NYCLA CLE I NSTITUTE credit toward certification in civil tria in civil toward certification credit 3 hours of total CLE credit. Of these, 1.5 qualify ashours of credit for ethics/professionalism, and 0 qualify as hours of This program has been approved by the Board of Continuing Legal Education of the Supreme Court of New Jersey for Practice Ethics; 1.5 Professional 1.5 hours; credit and Non-Transitional for amaximumBoard 3Transitional of This course has been approved inaccordance withthe requi
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Information Regarding CLE Credits and Certification Ethical and Other Recent Developments in Financial Litigation May 24, 2011, 6:00PM to 9:00PM
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Ethical and Other Developments in Financial Litigation Tuesday, May 24, 2011 6:00 PM – 9:00 PM
Table of Contents
SEC Enforcement Developments, by Gerald Russello
Litigation Implications of the Financial Crisis, by Vincent Chang
H.R. 4173, submitted by Sarah Warren
Ethics Materials, compiled by Gordon Eng
Faculty Biographies
New York County Lawyers’ Association Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646
Ethical and Other Recent Developments in Financial Regulation and Litigation
Tuesday, May 24, 2011, 9:00 AM – 12:00 PM
Program Co-sponsor: NYCLA’s Federal Courts Committee
Moderator & Faculty: Vincent T. Chang, Wollmuth Maher & Deutsch LLP
Faculty: Gordon Eng, Debevoise & Plimpton LLP; Craig Carpenito, Alston + Bird, LLP; Sarah Warren, Fried, Frank, Harris, Shriver & Jacobson LLP
AGENDA
5:30 PM – 6:00 PM Registration
6:00 PM – 6:10 PM Introductions and Announcements
6:10 PM – 7:00 PM Recent Developments in Financial Regulation Craig Carpenito, Alston + Bird, LLP; Sarah Warren, Fried, Frank, Harris, Shriver & Jacobson LLP
7:00 PM –7:10 PM BREAK
7:10 PM – 8:00 PM Recent Development in Financial Litigation Vincent T. Chang, Wollmuth Maher & Deutsch LLP
8:00 PM – 8:10 PM BREAK
8:10 PM – 8:50 PM Ethical Developments Gordon Eng, Debevoise & Plimpton LLP
8:50 PM – 9:00 PM Questions from the Audience
SEC Enforcement Developments
NYCLA March 29, 2011
Gerald J. Russello Partner 1 New Enforcement Division Units
• Announced on Aug. 5, 2009 and heads for each division named on Jan. 12, 2010 • Asset Management (Bruce Karpati and Robert B. Kaplan) – Focus on investment advisors, investment companies, hedge funds, and private equity funds – Disclosure, valuation, portfolio performance, transactions with affiliates, due diligence and diversification, transactions with affiliates, misappropriation and conflicts of interests • Market Abuse (Daniel M. Hawke) – Focus on preventing market abuses and complex manipulation schemes, including insider trading – Unit will use tools to target suspicious activity across markets, including equities, debt securities and derivatives, and across different corporate announcements and market events • Structured and New Products (Kenneth R. Lench) – Focus on complex derivatives and financial products, including CDS, CDOs, securitized products and newly-developing products • Foreign Corrupt Practices Act (Cheryl J. Scarboro) – Focus on new and proactive approaches to identifying violations of the FCPA – Unit will take a more global approach to these violations by working with foreign counterparts • Municipal Securities and Public Pensions (Elaine C. Greenberg) – Focus on potential abuses in municipal securities including offering and disclosure issues, tax and arbitrage activity, unfunded or underfunded liabilities and “pay to play” schemes
Gerald J. Russello Partner Bingham McCutchen LLP 2 Cooperation Guidelines • SEC announced measures to strengthen its enforcement program by encouraging greater cooperation. • Initiative establishes a structure for individuals and companies to truthfully cooperate and assist: – Could result in increased credit – Oral Assurances that Staff will not recommend charges – Cooperation Agreements/Deferred Prosecution/Non-Prosecution Agreements – Carter’s case first example of this new approach – Effects of the new policy remain to be seen • SEC provided an analytical framework to evaluate whether, how much, and in what manner to credit cooperation: – Assistance Provided – Importance of Matter – Interest in Holding Party Accountable – Profile of the Individual Gerald J. Russello Partner Bingham McCutchen LLP 3 Recent Cases in Aftermath of Economic Crisis: Disclosures • SEC v. Mozilo (2009) – Charged former Countrywide CEO Angelo Mozilo and several other Countrywide officers with securities fraud for misleading investors about the significant credit risks being taken in an effort to build and maintain the company’s market share. – Investors were assured Countrywide was a prime quality mortgage lender, when in fact, Countrywide was writing increasingly risky loans and the senior executives knew defaults and delinquencies would rise. – Mozilo also charged with insider trading. – Mozilo settled for $67.5 million in penalties and disgorgement-- the highest fine ever given to an executive of a public company.
Gerald J. Russello Partner Bingham McCutchen LLP 4 SEC v. Goldman Sachs & Co. (2010)
• Alleged Goldman structured and marketed a synthetic CDO tied to performance of subprime residential mortgage-backed securities (RMBS) – Goldman failed to disclose important information about the CDO, specially, the role a major hedge fund, Paulson & Co., played in the portfolio selection process and the fact it had taken a short position against the CDO. – Paulson shorted the portfolio it helped select by entering into credit default swaps with Goldman to buy protection on certain layers of the CDO capital structure. Thus, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. – Goldman paid $550 million to settle the charges. – Investigation into these structures is continuing.
Gerald J. Russello Partner Bingham McCutchen LLP 5 Recent Cases: Sales Practices • SEC v. ICP Asset Management (2010) – SEC charged the investment advisor and three affiliated firms with fraudulently managing investment products tied to the mortgage markets. – At the direction of its owner and president, ICP defrauded four CDOs by directing more than a billion dollars of trades for them at inflated prices. – ICP repeatedly caused the CDOs to overpay for securities in order to make money for ICP clients and protect other clients from realizing losses. – ICP caused the CDOs to lose tens of millions of dollars while obtaining millions in advisory fees and profits. – Court recently denied motion to dismiss.
Gerald J. Russello Partner Bingham McCutchen LLP 6 Recent Cases: Sales Practices • SEC v. State Street Bank (2010) – Alleged to have mislead investors during the subprime mortgage crisis about the extent of subprime mortgage-backed securities held in certain funds under management and selectively disclosed more complete information about subprime investments to certain investors. – State Street established a fund in 2002 and marketed it as an “enhanced cash” investment strategy alternative to a money market fund -- by 2007 the fund was almost entirely invested in subprime mortgage-backed securities and derivatives. – In July 2007 State Street sent certain investors misleading communications concerning the effect of the subprime market on the fund, while also providing other investors more accurate information about the subprime concentration and problems in the fund. – In addition to the $340 million paid to investors in private actions, State Street consented to a settlement of over $300 million for deposit in a Fair Fund for the benefit of harmed investors.
Gerald J. Russello Partner Bingham McCutchen LLP 7 Recent Cases: Sales Practices • SEC v. Citigroup (2010) – SEC charged Citigroup and two executives with misleading investors about the company’s subprime exposure. – In response to intense investor interest on the topic, Citigroup repeatedly made misleading statements in earnings calls and public filings about the extent of its holdings of assets backed by subprime mortgages. – Citigroup represented its subprime exposure was $13 billion or less when it was more than $50 billion. – Citigroup settled for $75 million and the two executives settled for $100,000 and $80,000. – “The rules of financial disclosure are simple - if you choose to speak, speak in full and not in half-truths.” Khuzami (July 29, 2010).
Gerald J. Russello Partner Bingham McCutchen LLP 8 Recent Cases: Pricing/Valuation
• In re Morgan Asset Management, Inc. (2010) – SEC brought administrative proceeding against Morgan Keegan and two employees accused of fraudulently overstating the value of securities backed by subprime mortgages. – Morgan Keegan failed to use reasonable procedures to internally price portfolio securities and therefore did not calculate accurate “net asset values” (NAVs) for the funds – Morgan Keegan published these NAVs and sold shares to investors based on inflated prices.
Gerald J. Russello Partner Bingham McCutchen LLP 9 Recent Cases: Financial Reporting • SEC v. Perry (2011) – SEC charged three former IndyMac senior executives with securities fraud for misleading investors about the mortgage lender’s worsening financial condition. – Despite regular internal reports showing IndyMac’s deteriorating capital and liquidity positions in 2007 and 2008, the executives failed to ensure adequate disclosure of the information in its financial reports and offering materials for the sale of millions of dollars in new stock. – One executive settled to a permanent injunction, a $100,000 penalty and $25,000 in disgorgement plus $1,592.26 in prejudgment interest.
10 Recent Cases: Insider Trading
• SEC v. Galleon (2010/2011) – The SEC has charged 27 defendants in an action that alleges widespread and repeated insider trading by numerous hedge funds and other professional traders in the securities of 14 companies, generating illicit profits of about $69 million. • SEC v. Gupta (2011) – Most recently, the SEC brought administrative proceedings against Goldman Sachs’ director, Rajat K. Gupta, for providing confidential information learned in his role as a board member, to Raj Rajaratnam. Rajaratnam used the information to trade for some of Galleon’s hedge funds or shared the information with others at his firm who traded on it ahead of the pubic. The trading generated more than $18 million in profits or loss avoidance. – At the time, Gupta was a direct or indirect investor in some of the Galleon hedge funds and had other business interests with Rajaratnam.
Gerald J. Russello Partner Bingham McCutchen LLP 11 Recent Cases: Pension Funds
• SEC order against New Jersey (2010) – In administrative cease and desist proceeding, the SEC charged NJ with securities fraud for misrepresenting and failing to disclose in billion dollar municipal bond offerings that it was underfunding the state’s two largest pension plans. – Documents for offerings between August 2001 and April 2007 created the false impression that the Teachers’ Pension and Annuity Fund and the Public Employee’s Retirement System were being adequately funded. In fact, NJ was unable to make contributions without raising taxes, cutting other services or otherwise changing the budget. – NJ is the first state ever charged by the SEC for a violation of the securities laws. It consented to the cease and desist order. • SEC investigation of California (2011) – The SEC is investigating the California Public Employees’ Retirement System, which suffered heavy losses during the financial crisis. The value of the fund dropped from $260 billion to $160 billion, but has since recovered to about $220 billion. – It is not clear whether the SEC is investigating the adequacy of risk disclosures or possible conflicts of interest in steering investments to related parties, the subject of a separate investigation by the California attorney general.
Gerald J. Russello Partner Bingham McCutchen LLP 12 Recent Cases: Credit Default Swaps • SEC v. Rorech & Negrin (2010) – SEC charged Rorech, a former salesman at an international investment bank, and Negrin, a former portfolio manager at a large hedge fund, with insider trading in credit default swaps (CDSs). – This was the first time the SEC brought an insider trading enforcement action involving CDSs, and to survive the motion to dismiss, the district court needed to find CDSs are subject to SEC enforcement jurisdiction. – The Southern District of New York ruled in favor of the defendants on the insider trading charges, but rejected their argument that the SEC did not have jurisdiction over CDSs because the contracts and prices were privately negotiated between the buyer and seller. – The court found the swaps were “securities-based” and subject to the SEC’s antifraud regulations because the price of the CDSs reflected the price, yield, or value of the underlying bond.
Gerald J. Russello Partner Bingham McCutchen LLP 13 Recent Cases: TARP Fraud
• SEC v. Brown; SEC v. Kelly (2011) – Former Treasurer of Taylor, Bean & Whitaker Mortgage Corp. helped facilitate the sale of over $1.5 billion in fictitious and impaired mortgage loans from TBW to Colonial Bank, and caused them to be reported by Colonial Bank to the public as high-quality, liquid assets. – Further, Brown helped cause Colonial Bank to misrepresent that it was eligible to receive TARP funds. – The SEC previous charged chairman and majority owner, Lee B. Farkas, who also pleaded guilty to criminal charges on Feb. 24, 2011. – Brown consented to a judgment permanently enjoining her from violating the securities laws. Financial penalties are pending. – SEC has also filed charges against the former operations supervisor of Colonial Bank for her role in the sale of the impaired mortgage loans.
14 Recent Cases: Federal Corrupt Practices Act (FCPA) • SEC v. Tyson Foods, Inc. (2011) – The SEC filed a settled civil action against Tyson Foods for violations of the FCPA by its subsidiary, Tyson de Mexico. – Tyson de Mexico made improper payments between 2004 and 2006 to two Mexican government veterinarians responsible for certifying its chicken products for export sales. – The company concealed the improper payments by putting the veterinarians’ wives on its payroll while they performed no services. – Tyson Foods consented to a final judgment ordering disgorgement plus pre-judgment interest of more than $1.2 million and a permanent injunction. – The DOJ also charged the Tyson Foods with criminal FCPA violations. The company agreed to enter a deferred prosecution agreement and pay a $4 million criminal penalty.
