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U.S. Securities and Exchange Commission investigators are considering extending the reach of enforcement actions in cases involving complex financial transactions to lawyers who provided the legal advice on fraudulent deals, an agency official said.
“I’ve seen some factual situations where advice that was given didn’t look like it was done in good faith,” Kenneth Lench, head of the structured products unit in the SEC’s enforcement division, said today at a law event in New York. “Something we need to seriously consider in appropriate cases are charges against lawyers.”
The SEC typically sanctions individuals who play an active role in making false statements or material omissions to investors, not the lawyers who advise them. Often, in matters involving a company and its employees, the individuals claim the lawyers signed off on the conduct in question, Lench said.
That claim presents a challenge for the SEC because communications between attorneys and their clients are generally considered confidential and not available to regulators who are investigating a matter. If the company refuses to waive confidentiality in the course of the probe, it can be difficult for the SEC to prove that someone willfully violated the law, he said.
Lench, whose unit is responsible for uncovering fraud in structured products such as mortgage-backed securities and derivatives, also said that the agency is prepared to pursue negligence claims against individuals who didn’t take reasonable steps to keep a fraud from occurring. Negligence is a lower legal standard than intentional or reckless fraud.
Mark Schonfeld, a former SEC attorney who is now a partner at law firm Gibson Dunn & Crutcher LLP (1128L) in New York, said the agency’s willingness to litigate cases based solely on claims of negligence is “dangerous ground to start treading on as an enforcement agency.” Schonfeld also spoke at the event, a conference on securities law enforcement sponsored by the New York City Bar Association.
Lench said those cases can have a deterrent impact.
“If it causes people to do their jobs better, that’s a positive thing,” said Lench.
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