tax exemption. The SEC's administrative law judge did not concur, ruling that the lawyer had acted properly based on the information available to him and was not responsible for requiring corrective disclosure after his representation had ended.

Rough waters ahead. The authors question the soundness of the SEC's legal theories and judgment in bringing many of its cases, which often fail to distinguish between major offenses and low-impact errors in gray areas. Nevertheless, they caution, the rapid proliferation of such cases, the disparity of contexts in which charges arise, and the variety of legal theories invoked by the SEC show that the SEC is aggressively seeking to charge lawyers with responsibility to police issuers' and registrants' internal information. To the SEC, the lawyer should independently verify nearly all statements of any significance, raise any issues to the highest levels, and—in effect—not take no for an answer. The authors believe that the SEC is seeking to exploit lawyers' vulnerability to reputational damage to advance its own agenda. Given this vulnerability, lawyers may have little choice but to comply.

Abstracted from University of Toledo Law Review, published by University of Toledo College of Law, MS 507, 2801 West Bancroft Street, Toledo, OH 43606. To subscribe, call (419) 530-2962; or visit http://law.utoledo.edu/students/lawreview/index.htm.