15 SEC Goals in Connection With Dodd-Frank • Chairman Shapiro recently noted that in the next year the SEC will: – Work with the CFTC “to shape the regulatory regime for OTC derivatives” – Propose “risk-retention requirements for asset backed securities transactions” – Consider rules for its “recent study recommending that financial professionals who provide personalized investment advice about securities adhere to a fiduciary standard of conduct ‘no less stringent’ than that imposed on investment advisers” – Finalize rules that allow the SEC “to leverage the resources of whistleblowers” – Schapiro, Feb. 4, 2011 (Evolving to Meet the Needs of Investors Address to Practicing Law Institute’s SEC Speaks in 2011 Program)
16 Looking Ahead
• Implementation of Dodd-Frank Rules
• Return of the Audit Committee
• Increased Visibility of Specialized Units
• More Insider Trading
Gerald J. Russello Partner Bingham McCutchen LLP 17
Litigation Implications of the Financial Crisis Vincent T. Chang
• Partner Wollmuth Maher & Deutsch LLP • Board of Directors of NYCLA Definitions
• CDO – “Collateralized Debt Obligation.” A CDO is formed by pooling together other assets and holders of CDO certificates are then paid a fixed amount of principal and interest based upon performance of the underlying assets. The performance of the CDO depends on the performance of the assets underlying it. • RMBS –”Residential Mortgage Backed Securities.” RMBS are collections of residential mortgages. The holders of RMBS are paid fixed amounts of principal and interest. As with CDOs, the quality of the RMBS depends on the performance of the underlying assets. Investors Purchase the Repackaged Securities Originators/ Home Owners Securitization Re-Securitization: CDO2 Investors Lenders CDO 100% 11% Hedge Funds Super AAA AAA Senior AAA
Pension 28% Banks BBB Funds AA 8.6% 20% AAA
A AA Other 11% A Equity Inv. BBB BBB 7% Banks Residual/Equity Resi 0% 7%
1) Lender makes 3) Bonds backed by mortgages 5) New CDOs can be mortgage loan to created in the primary market created from “select” home owners tranches of existing CDOs with a further “re-rating” of risk 2) Lender issues secured 4) Investments may 6) Investors buy certificates backed by become re-securitized customized loans (bonds based on bonds) financial instruments Tranching of Subprime Mortgages
AAA
= $1.1 Trillion
AA A
BBB • 2005 – 2007 First Lien Subprime Mortgage ABS • S&P expected loss ~ $200 billion • AAA rating is higher than that of many Source: S&P, September 3, 2008 governments Origins of the Crisis • $1.1 trillion of subprime loans out of $20 trillion of residential housing value • Plunge in residential housing prices • Many borrowers default or walk away from their loans Principal Obstacle Facing Credit Crisis Plaintiffs
• In March 17, 2010 opinion in the CIBC subprime-related securities suit, Southern District of New York Judge William H. Pauley III described the skepticism that often accompanies the filing of these suits. • “The Complaint describes an unprecedented paralysis of the credit market and a global recession. Major financial institutions like Bear Stearns, Merrill Lynch, and Lehman Brothers imploded as a consequence of the financial dislocation. Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud. …CIBC, like so may other institutions, could not have been expected to anticipate the crisis with the accuracy Plaintiff enjoys in hindsight.” Lawsuits Against Subprime Parties
• Lenders (inadequate disclosures) • Issuers (misrepresentations) • Rating agencies (negligence in ratings) • Bond insurers (inadequate disclosures) • Asset managers (misrep’ing credit quality) • Advisors (bad investment recommendation) • Accountants (negligence in reviewing books) CREDIT CRISIS SECURITIES LITIGATION
230 Cases Filed – and Counting OVERVIEW OF CREDIT CRISIS SECURITIES LITIGATION
• During 2008 there were 102 credit crisis-related lawsuit filings) and in 2009 there were 62. By contrast during 2010, there were only 23 new credit crisis-related securities lawsuits, representing about 13% percent of the total. Of these 23 new credit crisis cases, only nine of these cases were filed in the year’s second half, and only one was filed after August 2010. • Seventeen subprime and credit crisis-related securities class action lawsuits have settled, representing aggregate settlement amounts of $1.930 billion. The average settlement amount is $113.54 million. During 2010, there were only eight settlements of subprime and credit crisis-related securities class action lawsuits, only two of which were announced after August 1, 2010. • These settlement figures are inflated by three settlements, which account for $1.335 billion of the aggregate settlement amount – Countrywide ($624 million), Merrill Lynch ($475 million) and Charles Schwab YieldPlus ($235 million). If these three settlements are removed from the calculation, the average settlement was $42.51 million. OVERVIEW, continued
• Dismissal motions were filed in 106 cases and granted in half those cases. The dismissal rate for securities cases as a whole is 40%. So, credit crisis cases are dismissed somewhat more frequently than other securities cases. • In November 2010, a jury in federal court entered a plaintiffs’ verdict in the subprime-related securities class action lawsuit against BankAtlantic Bancorp and certain directors and officers. The jury awarded damages of $2.41/share, possibly worth as much as $42 million. This case was initially dismissed, but survived the renewed motion to dismiss. • There have been only 10 securities class action trials since the enactment of the PSLRA and only four plaintiffs’ verdicts. • Source for all these figures is D&O Diary. Securities Litigation
• Suits by Purchasers of MBS Complaints by MBS purchasers
• Defendants • Causes of action • Issuers (SPVs) • Section 10(b) of ’34 Act • Originators • Sections 11, 12 of • Underwriters ’33 Act • Individuals • Control person • Rating agencies claims • Others • Other Allegations in Securities Act claims
• Appraisers provided “the desired appraisals regardless of the actual value of the underlying property” • Borrowers “did not meet the prudent or maximum debt- to-income ratios” and “did not have the income or assets required by the lenders’ own guidelines” • Underwriting and quality control practices were “weak or non-existent” ¾ Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. • Borrowers “were steered to stated income/asset and low documentation mortgage loans,” and “did not have the income required by the lenders’ own guidelines” ¾ Plumbers’ & Pipefitters’ Local #562 Supplemental Plan & Trust v. J.P. Morgan Acceptance Corp. I • “Certificates sold to plaintiff and the Class were secured by assets that had a much greater risk profile than represented in the Registration Statement. In this way, defendants were able to obtain superior ratings on the tranches or classes of the Certificates, when in fact these tranches or classes were not equivalent to other investments with the same credit ratings.” ¾ City of Ann Arbor Employees’ Retirement Sys. v. Citigroup Mortgage Loan Trust Inc. Goldman Sachs Case: action against issuer of ABS
• On October 14, 2010, Southern District of New York JudgJudgee Miriam Cederbaum held in a case filed on behalf of holders of certain asset-backed certificates issued by Goldman Sachs-related entities that, where the holders had not alleged that they had failed to receive payments due under the certificates, they had failed to allege injuries cognizable under the federal securities laws. • The investors had purchased the asset-backed certificates in 2007 offerings. The certificates entitled the holders to monthly distributions of interest, your desired yield,“ • The offering documents for the certificatescertificates warned investors that the offering underwriters "cannot assure you that a secondary market" for the securities will exist, and "consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize • In its amended complaint, the plaintiff did not allege that it had failed to receive the monthly distributions. The harm the plaintiff claimed is that a hypothetical sale in the secondary market at the time of the suit "would have netted, at most, between 35 and 45 cents on the dollar." The plaintiff also claimed that it is exposed to "much more risk than the Offering Documents represented with respect to both the timing and absolute cash flow to be received." • Goldman Sachs, continued
• Rejecting the plaintiff’s argument that that their certificates would have a diminished value in a hypothetical sale, Judge Cedarbaum noted that "the Certificates were issued with the express warning that they might be resalable." She concluded that because the plaintiff "made an investment that it knew might not be liquid, it may not allege injury based upon the hypothetical price of the Certificates on a secondary market at the time of the suit." She noted further that the complaint failed to allege that a secondary market for the certificates "actually exists" and also failed to allege "any facts regarding the actual market price" for the certificates at the time of the suit.
• Judge Cedarbaum also rejected the sufficiency of the plaintiff’s allegations about the increased risk of diminished cash flow in the future, not that "Section 11 does not permit recovery for increased risk." She said that "to allege an injury cognizable under Section 11," the plaintiff must "allege the actual failure to receive payments due under the Certificates," adding that though the plaintiff has "had three opportunities to amend its complaint, it has never made the allegation." Other decisions reject the Goldman Sachs damages standard • “Defendants urge dismissal because Plaintiffs do not allege that they have failed to receive an income stream from the Certificates and, as such, have failed to allege an economic loss . . . Here, Plaintiffs’ allegations of loss give rise to the inference that the value of the security is much less than the purchase price. The mere fact that Plaintiffs have difficulty substantiating the exact nature of their loss in an illiquid market does not necessitate dismissal.” • Boilermakers Nat’l Annuity Trust Fund v. WAMU Mortgage Pass Through Certificates (W.D. Wash. Sept. 28, 2010). Exchange Act and other claims against issuers of MBS
• Luminent Mortgage Capital, Inc. v. Merrill Lynch & Co.
¾ Section 10(b) claim; Securities Act claims; common law tort claims; state statutory claims ¾ Alleged misrepresentations regarding: prepayment penalty terms; types of properties; borrowers’ FICO ratings; original interest rates on the mortgage loans; purpose of the mortgage loans; quality of the loans and level of due diligence on them
• Bankers Life Ins. Co. v. Credit Suisse First Boston Corp.
¾ Alleged misrepresentations regarding: whether mortgage loans were delinquent as of cut-off date; whether there were material defaults under the terms of the mortgage loans; whether there was fraud, error, omission, misrepresentation, negligence with respect to the mortgage loans on the part of the seller or mortgagor ¾ Motion to dismiss granted in part, denied in part, 2008 WL 1817294 (April 22, 2008) Lines of Defense • Misstatement/omission – risk disclosures • Reliance • Loss causation • Scienter in fraud-based claims • Due diligence defense • Class certification? • Damages issues MBS Issuer cases --Reliance Upon Ratings
• The complaint includes acknowledgments from S&P and Moody's executives conceding, in hindsight, that the models and data that the rating agencies were using were deficient. But the ratings were not false or misleading because rating agencies should have been using better methods and data. Defendants are not liable under the securities laws when their opinions, or those they reported, were honestly held when formed but simply turn out later to be inaccurate; nor are they liable only because they could have formed "better" opinions. See Boilermakers, 2010 U.S. Dist. LEXIS 104427, 2010 WL 3815796, at *7. A majority of district courts that have considered the issue have dismissed similar claims, and the Sixth Circuit affirmed one such dismissal. n15
Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2011 U.S. App. LEXIS 1254 (1st Cir. Jan. 20, 2011) Mortgage Underwriting Standards
• The SAC alleges not simply that the Offering Documents omitted the fact that originators could issue loans pursuant to "exceptions," but rather, alleges that the Offering Documents contained material misstatements as to whether the originators applied underwriting standards that took into account each loan applicant's ability to repay. The generalized language in the Offering Documents did not put investors on notice as to the underwriting practices that the loan originators were using, and therefore obscured the actual level of risk faced by investors who purchased the Certificates.
Public Emples. Ret. Sys. of Miss. v. Goldman Sachs Group, Inc., 2011 U.S. Dist. LEXIS 3267 (S.D.N.Y. Jan. 12, 2011) Mortgage Underwriting Standards
• To plead that defendants' stated underwriting guidelines were at odds with the reality of their practice, plaintiffs rely heavily on the statements of confidential witnesses who assert, among other things, that Wells Fargo placed "intense pressure" on its loan officers to close loans, including by coaching borrowers to provide qualifying income information, accepting implausible or falsified income information, and lowering its standards near the end of the calendar year. Complaint PP 83-88. Defendants argue that these allegations are insufficient because they are not linked to the specific types of prime mortgages that were packaged into the securities at issue in this case. However, plaintiffs have alleged that the challenged conduct infected the entire underwriting process, including with respect to prime loans. See Complaint P 76 (defendants failed to disclose that Wells Fargo "systematically did not follow its stated underwriting standards") (emphasis added); P 84 ("According to CW 1, Wells Fargo was approving so many stated income loans that it felt the same as CW 1's previous subprime lending job"). In the Court's view, plaintiffs' allegations with respect to defendants' underwriting practices are sufficiently specific to state a claim.
Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2011 U.S. App. LEXIS 1254 (1st Cir. Mass. Jan. 20, 2011) Appraisals
• The complaint alleges in a single general statement that the appraisals underlying the loans at issue here failed to comply with USPAP requirements; but there is no allegation that any specific bank that supplied mortgages to the trusts did exert undue pressure, let alone that the pressure succeeded. The complaint fairly read is that many appraisers in the banking industry were subject to such pressure. n12 So, unlike the lending standard allegation, the complaint is essentially a claim that other banks engaged in such practices, some of which probably distorted loans, and therefore this may have happened in this case. Mortgage Underwriting Standards (cont.)
• The underwriting guidelines. Plaintiffs first point to a set of statements in the offering documents implying that the banks that originated the mortgages used lending guidelines to determine borrowers' creditworthiness and ability to repay the loans. For example, the prospectus supplements for the two trusts at issue stated that First National Bank of Nevada ("FNBN"), one of the "key" loan originators for those trusts, used "underwriting guidelines [that] are primarily intended to evaluate the prospective borrower's credit standing and ability to repay the loan, as well as the value and adequacy of the proposed mortgaged property as collateral." In fact, plaintiffs allege, FNBN "routinely violated" its lending guidelines and instead approved as many loans as possible, even "scrub[bing]" loan applications of potentially disqualifying material. Indeed, plaintiffs allege that this was FNBN's "business model," aimed at milling applications at high speed to generate profits from the sale of such risky loans to others. Thus, plaintiffs say, contrary to the registration statement, borrowers did not "demonstrate[] an established ability to repay indebtedness in a timely fashion" and employment history was not "verified."
• Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2011 U.S. App. LEXIS 1254, 22-23 (1st Cir. Mass. Jan. 20, 2011) Appraisal Practices
• Appraisal practices. The complaint also alleges that the offering documents contained false statements relating to the methods used to appraise the property values of potential borrowers—the ratio of property value to loan being a key indicator of risk. For example, the April 19, 2006, registration statement and the prospectus supplements stated that "[a]ll appraisals" were conducted in accordance with the "Uniform Standards of Professional Appraisal Practice" ("USPAP"). These in turn require that appraisers "perform assignments with impartiality, objectivity, and independence" and make it unethical for appraisers, among other things, to accept an assignment contingent on reporting a predetermined result. Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 2011 U.S. App. LEXIS 1254, 22-23 (1st Cir. Mass. Jan. 20, 2011) Securities Litigation
Suits by Purchasers of Common Stock Complaints by shareholders
• Plaintiffs • Defendants • Originators (based on • Purchasers of stock of statements about their originators, other public business or value of companies in housing retained residual interests) industry – Indymac, Countrywide • Companies with exposure to MBS and derivatives • Others involved in securities • Purchasers of stock of offerings or sales companies with exposure to (underwriters, auditors, subprime investments -- directors and officers) Barclays, Citibank • Bond insurers Valuation of Subprime on the Books of the Bank
• "[F]inancial valuation models depend so heavily on the discretionary choices of the modeler . . . that the resulting models and their predictions can only fairly be characterized as subjective opinions." In re Salomon Analyst Level 3 Litig., 373 F. Supp. 2d 248, 251-52 (S.D.N.Y. 2005). Subjective opinions "are only actionable under the Securities Act if a complaint alleges that the speaker did not truly have the opinion at the time it was made public." DLJ Mortgage, 2010 U.S. Dist. LEXIS 47512, 2010 WL 1473288, at *7; see Fait, 712 F. Supp. 2d 117, 121 (S.D.N.Y. 2010) ("An opinion is actionable under Section 11 or 12 only if the complaint alleges that the speaker did not truly hold the opinion at the time it was issued.").
In re Barclays Bank PLC Sec. Litig., 2011 U.S. Dist. LEXIS 2667 (S.D.N.Y. Jan. 5, 2011) Risk Management Disclosures
• Lead Plaintiffs claim that Barclays' descriptions of its risk management practices were misleading. "[G]eneralizations regarding integrity, fiscal discipline, and risk management," however, are not actionable misstatements. In re JP Morgan Chase Sec. Litig., 363 F. Supp. 2d 595, 632-33 (S.D.N.Y. 2005). Further, expressions of "corporate optimism" are not securities violations because "[u]p to a point, companies must be permitted to operate with a hopeful outlook." Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004).
In re Barclays Bank PLC Sec. Litig., 2011 U.S. Dist. LEXIS 2667, 35- 36 (S.D.N.Y. Jan. 5, 2011) Citigroup Subprime Securities Litigation, 723 F. Supp. 2d 568 (S.D.N.Y. July 12, 2010) • Case brought by Citigroup shareholders against Citigroup’s CEO and other current or former board members, directors and officers. The case alleged that Citigroup had misled its investors about the extent of its CDO portfolio and thus about the overall financial health of Citigroup.
• Amended complaint was "536 pages long, contains 1,265 paragraphs, and weights six pounds." As Judge Stein noted, the plaintiffs’ "principal grievance" is that Citigroup "did not disclose that it held tens of billions of dollars of super-senior tranche CDOs until November 4, 2007," and that even after that date, until April 2008, the company did not disclose the full extent of its exposure.
