PINNING THE BLAME ON WALL STREET'S LAWYERS
Remember Donald M. Feuerstein? He was the general counsel of Salomon Inc. who left in the wake of the August, 1991, government-bond auction scandal--along with four other Salomon executives, including CEO John H. Gutfreund. So far, the Securities & Exchange Commission has not charged any of the Salomon five.
But it now appears that the SEC is getting ready to move--in a way that has the securities industry all riled up. Feuerstein may be hit with a charge normally reserved for line managers: "The SEC seems to be doing what it can to bring 'failure to supervise' charges against Don Feuerstein," says Robert I. Kleinberg, who heads the Legal & Compliance Div. of the Securities Industry Assn. (SIA) and is general counsel at Oppenheimer & Co. "It's a bum rap to be considered a supervisor when you are a professional legal adviser." The SEC declined to comment.
Says Harvey L. Pitt, Feuerstein's attorney and a former SEC general counsel: "While the SEC was certainly considering the issue of whether a lawyer could be charged with the failure to supervise . . . to my knowledge, no decisions have been made to charge Feuerstein with a failure to supervise."
KEEPING MUM. At issue is whether Feuerstein, as the in-house lawyer, should have acted more aggressively after he learned in April, 1991, that top trader Paul W. Mozer had been submitting false bond bids. While he persistently advised senior management to report the problem, it was August before the firm informed the SEC. Many experts believe Feuerstein should also have told Salomon's board about Mozer's impropriety as soon as it became clear management had not reported it promptly.
The SEC has begun to pin more blame on lawyers and accountants. Last year, for example, the agency charged an accounting firm with conflict of interest. And early this year, the agency held First Albany Corp.'s general counsel responsible for a broker's misconduct for failing to oversee the broker's trading activity adequately. Without admitting liability, the charges were settled (table).
Even though it is still uncertain whether his client will be charged at all, Pitt has been busy rallying industry support. Several weeks ago, he asked the SIA Legal & Compliance Div., made up of general counsels of many Wall Street firms, to sign a letter to the SEC in support of Feuerstein by raising general concerns about going after lawyers.
The SIA division declined to sign Pitt's letter because it wasn't in a position to judge the facts of Feuerstein's case. Instead, on Aug. 5 it sent its own letter to the SEC, voicing alarm at the move toward blaming supervisory lapses on compliance people. It argued that supervision is the role of executives who have authority to "hire, fire, reward, promote, and demote the people who report to them." A general counsel has no such authority over employees. "For the SEC to jeopardize the contribution of these allies and mislabel them 'supervisors' flies in the face of reality and threatens to undermine . . . a devoted group of people who carry your message to Wall Street every day," concludes the letter.
Pitt has succeeded in eliciting an emotional plea from the industry. But it might backfire. The SEC could get tough with Feuerstein to make a point to Wall Street: Give your lawyers and compliance departments more muscle.FIRST THE ACCOUNTANTS, NOW THE LAWYERS?
-- In June, 1991, the SEC charged Ernst & Young with conflict of interest
because Ernst partners borrowed $21.8 million from its client RepublicBank on
favorable terms. Ernst & Young disputes the charges
-- In March, 1992, the SEC found First Albany's general counsel failed to
supervise a broker by not making adequate inquiries into unauthorized trades.
The charges were settled
-- The SEC is considering bringing 'failure to supervise' charges against
Donald Feuerstein, Salomon's former general counsel
Leah Nathans Spiro and Michele Galen in New York, with Dean Foust in Washington