• Plaintiffs alleged that the defendants had failed to disclose that billions of dollars of the CDOs had not been purchased at all but instead had been retained by Citigroup. In November 2007, the company disclosed $43 billion of CDO exposure and estimated a write down of $8 to $11 billion. Citigroup Securities Litig., continued
• In his November 9 order, Judge Stein found that the plaintiffs had adequately alleged that Citigroup’s CDO valuations were false between February 2007 and October 2007. In concluding that these statements were made with scienter, Judge Stein noted that the plaintiffs’ claims "concern a series of statements denying or diminishing Citigroup’s CDO exposure and the risks associated with it." These statements were "inconsistent with the actions Citigroup was allegedly undertaking between February 2007 and October 2007."
• Citigroup was, Judge Stein found, "taking significant steps internally to address increasing risk in its CDO exposure but at the same time it was continuing to mislead investors about the significant risk those assets posed. This incongruity between word and deed establishes a strong inference of scienter." • Judge Stein then went on to hold that the plaintiffs allegations of scienter against seven of the individual defendants was insufficiently particularized, but that the allegations against the remaining defendants were sufficient, in part because these individuals attended meetings concerning the company’s CDO exposure during the period in question and in part because they were responsible for the company’s SEC filings, and therefore bear responsibility for the statements under the "group pleading doctrine." Citigroup Securities Litig., continued
• Judge Stein also found that even the company’s disclosures in November 2007 were materially misleading because they omitted to disclose an additional $10.5 of CDO exposure that the company had hedged.
• Judge Stein dismissed many of the other allegations. Suits by Shareholders of Mortgage Originators
• Tripp v. Indymac Financial Inc. ¾ Alleged misstatements and omissions regarding: how the company was hedging risks; the adequacy of internal controls; whether the company’s loan loss reserves took into consideration the effects of any changes in underwriting standards, lending practices, and national and local economic trends and conditions; whether the company had sound underwriting guidelines; whether the company conducted rigorous in-house appraisal reviews ¾ Motion to dismiss granted with leave to amend, 2007 WL 4591930 (November 29, 2007); Motion to dismiss second amended complaint granted with leave to amend (May 8, 2008) • In re New Century ¾ Alleged misstatements or omissions regarding: Compliance with GAAP; strength of internal controls; credit quality of mortgages; underwriting controls, guidelines, and risk management ¾ Motion to dismiss granted with leave to amend, 2008 WL 467619 (January 31, 2008) Securities Litigation
Suits Against Rating Agencies Claims and defenses
• Brought by purchasers of ABS, alleging reliance on rating agency ratings • Defense: First Amendment ¾ Are rating agencies members of the press? ¾ Are ratings protected expressions of opinion? Rating Agency Lawsuits – Outcome as of mid-2010
• There are roughly 30 lawsuits aimed at the rating agencies. Of the 15 motions to dismiss already acted on by judges, the rating agencies have prevailed 12 times, according to Standard & Poors. In addition, five cases have been dropped. Rating Agency Suits, outcome continued
• In one case involving a $5.86 billion structured investment vehicle sold by Cheyne Capital, SDNY judge Shira Scheindlin ruled in 2009 that First Amendment arguments will fail if the plaintiffs are able to prove that S.& P. and Moody's “disseminated their ratings to a select group of investors rather than to the public at large,” as part of a private placement. Derivative Litigation What is a derivative action?
• A derivative action is a suit brought by a shareholder, on behalf of the corporation, for corporate recovery of damages or equitable relief stemming from allegedly unlawful or improper conduct by directors, officers or other control persons. • The corporation is an indispensible party and is nominally served as a the defendant to assure its appearance. • A derivative action is actually two causes of action: it is an action to compel the corporation to sue and it is an action brought by a shareholder on behalf of the corporation to redress harm to the corporation. • A derivative action allows shareholders to monitor and redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. • An action is derivative when brought by a shareholder on behalf of the corporation for harm suffered by all shareholders in common. • In contrast, an action brought by a shareholder for harm done to an individual shareholder or a group of shareholders is a direct action. Types of Claims
• Demands and suits by shareholders of institutions that suffered subprime-related writedowns Defendants
• Typically originators, servicers and other financial institutions with exposure to MBS and derivatives Defendants
• Ambac Financial Group [2008] • MBIA [2008] • American International Group • Merrill Lynch • AIG/Government Bailout [2008] • Merrill Lynch/ Bank of America Merger [2008] • Bank of America [2008] Merger [2008] • Bear Stearns • Municipal Mortgage & Equity (“Muni • Bear Stearns Mae”) [2008] • Beazer Homes USA • Beazer Homes USA • National City Corp. [2008] • Centerline Holding Company [2008] • Centerline Holding Company [2008] • New Century Financial Corp. • Citigroup • Citigroup • Perini Corp. • Citigroup/MAT Five LLC [2008] • Citigroup/MAT Five LLC [2008] • RAIT Financial Trust • Countrywide • Countrywide • Regions Financial Corporation [2008] • E*Trade Financial Corp. • E*Trade Financial Corp. • Tarragon Corporation • First Marblehead Corp. [2008] • First Marblehead Corp. [2008] • Thornburg Mortgage Corp. • Impac Mortgage Corp. • Impac Mortgage Corp. • Washington Mutual [2008] • Luminent Mortgage Capital Typical Claims
• Disclosure • Insider Selling • Improper Share-Repurchase Program Typical Claims • Disclosure ¾ Section 10(b) and Rule 10b-5 Claims ¾ Breach-of-Fiduciary-Duty Claims 9Claims that certain directors and officers violated the federal securities laws and breached their fiduciary duties under state law by failing to prevent the Company from issuing allegedly misleading earnings releases that did not disclose the Company’s risk of loss in the event of a deterioration in the subprime mortgage market Typical Claims • Insider Selling ¾Breach-of-Fiduciary-Duty 9Claims that certain directors and officers allegedly breached their fiduciary duties under state law by selling Company stock on the basis of undisclosed information about the Company’s subprime exposure Typical Claims • Repurchase Program ¾ Breach-of-Fiduciary-Duty ¾ Waste 9Claims that the Company’s directors allegedly breached their fiduciary duties and committed waste under state law by authorizing the Company to repurchase its own stock at prices inflated by its alleged failure to disclose its subprime exposure Outcome of credit crisis derivative litigation
• In Delaware, Chancellor William Chandler dismissed most of the subprime-related claims in the Delaware-based In re Citigroup Inc. Shareholder Derivative Litigation. • In addition, the subprime-related derivative suit brought against Citigroup in the Southern District of New York, alleging similar claims, was also dismissed. Judge Sidney Stein held that "the complaint fails to allege with specificity facts showing that plaintiffs are excused from presuit demand," and "does not state with particularity facts giving rise to a strong inference that the defendants acted with the required state of mind.“ • However, claims regarding executive compensation are proceeding. In the Delaware- based Citigroup matter discussed above, Chancellor Chandler allowed claims of waste regarding executive compensation for Citigroup's CEO to proceed, while simultaneously dismissing claims related to the subprime mortgage market. • In California, a complaint was filed in March 2009 against AIG's CEO Edward Liddy and several other AIG directors and officers alleging that Liddy's explanation regarding bonus payments made to these executives was "outrageous on its face" and "absurd" as "there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG's deteriorating financial condition and dismal financial performance.“ Damages are sought for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment. DERIVATIVE SUIT OUTCOMES, continued
• A derivative shareholder lawsuit against AIG was recently dismissed by a federal court judge in New York. The dismissal was based on the defendant shareholders failure to make a pre-suit demand on the board of directors to file a suit against the company's management. • In the AIG case, the plaintiff-shareholders alleged that the defendants had failed to properly oversee the company’s credit default contracts and had made misleading statements about the company’s financial health and risk management. The plaintiffs also allege defendants wasted corporate resources and breached their fiduciary duties when they caused AIG to increase its dividend and buy back its stock in the months leading up to the company's collapse and government rescue. MADOFF LITIGATION MADOFF LITIGATION OVERVIEW
• Not strictly financial crisis – this kind of fraud could take place in any economic climate. The core allegations involve a $65 billion dollar Ponzi scheme exposed when Madoff was arrested on December11, 2008. • Many lawsuits. there are at leasleastt 19 separate federalfederal class actions suits iinvolvingnvolving the Madoff scheme as well as at least 49 other cases filed in state courts in Florida, California, New York, Massachusetts, Connecticut, Delaware, and New Jersey. This does not count the Trustee suits discussed below. • Many of the state court cases have been removed to fedefederalral court and some are now consolidated in multidistrict litigation proceedings. • The Madoff victims have ffilediled legal actions that target feeder fundsfunds,, auditors, banks, Madoff relatives and business associates, and various insurers. • Some recovery efforts lump most of these targets into a single suit, while other lawsuits focus on a single defendant. Several Madoff Complaints Have Been Dismissed
In a typically conclusory allegation, the Amended Complaint asserts that "Delaire knew, or had substantial information available to him sufficient to cause him to suspect, that the Madoff Fund was a Ponzi scheme or at least that the published reports concerning clients accounts at BMIS, and statements of investor accounts…were unsubstantiated, not independently verified, and not full, complete and accurate." Am. Compl. ¶34. No facts are provided, however, that show with any particularity what information Delaire actuallypossessed. This Court has "routinely" rejected the argument that such irregularities in Madoff's investment business were red flags that should have put investment professionals on notice of the fraud. See Saltz, 2010 WL 5298225, at *5 ("An inference of scienter based on publicly available red flags is simply not as cogent and compelling as the opposing inference of nonfraudulent intent."); Cohmad Securities, 2010 WL 363844, at *4 (describing such an argument as "fraud by hindsight.").
Continued next slide Schulman case, continued
This Court has recognized that the Madoff scheme went virtually undetected. See Cohmad Securities, 2010 WL 363844, at *2. As with other lawsuits involving CohMad representatives, the Amended Complaint here "supports the reasonable inference that Madoff fooled the defendant[] as he did individual investors, financial institutions, and regulators." Cohmad Securities, 2010 WL 363844, at *2. See also Saltz, 2010 WL 5298225, at *5-6 ("For twenty years, Madoff operated this fraud without being discovered and with only a handful of investors withdrawing their funds as a result of their suspicions."). • Martin A. Schulman, M.D., Martin Schulman, Individual Retirement Account, and Suzanne Schulman, Plaintiffs v. Alvin J. Delaire, Jr., 10 Civ. 3639 (HB) (S.D.N.Y. Feb. 25, 2011) Madoff Dismissals, cont.
• As other courts to consider similar red flag allegations in the aftermath of the Madoff affair have found, “[P]laintiffs do not allege that Markopolos ever discussed his assessment that Madoff was operating a Ponzi scheme with [Defendants] or published it in the press, [P]laintiffs do not assert that the [Defendants] knew that Madoff’s returns could not be replicated by others, and [P]laintiffs do not claim that investors who elected not to deal with Madoff informed the [Defendants] of their decisions.” In re Tremont Secs. Law, State Law and Ins. Litig., 703 F. Supp. 2d 362, 371 (S.D.N.Y. 2010); see also S.E. C. v.Cohmad Sec. Corp., No. 09 Civ. 5680 (LLS), 2010 WL 3 63 844, at *2 (S.D.N.Y. Feb. 2, 2010) (rejecting scienter allegations because “the complaint supports the reasonable inference that Madoff fooled the defendants as he did individual investors, financial institutions, and regulators”).
• In re Beacon Assocs. Litig., 2010 U.S. Dist. LEXIS 106355 (S.D.N.Y. Oct. 5, 2010) OTHER MADOFF CASES
• In a March 12, 2010 order in a Madoff-related derivative suit, the New York (Nassau County) Supreme Court, applying New York law, substantially denied defendants’ motion to dismiss, holding among other things that demand was excused. This was apparently the first Madoff- related derivative suit to survive a motion to dismiss. • The derivative suit was filed on April 1, 2009 by non-managing member of Andover LLC, on behalf of Andover LLC, as nominal defendant. Among the defendants are Andover’s investment manager (Andover Management), general partner, and investment consultant (Ivy Asset Management) and Andover’s auditor. The complaint alleged that Andover should recover damages for the defendants’ negligence, gross negligence, breach of fiduciary duty, and for aiding and abetting breach of fiduciary duty. • The complaint alleges that the defendants permitted Andover to invest "approximately a quarter of its assets under the personal control of [Bernard Madoff] through his investment firm." The complaint alleges that as of December 31, 2007, Andover had assets of $57.7 million. The complaint further alleges that Andover’s auditors were negligent in conducting annual audits by failing to plan and perform appropriate audits and appropriate tests that would have identified Madoff’s fraud. MADOFF CASES, continued
• On February 5, 2010, Florida Circuit Court Judge David French granted in part and denied in part the defendants’ motions to dismiss in a case involving the Tremont and Rye funds. • With respect to the Tremont and Rye funds defendants, Judge French granted the motions to dismiss, without prejudice, as to plaintiffs’ claims of breach of fiduciary duty (Count VI), breach of statutory fiduciary duty (Count VII), breach of contract (Count XI), and adding and abetting breach of fiduciary duty (Count XII), all essentially on the grounds that the plaintiffs had failed to allege individualized injury, apart from the injuries to the funds themselves. • However, Judge French denied the Tremont and Rye funds defendants’ dismissal motions as to plaintiffs’ claims for violation of state securities laws (Count I), Negligence Per Se (Count II), Fraud in the Inducement (Count III), Negligent Misrepresentation (Count IV), and Deceptive and Unfair Practices (Count VIII), as these are claims where the investor plaintiffs suffered their own individual injuries. MADOFF CASES, continued
• Judge French also granted without prejudice KPMG’s dismissal motions as to plaintiffs’ claims for Negligent Misrepresentation (Count V), Professional Malpractice (Count X) and Aiding and Abetting Breach of Fiduciary Duty (Count XIII), but denied KPMG’s dismissal motion as plaintiffs’ allegations against KPMG for deceptive or unfair practices (Count IX).
• While the defendants’ dismissal motions were granted in part, substantial portions of the plaintiffs’ complaint survived and the case will now go forward.
• On February 8, 2010, New York Supreme Court Judge Richard Lowe denied the defendants’ motions to dismiss in the New York Attorney General’s civil fraud lawsuit pending against Ezra Merken and his Madoff-related feeder funds..
• In late 2010, the Madoff bankruptcy trustee filed hundreds of clawback lawsuits. The trustee, Mr. Picard filed multibillion-dollar lawsuits against JPMorgan, UBS and HSBC, adding $17.4 billion to the amount he is claiming on behalf of victims, for a total of more than $32 billion. That amount, which includes demands for punitive damages, is 50 percent more than the $20 billion he has estimated as the actual cash losses in the fraud. Most notably, Sterling Partners and the New York Mets have been adversely affected.
Ethical Considerations for New York Attorneys Practicing Before the Securities and Exchange Commission and Other Federal Agencies
New York County Lawyers’ Association May 24, 2011 Gordon Eng, Esq1.
Introduction
A. Representing Clients Before Federal Agencies:
1. ABA Model Code of Professional Responsibility, EC 7-15. “The nature and purpose of proceedings before administrative agencies vary widely. . . The scope of an inquiry may be purely investigative or it may be truly adversary looking toward the adjudication of specific rights of a party or of classes of parties.. . . A lawyer appearing before an administrative agency, regardless of the nature of the proceeding it is conducting, has the continuing duty to advance the cause of his client within the bounds of the law. Where the applicable rules of the agency impose specific obligations upon a lawyer, it is his duty to comply therewith, unless the lawyer has a legitimate basis for challenging the validity thereof. . . .”
2. “But as an advocate before a service which itself represents the adversary point of view, where his client’s case is fairly arguable, a lawyer is under no duty to disclose its weaknesses, any more than he would be to make such a disclosure to a brother-lawyer. The limitations within which he must operate are best expressed in Canon 22. . .”ABA Opinion 314 (1965).
B. Is an administrative agency a tribunal?
a) New York Rules of Professional Conduct
(1) The New York Rules of Professional Conduct, effective April 1, 2009, Rule 1.0 (w): “’Tribunal’ denotes a court, an arbitrator in an arbitration proceeding or a legislative body, administrative agency or other body acting in an adjudicative capacity. A legislative body, administrative agency or other body acts in an adjudicative capacity when a neutral official, after the presentation of evidence of legal argument by a party or parties, will render a legal judgment directly affecting a party’s interest in a particular matter.” (emphasis added)
(2) Administrative agencies frequently function as tribunals and may issue their own set of rules, regulations, and standards. The
1 Gordon Eng is a litigation associate at Debevoise & Plimpton LLP, resident in New York. The content and views expressed here are his own and do not necessarily represent the views of Debevoise & Plimpton LLP or its clients. Any errors are the sole responsibility of the author. NYCLA Ethics Presentation May 24, 2011
United States Securities and Exchange Commission (“SEC” or “Commission”) has regulated the conduct of attorneys appearing before it since 1935 when it first promulgated Rule 102(e) (formerly named Rule 2(e)). See Touche Ross & Co. v. SEC, 609 F.2d 570, 578 n.13 (2d Cir. 1979)
(3) There are exceptions─ not all federal agencies are “tribunals” for the purposes of professional conduct. For example, the ABA issued an ethics opinion that the Internal Revenue Service (“IRS”) is not a tribunal under certain circumstances involving tax returns because it is primarily adversarial and tax returns, unlike registrations, are not typically disclosed. ABA Formal Op. 85-352.
(a) A distinguishing feature of practicing before the SEC is the preparation of filed documents that will be publicly disclosed and relied upon by the investing public.
(b) This contrasts with, for example, practice before the IRS, which generally deals with a taxpayer’s obligation to pay taxes and is not a publicly available document.
C. Federal Agency Rules of Attorney Practice
1. While this outline focuses primarily on the standards of professional conduct for New York attorneys practicing before the United States Securities and Exchange Commission (the “SEC” or the “Commission”), many other federal administrative agencies have their own attorney practice rules. For example,
a) Dep’t of Homeland Security (formerly, the Immigration and Naturalization Service): 8 CFR § 1003.102. The Professional Conduct for Practitioners ─ Rules and Procedures contain more than a dozen analogs found in the New York Rules of Professional Conduct.
b) Commodity Futures Trading Commission (“CFTC”): 17 CFR §12.9; 17 CFR § 14.8 (c)
c) Office of Thrift Supervision: 12 CFR § 513.4(a)(2)(3)
d) Office of the Comptroller of the Currency (“OCC”) 12 CFR Part 19
e) Internal Revenue Service: 31 CFR §§ 10.50-.51
2. The SEC, however, has been more aggressive in disciplining attorneys than any other federal agency. As one observer noted, over a 50 year period, the Commission has disbarred or suspended more lawyers than “nearly all other federal agencies combined.” Robert W. Emerson, Rule 2(e) Revisited: SEC Disciplining of Attorneys since In re Carter, 29 Am. Bus. L.J. 155, 178 (1991).
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3. In the early 1970’s, the Commission embraced the so-called “access” theory of securities law enforcement ─ to wit, access to the capital markets is controlled by a limited number of professional “gatekeepers,” and therefore, to achieve maximum deterrent value from limited resources, the Commission started bringing actions against gatekeepers rather than only proceeding against the principal wrongdoers. See Dissenting Statement of Commissioner Norman S. Johnson in Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57,164, 57,175 (Oct. 26, 1998).
4. For attorneys, the high water mark for SEC enforcement under Rule 102(e) was from 1975 to 1977, when the Commission brought actions against 53 attorneys and three law firms. Id. citing Robert W. Emerson, Rule 2(e) Revisited: SEC Disciplining Attorneys since In re Carter, 29 Am. Bus. L.J. 155, 176 (1991).
5. Since the 1970’s, most the Commission’s actions under Rule 102(e) have been directed against accountants.
D. SEC’s Recent Re-Focus on Attorney Conduct
1. There is no formal admission requirement to appear and practice before the SEC; any attorney in good standing and admitted to practice qualifies to appear and practice before the Commission.
2. In recent years the SEC has appears to have re-focused on attorneys and publicly stated its intention to increase scrutiny of attorneys practicing before it. (SEC Speaks 2007 at PLI). In a recent case involving a New York attorney, the SEC instituted its first ever administrative proceeding against a litigator based solely on charges of “unethical or improper professional conduct.” In the matter of Steven Altman, Exchange Act Release No. 63306, November 10, 2010.
E. Dodd-Frank Signals Increased Enforcement by SEC and CFTC
1. Following the credit market turmoil in 2007 and 2008, it is not unreasonable to expect stepped-up enforcement and investigations by the Commission as well as other regulators. The Dodd-Frank Act provides additional tools to regulators in their search for villains.
2. Title IX, Section 929O of the Dodd-Frank Act, Aiding and Abetting Standard of Knowledge Satisfied by Recklessness amends Section 20(e) of the Securities Exchange Act of 1934 (15 U.S.C. 78t(e)) by inserting “or recklessly” after “knowingly.” The provision will make it easier for the Commission to bring aiding and abetting actions. Section 20(e) of the Exchange Act reads:
Prosecution of Persons Who Aid and Abet Violations
For purposes of any action brought by the Commission under paragraph (1) or (3) of section 21(d), any person that knowingly or recklessly
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provides substantial assistance to another person in violation of a provision of this title, or any rule or regulation issued under this title, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.
3. Title VII, Section 753 of the Dodd-Frank Act expands the anti-manipulation authority of the CFTC by amendments to the Commodity Exchange Act patterned after § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
4. With enhanced enforcement authority, formal and informal investigations of issuers/registrants by the SEC and major derivatives players by the CFTC will likely increase in coming months.
5. Increased enforcement may lead to more demand for personal counsel by current and former employees and other individuals, particularly in light of increased penalties and inevitable complexity of some investigations of large issuers.
6. New York attorneys have always had and will probably continue to play significant roles in representing issuers, issuer-employees (both current and former), or non-issuer entities and individuals SEC and other regulatory investigations.
SEC Rules Governing Attorney Conduct: Sources of the Commission’s Authority
A. Statutory Power Under Section 4C of the Securities Exchange Act of 1934, Appearance and Practice Before the Commission. Section 4C(a), 15 U.S.C. § 78d-3(a) provides:
a) Authority to Censure. The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission, after notice and opportunity for hearing in the matter ─
(1) not to possess the requisite qualifications to represent others;
(2) to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct; or
(3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations issued thereunder.
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B. Contempt Powers
1. The Commission and SEC Administrative Law Judges (“ALJs”) may discipline attorneys for contemptuous conduct occurring in their presence during an administrative proceeding, not unlike the contempt power enjoyed by a court. 17 CFR § 201.180(a)(1).
2. The Rule provides that “[C]ontemptuous conduct by any person before the Commission or a hearing officer during any proceeding . . . shall be grounds for the Commission or the hearing officer to [e]xclude that person from such hearing . . . and/or [s]ummarily suspend that person from representing others in the proceeding in which such conduct occurred for the duration, or any portion, of the proceeding.”
C. Rule 102(e), Suspension and Disbarment
1. 17 CFR § 201.102 (e), (“Rule 102(e)”)is the primary tool available to the Commission to enforce attorney and other professional conduct. The Commission views Rule 102(e) as its primary tool to protect the integrity of its administrative processes. See e.g., Marrie v. SEC, 374 F.3d 1196, 1200 (D.C. Cir. 2004) (stating that Rule 102(e) “is directed at protecting the integrity of the Commission’s processes, as well as the confidence of the investing public in the integrity of the financial reporting process.”).
2. Formerly known as Rule 2(e) until 1995 when the rules were renumbered, Rule 102(e)(1) promulgates rules in accordance with Section 4C of the Exchange Act and provides the SEC with authority to “censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter:
(i) Not to possess the requisite qualifications to represent others; or
(ii) To be lacking in character or integrity or to have engaged in unethical or improper conduct; or
(iii) To have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. . .
(iv) Rule 102(e)(1) also provides for “improper professional practice” by accountants (which the Commission has traditionally focused on in the past).
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3. Rule 102(e) applies to SEC investigations. “The provisions of § 201.102(e) of this chapter (Rule 102(e) of the Commission’s rules of practice) are hereby made specifically applicable to all investigations.” Part 203 Rules Relating to Investigations, 17 CFR § 203.3.
4. While Rule 102(e) (1) provides for notice and opportunity to be heard before discipline is imposed, Rule 102(e) (2), Certain Professionals and Convicted Persons, dispenses with notice and opportunity to be heard under certain circumstances:
a) “Any attorney who has been suspended or disbarred by a court of the United States or of any State; or any person whose license to practice as an accountant, engineer, or other professional or expert has been revoked or suspended in any State; or any person who has been convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the Commission.A disbarment, suspension, revocation or conviction within the meaning of this section shall be deemed to have occurred when the disbarring, suspending, revoking or convicting agency or tribunal enters its judgment or order, including a judgment or order on a plea of nolo contendere, regardless of whether an appeal of such judgment or order is pending or could be taken.” Rule 102(e)(2) (emphasis added).
(1) Any attorney means whether or not transactional or litigator, whether or not representing an issuer or non-issuer. Non-issuers may include third party witnesses e.g. accountants and other service providers to issuers may be subpoenaed or requested to voluntarily be interviewed in connection with an SEC investigation.
(2) Misdemeanors involving moral turpitude (“CIMT”) may potentially have broad scope. Crimes in this category cover a broad range, including crimes with an intent to steal or defraud as an element (e.g. theft, forgery); crimes in which bodily harm is caused or threatened by an intentional act, or serious bodily harm is caused or threatened by a reckless act (e.g. murder, rape, some manslaughter or assault crimes); and most sex offenses.
b) Appearing or practicing before the Commission is defined in 17 CFR § 201.102 (f): “For the purposes of these Rules of Practice, practicing before the Commission shall include, but shall not be limited to:
(1) Transacting any business with the Commission; and
(2) The preparation of any statement, opinion or other paper by any attorney, accountant, engineer or other professional or expert, filed with the Commission in any registration statement,
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notification, application, report or other document with the consent of such attorney, accountant, engineer or other professional or expert.”
c) The definition in Rule 102(f) is intended to be broad and is echoed in 17 CFR § 205.2, Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission in the Representation of an Issuer, codified by Sarbanes-Oxley Act of 2002.
(1) But there are limits to Rule 102(f) and 205.2. An attorney must have notice that the document he or she is preparing or assisting in preparing will be submitted to the Commission to be deemed to be “appearing and practicing” under the definition.
(2) The definition of appearing and practicing in Rule 102(f) also clarifies that an attorney’s preparation of a document (such as a contract) which he or she never intended or had notice would be submitted to the Commission, or incorporated into a document submitted to the Commission, but which subsequently is submitted to the Commission as an exhibit to or in connection with a filing, does not constitute “appearing and practicing” before the Commission. Implementation of Standards of Professional Conduct for Attorneys, 68 Federal Register 6296, 6298 (Feb. 6, 2003).
d) Appearing and Practicing Before the Commission as defined in Rule 102(f) is not, however, a requisite for the applicability of Rule 102(e). The Commission has previously held that Rule 102(e)(1) contains no requirement that a person must be appearing or practicing before the Commission at the time of the conduct on which the Commission’s findings are based. Denying an attorney the privilege of appearing or practicing before the Commission is an authorized remedy once the Commission makes one of the findings specified in Rule 102(e)(1) (i) – (iii); appearing or practicing before the Commission at the time of the misconduct is not a precondition to imposing such a bar. See Robert W. Armstrong, III, 58 S.E.C. 542, 574 (2005).
D. 17 CFR Part 205, Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission in the Representation of an Issuer
1. In addition to Rule 102(e), rules implementing Section 307 of Sarbanes-Oxley provided further ethical guidelines for attorneys, both transactional and litigators, who represent issuers (“issuer” is a company with publicly traded stock or registered securities). 15 U.S.C. § 7201 (a)(7).
2. On January 23, 2003, the Commission adopted a final rule establishing standards of professional conduct for attorneys who appear and practice before
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the Commission on behalf of issuers pursuant to Section 307 of the Sarbanes- Oxley Act of 2002, Pub. Law 107-204 (July 30, 2002), codified in 15 U.S.C. § 7245 (2002 supp.).
3. While Section 307 of Sarbanes-Oxley mandated rules concerning the representation of issuers, (public or about to become public companies), the SEC Rules of Practice are not expressly limited to representation of public companies. Rule 102 (f) expressly applies to “transacting any business with the Commission.” The Rules appear to apply to representation of non-public companies as well as third party witnesses.
4. Passed in the aftermath of the bankruptcy of Enron, Sarbanes-Oxley, 15 USC §7245, provides that, not later than 180 days after July 30, 2002, the Commission shall issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers, including a rule –
a) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, up-the-ladder within the company to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); and
b) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the full board of directors.
c) 17 CFR Part 205 responded to this directive and is “intended to protect investors and increase their confidence in public companies by ensuring the attorneys who work for those companies respond appropriately to evidence of material misconduct.” Implementation of Standards of Professional Conduct for Attorneys, 68 Federal Register 6296 (Feb. 6, 2003).
5. At the time, the proposed release generated significant comment and extensive debate. The Commission received a total of 167 timely comment letters, many of which focused on the application of the rules to attorneys who either are not admitted to practice in the U.S., or are admitted in the U.S. but who do not practice in the field of securities laws; the proposed “noisy withdrawal” provision; and the triggering standard for an attorney’s duty to report evidence of wrongdoing. As a result of the comments, the Part 205 rules were significantly modified.
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a) The triggering standard for reporting evidence of a material violation was modified to clarify and confirm that an attorney’s actions will be evaluated against an objective standard.
b) The documentation requirement imposed upon attorneys and issuers under the proposed rule have been eliminated, and a “safe harbor” provision has been added to protect attorneys, law firms, issuers and officers and directors of issuers. See Rules 205.1; 205.3(d)(2).
6. Highlights of Part 205
a) Section 205.1, Purpose and Scope: The language clarifies that this part does not preempt ethical rules in United States jurisdictions that establish more rigorous obligations than imposed by this part. At the same time, the Commission reaffirms that its rules shall prevail over any conflicting or inconsistent laws of a state or other United States jurisdiction in which an attorney is admitted or practices. See Letter from SEC General Counsel to Washington State Bar Association dated July 23, 2003, available at: http://www.sec.gov/news/speech/spch072303.htm.
b) Section 205.2, Definitions:
(1) Clarifies that, “appearing and practicing before the Commission” applies only in cases of reasonable notice. Appearing and practicing before the Commission means:
(i) Transacting any business with the Commission, including communications in any form;
(ii) Representing an issuer in a Commission administrative proceeding or in connection with any Commission investigation, inquiry, information request, or subpoena;
(iii) Providing advice in respect of the United States securities laws or the Commission's rules or regulations thereunder regarding any document that the attorney has notice will be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the Commission, including the provision of such advice in the context of preparing, or participating in the preparation of, any such document; or
(iv) Advising an issuer as to whether information or a statement, opinion, or other writing is required under the United States securities laws or the Commission's rules or regulations thereunder to be
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filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the Commission.
(2) Excludes non-appearing foreign attorneys; and excludes attorneys “other than in the context of providing legal services to an issuer with whom the attorney has an attorney-client relationship.” This portion of the definition is intended to exclude from coverage attorneys at public broker-dealers and other issuers who are licensed to practice law and who may transact business with the Commission, but who are not in the legal department and do not provided legal services within the context of an attorney- client relationship.
(3) The definition of “appropriate response” in terms of when to report up-the-ladder emphasizes that an attorney’s evaluation of, and the appropriateness of an issuer’s response to, evidence of material violations will be measured against a reasonableness standard.
(a) The Commission’s intent is to permit attorneys to exercise their judgment as to whether or not a response to a report is appropriate.
(b) The definition of “appropriate response” in subparagraph (b)(3) permits an issuer to assert as an appropriate response that it has directed its attorney, whether employed or retained, to undertake an internal review of reported evidence of a material violation and has substantially implemented the recommendations made by an attorney after reasonable investigation and evaluation of the reported evidence.
(i) However, the attorney retained or directed to conduct the evaluation must have been retained or directed with the consent of the issuer’s board of directors, a committee thereof to whom a report could be made, or a qualified legal compliance committee (“QLCC”). See Rule 205.2(k) for definition of QLCC.
(ii) The rule permits as an appropriate response for an issuer’s CLO to direct defense counsel to assert either a “colorable defense” or a “colorable basis for contending that the Staff should not prevail.”
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(iii) The provision above only applies, however, where the defense could be asserted consistent with an attorney’s professional obligations.
(iv) The Commission expressed its view that the rule concerning an appropriate response not “impair zealous advocacy, which is essential to the Commission’s processes.” That is, “[t]he attorney conducting an internal investigation that is contemplated under subparagraph (b)(3) may engage in full and frank exchanges of information with the issuer he or she represents.” FR Vol. 68 at 6300, February 6, 2003.
(4) The definition in § 205.2(e) clarifies that, “evidence of a material violation means credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing, or is about to occur.”
(a) The double negative formulation was intended to incorporate an objective standard of reasonableness while recognizing that there is a range of conduct in which an attorney may engage without being unreasonable. The double negative appears inconsistent with Rule 421(d)(2)(vi), 17 CFR § 230.421(d)(2)(vi), the plain English rule proscribing multiple negatives.
(b) The “circumstances” in the definition refer to the circumstances at the time the attorney decides whether he or she is obligated to report the information. These circumstances may include, among others:
(i) The attorney’s professional skills, background and experience;
(ii) time constraints under which the attorney is acting;
(iii) attorney’s previous experience and familiarity with the client; and
(iv) availability of other lawyers with whom the lawyer may consult.
(v) Under this definition, an attorney is not required (or expected) to report gossip, hearsay, or innuendo.
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(vi) Nor is the rule’s reporting obligation triggered by a combination of hindsight from which the attorney should have drawn an inference.
(c) On the other hand, “evidence of a material violation” is not triggered only when the attorney has “actual knowledge” that a material violation has occurred or when the attorney concludes that there has been a material violation and no reasonable fact finder could conclude otherwise. That threshold to report would be too high.
(d) Under the Commission’s rule, evidence of a material violation must be reported in all circumstances in which it would be unreasonable for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred.
(i) To be “reasonably likely,” a material violation must be more than a mere possibility, but it need not be “more likely than not.”
(ii) If a material violation is reasonably likely, an attorney must report evidence of this violation.
(iii) The term “reasonably likely” qualifies each of three instances when a report must be made. Thus, a report is required when it is reasonably likely a violation has occurred, when it is reasonably likely a violation is ongoing or when reasonably likely a violation will occur. See 205.2(l), (m).
c) Section 205.3, Issuer as Client: this section, the heart of Part 205, makes explicit that the client of an attorney representing an issuer before the Commission is the issuer as an entity and not the issuer’s individual officers or employees that the attorney regularly interacts with and advises on the issuer’s behalf. This section also provides the guidance for reporting up-the-ladder.
(1) NY RPC 1.13 differs from ABA 1.13.
(a) In substance, both provide that if the highest authority in the organization is not responsive and a clear violation exists likely to bring substantial injury to the organization, the lawyer may reveal confidential information.
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(b) However, New York provides that the lawyer may reveal information only if permitted by Rule 1.6, whereas ABA Model Rule 1.13 permits revealing the confidential information regardless of whether or not Rule 1.6 permits disclosure to the extent necessary to prevent substantial injury to the organization.
(c) The New York Rule is “less zealous than the SEC attorney conduct rules promulgated pursuant to Sarbanes Oxley, located at 17 CFR Part 205.” The New York Rules of Professional Conduct, Fall 2010, Vol. 1, p. 311, Edited by New York County Lawyers’ Association Ethics Institute, Oxford University Press, © 2010.
(d) A violation alone may not be enough to trigger a lawyer’s ethical obligation to act. Substantial injury is a facts-and-circumstances determination. Id. at 310.
(2) Upjohn warnings: Upjohn Co. v. United States, 449 U.S. 383 (1981).
(a) Supreme Court rejected the control group test and adopted elements of the subject matter test.
(b) The Court identified five factors to consider in determining who within the corporation is the client:
(i) Whether the information necessary to supply the basis for legal advice to the corporation was ordered to be communicated by superior officers.
(ii) Whether the information was available from control group employees.
(iii) Whether the communications concerned matters within the scope of the employee’s duties.
(iv) Whether the employees were aware that they were being questioned for the corporation to obtain legal advice.
(v) Whether the communications were considered confidential when made and have been kept confidential.
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(c) Some state courts are not bound by Upjohn, and some follow the “control group” test. New York follows the subject matter test. Spectrum Systems Intern. Corp. v. Chemical Bank, 78 N.Y.2d 371 (1991) (internal report of investigation of fraud through interviews with corporate employees was protected by the privilege). See also Niesig v. Team I, 149 A.D2d 94, 100 (2d Dep’t 1989).
(3) A proposed rule mandating that reports and responses under this provision be documented and maintained for a reasonable time was eliminated because of concerns by commentators that such a requirement would have a chilling effect and be an impediment to open and candid discussion between attorneys and their issuer clients; create a potential conflict of interest between the attorney and client; and increase the issuer’s vulnerability to litigation as such documentation would be “a treasure trove of selectively damning evidence.”
(4) 205.3(b)(2) Duty to Report evidence of a material violation describes the responsibilities of the issuer’s CLO in handling reported evidence of a material violation.
(5) 205.3(b)(3) describes the circumstances under which an attorney who has reported evidence of a material violation to the issuer’s CLO and/or CEO is obliged to report that evidence further up-the-ladder within the client issuer. (This paragraph tracks the statutory language in Section 307 of Sarbanes-Oxley and was not controversial.)
(6) 205.3(b)(4) is a bypass provision and describes what an attorney should do if the attorney believes it would be futile to report evidence of a material violation to the CLO or CEO – basically revert to procedures specified in 205.3(b)(3).
(7) 205.3(b)(5) makes two points: first, that investigating attorneys are themselves appearing and practicing before the Commission and are accordingly bound by the rules herein; and second, that the officers or directors who retained them to conduct an internal investigation remain obligated to respond to the attorney who initially reported the evidence of a material violation that other attorneys have been directed to investigate.
(8) 205.3(b)(6) and (7) addresses the responsibilities of attorneys retained or directed by the CLO or QLCC to investigate or litigate reported violations.
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(a) If an attorney is retained by the CLO, the attorney has no obligation to report where the results of the investigation are provided to the CLO and the attorney and CLO agree that no violation has occurred and report the results of the inquiry to the issuer’s board of directors or to an independent committee of the board.
(b) An attorney retained or directed by the CLO to litigate a reported violation does not have a reporting obligation so long as he or she is able to assert a colorable defense on behalf of the issuer, and the CLO provides reports on the progress and outcome of the litigation to the issuer’s board of directors.
(c) An attorney retained or directed by a QLCC to investigate a reported violation has no reporting obligations. Similarly, if retained or directed to litigate a reported violation by the QLCC, the attorney has no obligation to report provided he or she may assert a colorable defense on behalf of the issuer.
(9) 205.3(b)(8), (9) elicited no comments and were adopted without substantive changes.
(10) 205.3(b)(10): any reporting attorney who reasonably believes he or she was discharged for reporting a material violation is authorized to notify the board of directors or any committee thereof. This provision is designed to ensure that a CLO is not permitted to block a report to the issuer’s board or other committee by terminating a reporting attorney.
(11) 205.3(c) establishes an alternative reporting procedure and would allow, though not require, an attorney to report evidence of a material violation directly to a committee of the board of directors that meets the definitional requirements for a QLCC. It also relieves the reporting attorney of any further obligation once he or she has reported such evidence to the issuer’s QLCC. Under this alternative the QLCC takes responsibility for carrying out the steps required by Section 307 of the Sarbanes-Oxley Act.
(a) The most important difference between Section 205.3(b) and Section 205.3(c) is that 205.3(c) relieves an attorney who has reported evidence of a material violation to a QLCC from any obligation “to assess the issuer’s response to the reported evidence of a material violation.”
(12) Section 205.3(d)(1) Issuer Confidences makes clear that an
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attorney may use any records the attorney may have in the course of fulfilling his or her reporting obligations under this part to defend himself or herself against charges of misconduct. It is effectively equivalent to ABA Model Rule 1.6(b)(5) or NY RPC 1.6(b)(5)(i).
(13) Section 205.3(d) (2) permits, but does not require, an attorney to disclose, under specified circumstances, confidential information related to his appearing and practicing before the Commission. It corresponds to ABA Model Rule 1.6 (b), which permits an attorney:
(a) To prevent reasonably certain death or substantial bodily harm;
(b) To prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services;
(c) New York RPC 1.6 does not include language concerning “substantial injury to the financial interests or property of another.”
d) Section 205.4 Responsibilities of Supervisory Attorneys is based in part on ABA Model Rule 5.1 and confirms that a supervisory attorney to whom a subordinate attorney reports evidence of a material violation is responsible for complying with the reporting requirements prescribed under the rule.
e) Section 205.5 Responsibilities of a Subordinate Attorney is based, in part, on Rule 5.2 of the ABA Model Rules and confirms that a subordinate attorney is responsible for complying with this rule. The Commission expressed the view that exempting a subordinate attorney from the rule merely because he or she reports to a supervising attorney “would seriously undermine Congress’ intent to provide for the reporting of evidence of material violations to issuers.” FR Vol. 68 at 6313, February 6, 2003.
f) Section 205.6 Sanctions and Discipline tracks the language of § 3(b) of the Sarbanes Oxley Act and emphasizes that violations of these rules promulgated under the Sarbanes Oxley Act shall be treated as a violation of the Exchange Act, subjecting any person committing such a violation to the same penalties as are prescribed for violations of the Exchange Act.
(1) The Commission intends to proceed against individuals
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violating Part 205 as it would against other violators of the federal securities laws and, when appropriate, to initiate proceedings under this rule seeking an appropriate disciplinary sanction.
(2) 205.6(c) provides that attorneys who comply in good faith with this part shall not be subject to discipline for violations of inconsistent standards imposed by a state or other United States jurisdiction. This section does not apply where state or other jurisdiction imposes additional requirements on the attorney that are consistent with the Commission’s rules.
(3) However, the converse is not true: even if a state ethics board or a court were to determine in an action not brought by the Commission that an attorney complied with this part or complied in good faith with this part, that determination would not preclude the Commission from bringing either an enforcement action or a disciplinary proceeding against that attorney for a violation of this part based on the same conduct. FR, No. 68 at 6314, February 6, 2003.
g) Section 205.7 No Private Right of Action expresses the Commission’s view that nothing in Sarbanes-Oxley Section 307 creates a private right of action against an attorney.
E. In addition of Rule 102 (e) and Part 205, the SEC may also bring actions against attorneys under its general enforcement powers. For example, Exchange Act § 15(c)(4) provides the SEC with broad authority to institute administrative proceedings and impose sanctions against anyone (including attorneys) who is a “cause” of a securities law violation.
If the Commission finds, after notice and opportunity for a hearing, that any person subject to the provisions of section 12, 13, 14, or subsection (d) of section 15 of this title or any rule or regulation thereunder has failed to comply with any such provision, rule, or regulation in any material respect, the Commission may publish its findings and issue an order requiring such person, and any person who was a cause of the failure to comply due to an act or omission the person knew or should have known would contribute to the failure to comply, to comply, or to take steps to effect compliance, with such provision or such rule or regulation thereunder upon such terms and conditions and within such time as the Commission may specify in such order.
Securities Exchange Act of 1934 § 15(c)(4)
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SEC Proceedings
A. The Investigative Process
1. The investigative process for attorney discipline closely resembles the normal procedures followed by the SEC’s Division of Enforcement except that the investigation and prosecution of attorneys is handled by the Commission’s Office of General Counsel (“OGC”), typically upon referral by the Enforcement Staff. 17 CFR § 200.21(a) (providing that the General Counsel is responsible for conducting preliminary investigations into potential violations of Rule 102(e) by attorneys).
2. Formal investigations must be officially authorized by the Commission, and when so duly authorized vests the OGC with subpoena power in the investigation. The OGC may also proceed initially on an informal basis requesting voluntary interviews with subjects or targets of its investigation.
3. The Commission has also delegated to the General Counsel authority to refer to the applicable state bar or division of the state bar, information concerning possible professional misconduct.
4. Before an administrative action or court injunction is commenced, the OGC will notify the respondent in what is commonly referred to as a “Wells Notice” informing the respondent that the OGC is considering recommending to the Commission that a formal action be commenced.
5. After receiving a Wells Notice, the respondent may respond in writing or orally with a Wells Submission in an attempt to persuade the OGC (or the Commission if the OGC persists) not to proceed with a court injunction or administrative proceeding.
6. If the Wells Submission fails to persuade the OGC or the Commission, formal proceedings will commence.
B. Disciplinary Proceedings are Governed Under the Commission’s Rules of Practice, 17 CFR § 201.100 et seq.
1. In administrative proceedings, the Securities and Exchange Commission applies a preponderance-of-the-evidence standard of proof. Steadman v. SEC, 450 U.S. 91 (1981).
2. It is unclear generally what mental state requirement applies to attorney discipline in SEC proceedings. Rule 102(e) and Exchange Act § 4C do not specify the mental state necessary to discipline an attorney for “unethical or improper professional conduct.” Cf. 17 CFR § 102(e)(1)(iv) (expressly setting forth mental state standards for accountants who engage in “improper professional conduct” under Rule 102(e)(1)(ii)).
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a) In the recent case of a New York attorney, the Commission applied New York law and found the attorney violated certain provisions of New York’s Code of Professional Responsibility (the conduct in question occurred before April 1, 2009) with scienter, citing Matter of Altomerianos, 160 A.D.2d 96 (1st Dept. 1990) (stating that “venal intent,” which is a necessary element of a DR 1-102(A)(4) (now NY RPC 8.4(c)) violation, does not include conduct “which lacks an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations which can be reasonably expected to induce detrimental reliance by another”) (quoting definition of fraud in “Definitions” section of Code of Professional Responsibility), but noting scienter does not apply to violations of DR 1-102(A)(7) (“any other conduct that adversely reflects on the lawyer’s fitness as a lawyer”) (citing In re Latimore, 252 A.D.2d 217 (1st Dept. 1999), appeal and reargument denied, 260 A.D.2d 170 (1st Dept. 1999)
b) The current New York Rules of Professional Conduct, Rule 1.0 (i) provides:
“Fraud” or “fraudulent” conduct denotes conduct that is fraudulent under the substantive or procedural law of the applicable jurisdiction or has a purpose to deceive, provided that it does not include conduct that, although characterized as fraudulent by statute or administrative rule, lacks an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations that can be reasonably expected to induce detrimental reliance by another.
c) Comment [5] to RPC 1.0 provides as follows:
When used in these Rules, the terms “fraud” and “fraudulent” refer to conduct that is characterized as such under the substantive or procedural law of the applicable jurisdiction and has a purpose to deceive. This does not include merely negligent misrepresentation or negligent failure to apprise another of relevant information. For purposes of these Rules, it is not necessary that anyone has suffered damages or relied on the misrepresentation or failure to inform, so long as the necessary scienter is present and the conduct in question could be reasonably expected to induce detrimental reliance.
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3. A respondent in a disciplinary proceeding before the Commission is entitled to receive timely notice of the charges and the questions of fact and law to be determined. 17 CFR § 201.200.
4. A respondent may retain counsel to represent him or her in connection with the proceeding, § 203.7 (b), file an answer to the charges against him or her, §201.220(a), and move for a more definite statement of those charges § 203.7(d), and have a trial-type hearing presided over by an impartial administrative law judge, other duly-appointed officer, or a Commission member.
5. The respondent may present oral or documentary evidence, cross-examine adverse witnesses, and object to the admission or exclusion of evidence. §§201.233; 201.326.
6. A respondent may compel production of evidence by subpoena, §201.230(a)(2), and may obtain witness statements in the possession of the Commission’s staff for cross-examination purposes, § 203.7(d).
7. At the conclusion of the hearing, the respondent has the right to submit briefs and proposed findings of fact and conclusions of law. §201.340(a).
8. The initial decision of the administrative law judge must include findings of fact and conclusions of law, with supporting reasons, on all material issues of fact, law, or discretion presented on the record. § 201.360(b).
9. A respondent may seek review by the Commission, which may affirm, reverse, or modify the initial decision based on its independent review of the record. §§ 201.410; 201.411.
10. The securities laws provide for judicial review of Commission disciplinary proceedings in the federal courts of appeals within any circuit wherein such person resides or has his or her principal place of business, or in the United States Court of Appeals for the District of Columbia.
Other Examples of Federal Agency Rules of Attorney Practice
A. Department of Homeland Security (“DHS”) (former Immigration and Naturalization Service), 8 CFR § 1001.1 Definitions
1. Applies to the Immigration and Naturalization Service, as it existed before March 1, 2003, and references to the Service on or after that date means the offices of the Department of Homeland Security to which the functions of the former Service were transferred pursuant to the Homeland Security Act, Public Law 107-296 (Nov. 25, 2002), as provided in 8 CFR chapter I.
2. “It will be in the public interest to impose disciplinary sanctions against a practitioner who is authorized to practice before the Board [of Immigration Appeals] and the Immigration Courts when such person has engaged in criminal,
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unethical, or unprofessional conduct, or in frivolous behavior, as set forth in § 1003.102.” 8 CFR § 1003.101.
3. “The term attorney means any person who is eligible to practice law in and is a member in good standing of the bar in the highest court of any State, possession, territory, or Commonwealth of the United States, or of the District of Columbia, and is not under any order suspending, enjoining, restraining, disbarring, or otherwise restricting him in the practice of law.” 8 CFR § 1001.1 (f).
4. “The term practice means the act or acts of any person appearing in any case, either in person or through the preparation or filing of any brief or other document, paper, application, or petition on behalf of another person or client before or with DHS, or any immigration judge, or the Board.” 8 CFR § 1001.1 (i). See 8 CFR § 1001.1 (k) for the term “preparation” constituting practice.
5. Rules and Procedures for Attorney Conduct in immigration matters are found in 8 CFR § 1003.101 and 102, the latter which provides up to 21 non-exclusive categories that constitute grounds for attorney disciplinary sanctions “in the public interest.”
6. Sanctions, after notice and opportunity to be heard, may include permanent disbarment from practice before the Immigration Board, Immigration Courts, and DHS; suspension, public or private censure or “such other disciplinary sanctions as the adjudicating official or the Board deems appropriate.” 8 CFR § 1003.101(a).
B. CFTC standard of attorney practice
1. 17 CFR § 14.8: “Lack of requisite qualifications, character and integrity.” The [CFTC] may, after notice and hearing in the matter, deny, temporarily or permanently, the privilege of appearing or practicing before it to any person who is found by the Commission by a preponderance of the evidence: (a) not to possess the requisite qualifications to represent others; or (b) to be lacking in character or integrity; or (c) to have engaged in unethical or improper unprofessional conduct either in the course of an adjudicatory, investigative, rulemaking or other proceeding before the Commission or otherwise.”
2. 17 CFR § 14.2 (a) “Appearance. For the purpose of this part, ‘appearance’ refers to the representation of a person by another who appears in his behalf at any adjudicatory, investigatory or rulemaking proceeding conducted before the [CFTC], including but not limited to those proceedings encompassed in parts 10 through 13 of the [CFTC’s] rules.
3. 17 CFR § 14.2 (b) “Practice. For the purpose of this part, practicing before the [CFTC] shall include but shall not be limited to:
(1) The preparation of any statement, opinion or other paper by any attorney or accountant filed with or submitted to the [CFTC]
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on behalf of another person in or in connection with any application, notification, report or other document; and
(2) Transacting any other formal business with the [CFTC], on behalf of another person, in the capacity of an attorney and accountant.”
C. Parties and Representational Practice Before the Office of the Comptroller of the Currency; Standards of Conduct, 12 CFR Part 19
1. Subpart K at 12 CFR § 19.190 contains rules relating to parties and representational practice before the OCC and also covers disciplinary sanctions ─ censure, suspension or debarment ─ against individuals who appear before the OCC in a representational capacity (including but not limited to attorneys and accountants) either in an adjudicatory proceeding under this part or in any other matters connected with presentations to the OCC relating to client’s rights, privileges, or liabilities.
2. Unlike the SEC, CFTC, DHS, and OTS rules, however, the OCC Standards of Conduct (and IRS) do not include the word “unethical” or “integrity.”
3. The OCC, however, may censure, debar or suspend an individual for “disreputable conduct,” which includes willfully or recklessly violating or recklessly aiding and abetting the violation of any provision of the federal banking or securities laws; any conviction for offenses involving dishonesty or breach of trust; knowingly or recklessly giving false or misleading information; directly or indirectly attempting to influence an OCC employee or official by use of threats, false accusations, duress or coercion, bribes; contemptuous and other conduct provided under the rules. 12 CFR § 19.196.
4. OCC rules also provide that “suspension, debarment or removal from practice before the Board of Governors, the FDIC, the OTS, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and any other Federal or state agency” will constitute disreputable conduct subject to censure, debarment, or suspension from practice before the OCC. 12 CFR § 19.196 (g).
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Recent Developments
A. Applying Rule 205.3 in the case of Allen Stanford. According to press reports, a NY lawyer representing Allen Stanford and his companies resigned from the representation on Feb. 14, 2009, three days before the SEC filed suit against Stanford and others, alleging an $8 billion fraud. According to the WSJ and others, Stanford’s lawyer sent a note to the SEC reading: “I disaffirm al prior oral and written representations made by me and my associates to the SEC staff regarding Stanford Financial Group and its affiliates.”
B. Rule 102(e) in action: In the matter of Steven Altman, Esq. (the “Respondent”) Securities Exchange Act of 1934 Rel. No. 63665, January 6, 2011.
1. This is a proceeding invoking Section 4C of the Exchange Act and Rule 102(e) began when the Commission issued on Order Instituting Administrative Proceeding (“OIP”) on January 30, 2008. Hearings were held on several days in May 2008. The OGC presented four witnesses and introduced twenty-six exhibits. Respondent presented his testimony and two experts and introduced three exhibits.
2. The ALJ found Respondent knowingly, in representing a witness in a Commission administrative proceeding, violated the New York State Bar Association Lawyer’s Code of Professional Responsibility Disciplinary Rule 1- 102(A)(4), (5), and (7), and constituted improper professional conduct subject to discipline pursuant to Section 4C of the Exchange Act and Commission Rule of Practice 102(e)(1)(ii). As noted supra, the ALJ found Respondent violated DR 1- 102(A)(4) with scienter.
a) DR 102(A) (4) prohibits “conduct involving dishonesty, fraud, deceit, or misrepresentation. It is now RPC 8.4 (c).
b) DR 102(A) (5) prohibits “conduct that is prejudicial to the administration of justice.” It is now RPC 8.4 (d).
c) DR 102(A) (7) prohibits “any other conduct that adversely reflects on the lawyer’s fitness as a lawyer.” It is now RPC 8.4 (h).
3. Specifically, the ALJ found that, between January 28 and March 10, 2004, Respondent offered to have his client evade the Division of Enforcement’s service of a subpoena and/or testify in exchange for financial and other benefits from two respondents in the investigation then underway.
a) The Commission noted that New York courts have found violations of DR 1-102(A)(4), (5), and (7) on similar facts and ordered that the attorney be disbarred citing In re Geoghan, 253 A.D.2d 205 (2d Dept. 1999) (attorney who offered to have his client testify falsely in criminal proceeding in exchange for personal injury settlement violated DR 1- 102(A)(4), (5), and (7) and was disbarred);
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b) See also In re Gen, 29 A.D.3d 230 (1st Dept. 2006) (attorney who offered that his burglary victim client would provide favorable victim’s statement, waive civil liability, and refuse to cooperate with district attorney in exchange for $100,000 payment from burglary defendant’s family engaged in conduct prejudicial to the administration of justice that reflected adversely on his fitness to practice law and was disbarred).
4. The ALJ’s findings were based on the record and her observations of the witnesses’ demeanor applying a preponderance of the evidence standard, citing Steadman v. SEC, 450 U.S. 91, 102 (1981); William R. Carter, 47 S.E.C. 471, 472 n.3 (1981).
5. The ALJ imposed a nine-month suspension.
6. OGC appealed the nine-month suspension to the Commission and sought an order permanently denying him the privilege of appearing or practicing before the Commission.
7. The Commission, in on opinion issued on November 10, 2010, held that, “it is in the public interest to permanently deny him the right to appear or practice before the Commission.”
8. The ALJ’s findings were based on the record and her observations of the witnesses’ demeanor applying a preponderance of the evidence standard, citing Steadman v. SEC, 450 U.S. 91, 102 (1981); William R. Carter, 47 S.E.C. 471, 472 n.3 (1981).
9. Respondent appealed to the United States District Court in Southern District of New York in a declaratory judgment. The district court declined on the basis that the appeal should be directed to the U.S. Court of Appeals.
10. In rendering its opinion on appeal, the Commission noted, among other things, the following:
a) A federal securities law violation is not a prerequisite to the initiation of a disciplinary proceeding under Rule 102(e) and Exchange Act Section 4C. Those provisions set forth independent bases on which the Commission may discipline a person licensed to practice as an attorney;
b) Appearing and practicing before the Commission as defined in Rule 102(f) is not a requisite for the applicability of Rule 102(e). The text of Rule 102(e)(1) contains no requirement that a person must be appearing or practicing before the Commission at the time of the conduct on which the Commission’s findings are based. Robert W. Armstrong III, 58 S.E.C. 542, 574 (2005).
c) Representing a witness before the Commission is conduct that constitutes “appearing or practicing” before the Commission.
`24 NYCLA Ethics Presentation May 24, 2011
C. Chernick v. Essex Equity Holdings USA, LLC, NY Sup. Ct. No. 600995/2010, 29 Misc. 3d 371, June 10, 2010. Manhattan Supreme Court granted motion to disqualify boutique law firm from representing client in a $285 million FINRA arbitration after a former federal prosecutor who worked on matters related to the arbitration joined the boutique firm where the court concluded that screening and notice procedures under RPC Rule 1.11 (Specific Conflicts of Interest for Former and Current Government Officers and Employees) were inadequate under the circumstances.
D. New York’s Solicitation Rule: Rivera v. Lutheran Medical Center, 73 A.D.3d 891 (Sup. Ct. 2d Dep’t May 11, 2010). In a summary ruling, the Second Department affirmed the disqualification of a prominent law firm for offering to represent current and former employees of its client because those offers were found to be unlawful acts of solicitation in violation of RPC Rule 7.3.
`25 NYCLA Ethics Presentation May 24, 2011
Additional Bibliography
Harold S. Bloomenthal and Samuel Wolff, SEC and the Professional, Securities Law Handbook, §§ 39:16-39:55, Vol. 2, 2011 edition, Thomson Reuters.
Thomas Lee Hazen, §9.8 Controls on Attorney Practice, Law of Securities Regulation, 2011 Thomson Reuters, updated by the January 2011 pocket part.
Thomas Lee Hazen, Administrative Law Controls on Attorney Practice – A Look at the Securities and Exchange Commission’s Lawyer Conduct Rules, 55 Administrative Law Review 323, Spring 2003, copyright 2003 American Bar Association.
Julie Andersen Hill, Divide and Conquer: SEC Discipline of Litigation Attorneys, 22 Georgetown Journal of Legal Ethics 373, Spring 2009.
`26 § 201.100 17 CFR Ch. II (4–1–10 Edition)
GENERAL RULES quorum of the Commission, an indi- vidual Commissioner, or any other per- § 201.100 Scope of the rules of practice. son duly authorized to preside at a (a) Unless provided otherwise, these hearing; Rules of Practice govern proceedings (6) Interested division means a division before the Commission under the stat- or an office assigned primary responsi- utes that it administers. bility by the Commission to partici- (b) These rules do not apply to: pate in a particular proceeding; (1) Investigations, except where made (7) Order instituting proceedings means specifically applicable by the Rules Re- an order issued by the Commission lating to Investigations, part 203 of commencing a proceeding or an order this chapter; or issued by the Commission to hold a (2) Actions taken by the duty officer hearing; pursuant to delegated authority under 17 CFR 200.43. (8) Party means the interested divi- (c) The Commission, upon its deter- sion, any person named as a respondent mination that to do so would serve the in an order instituting proceedings, interests of justice and not result in any applicant named in the caption of prejudice to the parties to the pro- any order, persons entitled to notice in ceeding, may by order direct, in a par- a stop order proceeding as set forth in ticular proceeding, that an alternative § 201.200(a)(2) or any person seeking procedure shall apply or that compli- Commission review of a decision; ance with an otherwise applicable rule (9) Proceeding means any agency is unnecessary. process initiated: (i) By an order instituting pro- [60 FR 32796, June 23, 1995; 60 FR 46499, Sept. 7, 1995, as amended at 69 FR 13175, Mar. 19, ceedings; or 2004] (ii) By the filing, pursuant to § 201.410, of a petition for review of an § 201.101 Definitions. initial decision by a hearing officer; or (a) For purposes of these Rules of (iii) By the filing, pursuant to Practice, unless explicitly stated to the § 201.420, of an application for review of contrary: a self-regulatory organization deter- (1) Commission means the United mination; or States Securities and Exchange Com- (iv) By the filing, pursuant to mission, or a panel of Commissioners § 201.430, of a notice of intention to file constituting a quorum of the Commis- a petition for review of a determina- sion, or a single Commissioner acting tion made pursuant to delegated au- as duty officer pursuant to 17 CFR thority; or 200.43; (v) By the filing, pursuant to § 201.440, (2) Counsel means any attorney rep- of an application for review of a deter- resenting a party or any other person mination by the Public Company Ac- representing a party pursuant to counting Oversight Board; or § 201.102(b); (vi) By the filing, pursuant to § 242.601 (3) Disciplinary proceeding means an of this chapter, of an application for re- action pursuant to § 201.102(e); (4) Enforcement proceeding means an view of an action or failure to act in action, initiated by an order insti- connection with the implementation or tuting proceedings, held for the pur- operation of any effective transaction pose of determining whether or not a reporting plan; or person is about to violate, has violated, (vii) By the filing, pursuant to has caused a violation of, or has aided § 242.608 of this chapter, of an applica- or abetted a violation of any statute or tion for review of an action taken or rule administered by the Commission, failure to act in connection with the or whether to impose a sanction as de- implementation or operation of any ef- fined in Section 551(10) of the Adminis- fective national market system plan; trative Procedure Act, 5 U.S.C. 551(10); or (5) Hearing officer means an adminis- (viii) By the filing, pursuant to Sec- trative law judge, a panel of Commis- tion 11A(b)(5) of the Securities Ex- sioners constituting less than a change Act of 1934, of an application
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for review of a determination of a reg- ing or otherwise appears on his or her istered securities information proc- own behalf before the Commission or a essor; hearing officer in a proceeding as de- (10) Secretary means the Secretary of fined in § 201.101(a), he or she shall file the Commission; with the Commission, or otherwise (11) Temporary sanction means a tem- state on the record, and keep current, porary cease-and-desist order or a tem- an address at which any notice or other porary suspension of the registration of written communication required to be a broker, dealer, municipal securities served upon him or her or furnished to dealer, government securities broker, him or her may be sent and a telephone government securities dealer, or trans- number where he or she may be fer agent pending final determination reached during business hours. whether the registration shall be re- (2) Representing others. When a person voked; and first makes any filing or otherwise ap- (12) Board means the Public Company pears in a representative capacity be- Accounting Oversight Board. fore the Commission or a hearing offi- (b) [Reserved] cer in a proceeding as defined in [60 FR 32796, June 23, 1995, as amended at 69 § 201.101(a), that person shall file with FR 13175, Mar. 19, 2004; 70 FR 37617, June 29, the Commission, and keep current, a 2005] written notice stating the name of the proceeding; the representative’s name, § 201.102 Appearance and practice be- business address and telephone num- fore the Commission. ber; and the name and address of the A person shall not be represented be- person or persons represented. fore the Commission or a hearing offi- (3) Power of attorney. Any individual cer except as stated in paragraphs (a) appearing or practicing before the and (b) of this section or as otherwise Commission in a representative capac- permitted by the Commission or a ity may be required to file a power of hearing officer. attorney with the Commission showing (a) Representing oneself. In any pro- his or her authority to act in such ca- ceeding, an individual may appear on pacity. his or her own behalf. (4) Withdrawal. Any person seeking to (b) Representing others. In any pro- withdraw his or her appearance in a ceeding, a person may be represented representative capacity shall file a no- by an attorney at law admitted to tice of withdrawal with the Commis- practice before the Supreme Court of sion or the hearing officer. The notice the United States or the highest court shall state the name, address, and tele- of any State (as defined in Section phone number of the withdrawing rep- 3(a)(16) of the Exchange Act, 15 U.S.C. resentative; the name, address, and 78c(a)(16)); a member of a partnership telephone number of the person for may represent the partnership; a bona whom the appearance was made; and fide officer of a corporation, trust or the effective date of the withdrawal. If association may represent the corpora- the person seeking to withdraw knows tion, trust or association; and an offi- the name, address, and telephone num- cer or employee of a state commission ber of the new representative, or knows or of a department or political subdivi- that the person for whom the appear- sion of a state may represent the state ance was made intends to represent commission or the department or polit- him- or herself, that information shall ical subdivision of the state. be included in the notice. The notice (c) Former Commission employees. must be served on the parties in ac- Former employees of the Commission cordance with § 201.150. The notice shall must comply with the restrictions on be filed at least five days before the practice contained in the Commission’s proposed effective date of the with- Conduct Regulation, Subpart M, 17 drawal. CFR 200.735. (e) Suspension and disbarment—(1) (d) Designation of address for service; Generally. The Commission may cen- notice of appearance; power of attorney; sure a person or deny, temporarily or withdrawal—(1) Representing oneself. permanently, the privilege of appear- When an individual first makes any fil- ing or practicing before it in any way
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to any person who is found by the Com- (3) Temporary suspensions. An order of mission after notice and opportunity temporary suspension shall become ef- for hearing in the matter: fective upon service on the respondent. (i) Not to possess the requisite quali- No order of temporary suspension shall fications to represent others; or be entered by the Commission pursuant (ii) To be lacking in character or in- to paragraph (e)(3)(i) of this section tegrity or to have engaged in unethical more than 90 days after the date on or improper professional conduct; or which the final judgment or order en- (iii) To have willfully violated, or tered in a judicial or administrative willfully aided and abetted the viola- proceeding described in paragraph tion of any provision of the Federal se- (e)(3)(i)(A) or (e)(3)(i)(B) of this section curities laws or the rules and regula- has become effective, whether upon tions thereunder. completion of review or appeal proce- dures or because further review or ap- (iv) With respect to persons licensed peal procedures are no longer avail- to practice as accountants, ‘‘improper able. professional conduct’’ under (i) The Commission, with due regard § 201.102(e)(1)(ii) means: to the public interest and without pre- (A) Intentional or knowing conduct, liminary hearing, may, by order, tem- including reckless conduct, that re- porarily suspend from appearing or sults in a violation of applicable pro- practicing before it any attorney, ac- fessional standards; or countant, engineer, or other profes- (B) Either of the following two types sional or expert who has been by name: of negligent conduct: (A) Permanently enjoined by any (1) A single instance of highly unrea- court of competent jurisdiction, by rea- sonable conduct that results in a viola- son of his or her misconduct in an ac- tion of applicable professional stand- tion brought by the Commission, from ards in circumstances in which an ac- violating or aiding and abetting the countant knows, or should know, that violation of any provision of the Fed- heightened scrutiny is warranted. eral securities laws or of the rules and (2) Repeated instances of unreason- regulations thereunder; or able conduct, each resulting in a viola- (B) Found by any court of competent tion of applicable professional stand- jurisdiction in an action brought by ards, that indicate a lack of com- the Commission to which he or she is a petence to practice before the Commis- party or found by the Commission in sion. any administrative proceeding to (2) Certain professionals and convicted which he or she is a party to have vio- persons. Any attorney who has been lated (unless the violation was found suspended or disbarred by a court of not to have been willful) or aided and the United States or of any State; or abetted the violation of any provision any person whose license to practice as of the Federal securities laws or of the an accountant, engineer, or other pro- rules and regulations thereunder. fessional or expert has been revoked or (ii) Any person temporarily sus- suspended in any State; or any person pended from appearing and practicing who has been convicted of a felony or a before the Commission in accordance misdemeanor involving moral turpi- with paragraph (e)(3)(i) of this section tude shall be forthwith suspended from may, within 30 days after service upon appearing or practicing before the him or her of the order of temporary Commission. A disbarment, suspension, suspension, petition the Commission to revocation or conviction within the lift the temporary suspension. If no pe- meaning of this section shall be tition has been received by the Com- deemed to have occurred when the dis- mission within 30 days after service of barring, suspending, revoking or con- the order, the suspension shall become victing agency or tribunal enters its permanent. judgment or order, including a judg- (iii) Within 30 days after the filing of ment or order on a plea of nolo a petition in accordance with para- contendere, regardless of whether an graph (e)(3)(ii) of this section, the Com- appeal of such judgment or order is mission shall either lift the temporary pending or could be taken. suspension, or set the matter down for
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hearing at a time and place designated judgment, decree or finding shall not by the Commission, or both, and, after impair the operation of any other pro- opportunity for hearing, may censure vision of this section. the petitioner or disqualify the peti- (5) Reinstatement. (i) An application tioner from appearing or practicing be- for reinstatement of a person perma- fore the Commission for a period of nently suspended or disqualified under time or permanently. In every case in paragraph (e)(1) or (e)(3) of this section which the temporary suspension has may be made at any time, and the ap- not been lifted, every hearing held and plicant may, in the Commission’s dis- other action taken pursuant to this cretion, be afforded a hearing; however, paragraph (e)(3) shall be expedited in the suspension or disqualification shall accordance with § 201.500. If the hearing continue unless and until the applicant is held before a hearing officer, the time limits set forth in § 201.540 will has been reinstated by the Commission govern review of the hearing officer’s for good cause shown. initial decision. (ii) Any person suspended under para- (iv) In any hearing held on a petition graph (e)(2) of this section shall be re- filed in accordance with paragraph instated by the Commission, upon ap- (e)(3)(ii) of this section, the staff of the propriate application, if all the grounds Commission shall show either that the for application of the provisions of that petitioner has been enjoined as de- paragraph are subsequently removed scribed in paragraph (e)(3)(i)(A) of this by a reversal of the conviction or ter- section or that the petitioner has been mination of the suspension, disbar- found to have committed or aided and ment, or revocation. An application for abetted violations as described in para- reinstatement on any other grounds by graph (e)(3)(i)(B) of this section and any person suspended under paragraph that showing, without more, may be (e)(2) of this section may be filed at the basis for censure or disqualifica- any time and the applicant shall be ac- tion. Once that showing has been made, corded an opportunity for a hearing in the burden shall be upon the petitioner the matter; however, such suspension to show cause why he or she should not shall continue unless and until the ap- be censured or temporarily or perma- plicant has been reinstated by order of nently disqualified from appearing and the Commission for good cause shown. practicing before the Commission. In (6) A any such hearing, the petitioner may Other proceedings not precluded. not contest any finding made against proceeding brought under paragraph him or her or fact admitted by him or (e)(1), (e)(2) or (e)(3) of this section her in the judicial or administrative shall not preclude another proceeding proceeding upon which the proceeding brought under these same paragraphs. under this paragraph (e)(3) is predi- (7) Public hearings. All hearings held cated. A person who has consented to under this paragraph (e) shall be public the entry of a permanent injunction as unless otherwise ordered by the Com- described in paragraph (e)(3)(i)(A) of mission on its own motion or after con- this section without admitting the sidering the motion of a party. facts set forth in the complaint shall (f) Practice defined. For the purposes be presumed for all purposes under this of these Rules of Practice, practicing paragraph (e)(3) to have been enjoined before the Commission shall include, by reason of the misconduct alleged in but shall not be limited to: the complaint. (1) Transacting any business with the (4) Filing of prior orders. Any person Commission; and appearing or practicing before the (2) The preparation of any statement, Commission who has been the subject opinion or other paper by any attor- of an order, judgment, decree, or find- ney, accountant, engineer or other pro- ing as set forth in paragraph (e)(3) of this section shall promptly file with fessional or expert, filed with the Com- the Secretary a copy thereof (together mission in any registration statement, with any related opinion or statement notification, application, report or of the agency or tribunal involved). other document with the consent of Failure to file any such paper, order,
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such attorney, accountant, engineer or trative law judge, the Chief Adminis- other professional or expert. trative Law Judge shall select, pursu- ant to 17 CFR 200.30–10, the administra- [60 FR 32796, June 23, 1995, as amended at 63 FR 57122, Oct. 26, 1998; 69 FR 13176, Mar. 19, tive law judge to preside. 2004; 70 FR 72569, Dec. 5, 2005] § 201.111 Hearing officer: Authority. § 201.103 Construction of rules. The hearing officer shall have the au- (a) The Rules of Practice shall be thority to do all things necessary and construed and administered to secure appropriate to discharge his or her du- the just, speedy, and inexpensive deter- ties. No provision of these Rules of mination of every proceeding. Practice shall be construed to limit the (b) In any particular proceeding, to powers of the hearing officer provided the extent that there is a conflict be- by the Administrative Procedure Act, 5 tween these rules and a procedural re- U.S.C. 556, 557. The powers of the hear- quirement contained in any statute, or ing officer include, but are not limited any rule or form adopted thereunder, to, the following: the latter shall control. (a) Administering oaths and affirma- (c) For purposes of these rules: tions; (1) Any term in the singular includes (b) Issuing subpoenas authorized by the plural, and any term in the plural law and revoking, quashing, or modi- includes the singular, if such use would fying any such subpoena; be appropriate; (c) Receiving relevant evidence and (2) Any use of a masculine, feminine, ruling upon the admission of evidence or neuter gender encompasses such and offers of proof; other genders as would be appropriate; (d) Regulating the course of a pro- and ceeding and the conduct of the parties (3) Unless the context requires other- and their counsel; wise, counsel for a party may take any (e) Holding prehearing and other con- action required or permitted to be ferences as set forth in § 201.221 and re- taken by such party. quiring the attendance at any such conference of at least one representa- § 201.104 Business hours. tive of each party who has authority to negotiate concerning the resolution of The Headquarters office of the Com- issues in controversy; mission, at 100 F Street, NE., Wash- (f) Recusing himself or herself upon ington, DC 20549, is open each day, ex- motion made by a party or upon his or cept Saturdays, Sundays, and Federal her own motion; legal holidays, from 9 a.m. to 5:30 p.m., (g) Ordering, in his or her discretion, Eastern Standard Time or Eastern in a proceeding involving more than Daylight Saving Time, whichever is one respondent, that the interested di- currently in effect in Washington, D.C. vision indicate, on the record, at least Federal legal holidays consist of New one day prior to the presentation of Year’s Day; Birthday of Martin Luther any evidence, each respondent against King, Jr.; Presidents Day; Memorial whom that evidence will be offered; Day; Independence Day; Labor Day; Co- (h) Subject to any limitations set lumbus Day; Veterans Day; Thanks- forth elsewhere in these Rules of Prac- giving Day; Christmas Day; and any tice, considering and ruling upon all other day appointed as a holiday in procedural and other motions, includ- Washington, D.C. by the President or ing a motion to correct a manifest the Congress of the United States. error of fact in the initial decision. A [60 FR 32796, June 23, 1995, as amended at 70 motion to correct is properly filed FR 72569, Dec. 5, 2005] under this Rule only if the basis for the motion is a patent misstatement of § 201.110 Presiding officer. fact in the initial decision. Any motion All proceedings shall be presided over to correct must be filed within ten by the Commission or, if the Commis- days of the initial decision. A brief in sion so orders, by a hearing officer. opposition may be filed within five When the Commission designates that days of a motion to correct. The hear- the hearing officer shall be an adminis- ing officer shall have 20 days from the
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SECURITIES EXCHANGE ACT OF 1934 Rel. No. 63306 / November 10, 2010 CORRECTED Admin. Proc. File No. 3-12944
In the Matter of
STEVEN ALTMAN, ESQ.
c/o Jeffrey C. Hoffman, Esq. Hoffman & Pollok LLP 260 Madison Avenue 22nd Floor New York, NY 10016
OPINION OF THE COMMISSION
RULE 102(e) PROCEEDING
EXCHANGE ACT SECTION 4C PROCEEDING
Grounds for Remedial Action
Unethical or Improper Professional Conduct
Attorney engaged in unethical and improper professional conduct while representing prospective witness in Commission administrative proceeding, in violation of state bar disciplinary rules. Held, it is in the public interest to permanently deny him the right to appear or practice before the Commission.
APPEARANCES:
Jeffrey C. Hoffman, of Hoffman & Pollok LLP, for Steven Altman.
Melinda Hardy, Donna S. McCaffrey, and Christopher M. Bruckmann, for the Office of the General Counsel.
Appeal filed: February 2, 2009 Last briefs filed: January 19, 2010 2
I.
Steven Altman, Esq., an attorney licensed to practice law in New York, appeals from an administrative law judge's decision.1 The law judge found that between January 28, 2004 and March 10, 2004 (the "relevant period"), Altman engaged in unethical and improper professional conduct while representing a prospective witness for the Division of Enforcement ("Division") in a Commission administrative proceeding. Specifically, the law judge found that Altman offered to have his client evade the Division's service of a subpoena and/or testify falsely in exchange for a financial package from two respondents in the proceeding. The law judge further found that Altman did so with scienter. As a result of his conduct, Altman violated Disciplinary Rules ("DR") 1-102(A)(4), 102(A)(5), and 102(A)(7) of the New York State Bar Association Lawyer's Code of Professional Responsibility.2 The law judge suspended Altman from appearing or practicing before the Commission for nine months pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice3 and Section 4C of the Securities Exchange Act of 1934.4
1 Steven Altman, Esq., Initial Decision Rel. No. 367 (Jan. 14, 2009), 94 SEC Docket 13430.
2 DR 1-102(A)(4) prohibits "conduct involving dishonesty, fraud, deceit, or misrepresentation." DR 1-102(A)(5) prohibits "conduct that is prejudicial to the administration of justice." DR 1-102(A)(7) prohibits "conduct that adversely reflects on the lawyer's fitness as a lawyer." After the events at issue, New York replaced its existing disciplinary rules with new professional conduct rules that follow the format of the American Bar Association ("ABA") Model Rules of Professional Conduct. Although the New York Rules of Professional Conduct did not become effective until April 1, 2009, new Rules 8.4(c),(d), and (h) are identical in substance to former DR 1-102(A)(4), (5), and (7), respectively. The conclusions reached in this proceeding would be the same, whether resolved under the Code of Professional Responsibility or the ABA Model Rules of Professional Conduct.
3 17 C.F.R. § 201.102(e)(1)(ii) (providing, in pertinent part, that "[t]he Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter -- to be lacking in character or integrity or to have engaged in unethical or improper professional conduct").
4 15 U.S.C. § 78d-3(a)(2) (providing, in pertinent part, that "[t]he Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person is found by the Commission, after notice and opportunity for hearing in the matter -- to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct") (codifying Rule of Practice 102(e)). 3
The Office of the General Counsel ("OGC") appeals the nine-month suspension imposed on Altman. It seeks an order permanently denying him the privilege of appearing or practicing before the Commission. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. We conclude that Altman's conduct is fundamentally inconsistent with the effective administration of justice and warrants a permanent denial of the privilege of appearing or practicing before the Commission.
A. Altman.
Altman has been a member of the New York bar since 1987 and practices law in New York City with his solely-owned firm, Altman & Company, P.C.5 Altman describes himself as a general commercial litigator who is regularly involved in state and federal court litigation and National Association of Securities Dealers, Inc. ("NASD," now known as FINRA) arbitrations. Altman has represented parties in proceedings before the Commission,6 but considers such matters to constitute a "small" percentage of his legal practice.
B. Altman's Representation of Rosen.
Altman has known Bonnie Rosen since he was in high school and she worked at a local insurance agency.7 From November 1999 to October 2003, Rosen worked as an administrative assistant with a salary of $60,000 at Nextgen Inc. ("Nextgen"), a company that was owned by Jay Adoni and shared office space with Harrison Securities, Inc. ("Harrison"), a broker-dealer. Nextgen paid Rosen's salary, but she spent half of her time working for Harrison and its chief executive officer, Frederick C. Blumer, who was Adoni's close business associate.
Sometime in 2003, Rosen called Altman and told him that she had been forced out of her job at Nextgen. Rosen asked Altman for his help in obtaining severance pay from Nextgen and removing her name from two car leases she co-signed for Blumer, who used the cars and paid the leases. Altman testified that he agreed to assist Rosen as a "favor." Altman twice contacted
5 Altman is not a member of the bar of any other state.
6 See, e.g., Sky Capital LLC, Securities Exchange Act Rel. No. 55828 (May 30, 2007), 90 SEC Docket 2201; Dominic A. Alvarez, Exchange Act Rel. No. 53231 (Feb. 6, 2006), 87 SEC Docket 985; Javed Anver Latef, 56 S.E.C. 290 (2003), petition denied, 94 Fed. Appx. 969 (3d Cir. 2004) (Table).
7 Rosen declined to testify during OGC's investigation of Altman and asserted her Fifth Amendment privilege against self-incrimination. Rosen was not called as a witness at the May 2008 hearing in this Rule 102(e) proceeding. 4
Adoni and requested that he pay Rosen severance and remove her name from the car leases.8 On both occasions, Adoni refused the requests.
C. The Harrison Proceeding.
In 2003, the Division instituted administrative and cease-and-desist proceedings against Harrison, Blumer, and Nebrissa Song, alleging violations of the Exchange Act's books and records, net capital, and financial reporting provisions (hereinafter the "Harrison Proceeding"). Respondents raised as a defense to the books and records charge that they were unable to maintain the firm's general ledger for certain periods because a computer virus corrupted their files. A hearing in the Harrison Proceeding was held on January 20 through January 26, 2004 and March 8 through 10, 2004.
On January 26, 2004, Division staff learned from NASD staff that Rosen had called NASD and claimed to have information adverse to Harrison's and Blumer's computer virus defense. Division staff hoped, but were not sure, that Rosen would be able to testify that there was no computer virus that compromised Harrison's files. Division staff also thought that Rosen might be able to testify about Blumer's accounting practices. Division staff concluded that Rosen might be a good rebuttal witness.
Division staff called Rosen on January 28, 2004 and told her that they learned she might have useful information for the Harrison Proceeding. They asked Rosen if she would be willing to meet or speak with them. Rosen expressed some anxiety about testifying. She mentioned to Division staff that she co-signed two car leases for Blumer, and she was concerned that if Blumer was ordered to pay a civil penalty in the Harrison Proceeding, it might increase the likelihood that he would default on the leases and she would have to pay the remaining balance on the leases. Division staff testified that the car leases were not relevant to their case and were not a subject of interest to them, except insofar as the leases might prevent Rosen from testifying in the Harrison Proceeding. Rosen identified Altman as her attorney and referred Division staff to him.
D. Division Staff Communicate with Altman about Interviewing Rosen.
On or about January 28, 2004, Division staff spoke with Altman, who identified himself as Rosen's legal representative. During the conversation, Division staff described the nature of the Harrison Proceeding, indicated that it was ongoing, and expressed their interest in possibly using Rosen's testimony as part of their case. Division staff asked Altman if they could interview Rosen. Division staff testified that Altman was "noncommital" about whether Rosen would
8 Altman testified that he did not open a file for Rosen or enter into a retainer agreement with her. Altman testified that Rosen was not an active, paying client, and that he did not bill her or get paid by her. Altman testified that he could not recall specifically telling Rosen that he would not bill her for his services, but that he never intended to do so. 5 agree to an interview and said that he would get back to them. Altman asked Division staff who was representing Harrison and Blumer, and they gave him Irving Einhorn's name.9
Over the next six weeks, Division staff contacted Altman multiple times in an effort to determine if Rosen would cooperate with them by agreeing to be interviewed and appearing for testimony in the Harrison Proceeding. Division staff testified that they wanted to know what Rosen knew and what she would say if called to testify as a witness. According to Division staff, Altman did not promptly return messages they left him, and when he answered their calls, he was "noncommittal" about Rosen's cooperation and whether he would allow them to interview her. At the May 2008 hearing in this proceeding, the law judge asked Altman if there was a reason why he did not return the Division's calls. Altman responded that the matter was not a "high priority" for him and that he paid it "very little" attention.
E. Altman Calls Einhorn Seeking a Financial Package for Rosen in Exchange for her Not Cooperating or Not Remembering Relevant Facts.
While Altman was "trad[ing] phone calls" with Division staff, he initiated a series of at least six telephone conversations with Einhorn that occurred between January 28 and February 10, 2004. Einhorn tape recorded five of these conversations without Altman's knowledge. During the conversations, Altman requested that Harrison and Blumer give Rosen a financial package consisting of severance pay and a release from her obligations under the car leases. In return, Altman suggested that Rosen would evade the Division's service of a subpoena, and/or if served, testify falsely that she could not recall facts damaging to Harrison's and Blumer's computer virus defense.
1. The first (untaped) telephone conversation.
Altman first called Einhorn on or about January 28, 2004. In this conversation, Altman told Einhorn that he represented Rosen and that the Division was interested in possibly using her as a witness in the Harrison Proceeding. Altman also told Einhorn that Rosen had left Nextgen under unfavorable circumstances with little or no severance pay; she had worked for Harrison and Blumer; and she was hostile towards them. Altman gave Einhorn an abbreviated version of his discussions with Adoni and said he thought this would be an opportune time to reinvigorate Rosen's requests for severance pay and removal of her name from the car leases. In his hearing testimony and briefs on appeal, Altman admitted that the Division's interest in Rosen as a witness gave him some leverage to renew her requests.
Einhorn testified that he was "stunned" by Altman's call. According to Einhorn, Altman "suggested that if a favorable . . . severance/compensation package could be arranged for Ms. Rosen, she would be more favorably disposed towards [his] client[s] if she was called as a
9 Einhorn has practiced law since 1972 and maintains a solo practice in California. 6 witness. . . and whether she would even appear as a witness."10 Einhorn interpreted Altman's call as "an extortion attempt, seeking money from [his] client[s] in exchange for favorable behavior and testimony from a witness." Einhorn understood that if paid the money, Rosen would be inclined to testify favorably, or not at all, against his clients, and if not paid the money, she would do damage to his clients at the hearing. Einhorn told Altman that he did not know what Altman was talking about and would have to talk to Blumer before he could respond.
Einhorn testified that he decided to tape record their subsequent conversations because he believed Altman was engaging in an "extortion attempt" and wanted to protect himself and his clients in the event Rosen testified in the Harrison Proceeding "without being paid off." Einhorn did not tell Altman that he was taping their conversations, and Altman was unaware that he was being taped.
2. The second (first taped) telephone conversation.
The second conversation, which was the first taped conversation, occurred on or about February 2, 2004, when Einhorn returned Altman's call after speaking to Blumer. Einhorn told Altman that Blumer said Rosen did not work for him and had nothing to do with his computer. The following discussion ensued:
MR. ALTMAN: I am not going to pull punches with you. They [Division staff] are aware[,] if asked, [Rosen] will testify that there was no virus in the computer,11 and I suspect once they start peeling it away, some other very, very unhelpful stuff with respect to the books and records of the firm --
(Untranscribable)
MR. ALTMAN: As I understand it, [b]ased on her personal knowledge, . . . it was a small suite of executive offices that they all sat in.
MR. EINHORN: Uh-huh.
10 The law judge found that Einhorn gave credible testimony. A law judge's credibility findings are entitled to considerable weight because they are based on hearing the witnesses' testimony and observing their demeanor. Anthony Tricarico, 51 S.E.C. 457, 460 (1993). These credibility findings can be overcome only where the record contains substantial evidence for doing so. Id. We find no such evidence here. We therefore reject Altman's various arguments that the law judge erred in crediting Einhorn's testimony.
11 Einhorn acknowledged that it would be "very detrimental" and "harmful" to his clients if Rosen were to testify that there was no computer virus because such testimony "directly related" to his clients' defense to the books and records charge. 7
MR. ALTMAN: And that this was not just a professional relationship, it was personal, not, not in any --
MR. EINHORN: Not a sexual or intimate way.
MR. ALTMAN: Not an intimate way, but a personal basis. And, listen, when you have a $60,000 a year secretary co-signing for cars of a president of a firm, it . . . raises eyebrows initially.12 Frankly, probably all this would have gone away if at least something would have happened,13 but, you know, if that's Fred's [Blumer] view, that is -- you know, it shouldn't have gone forward.
MR. EINHORN: No, no, no, I am here, Steven, trying to figure out what's happening here. So, she hasn't given that testimony?
MR. ALTMAN: That's correct. She is not a registered rep[resentative] so she is not at risk of losing her license if she doesn't appear any place.
MR. EINHORN: Well, suppose she gets a subpoena to appear at the hearing?
MR. ALTMAN: Well, you know[,] if she gets served, then, you know, she is going to be [like] any other human being. I, of course, can't advise her to evade the
12 Altman testified that his statement, "[W]hen you have a $60,000 a year secretary co-signing for cars of a president of a firm, it . . . raises eyebrows initially," meant that Blumer would look "foolish" on the witness stand in the Harrison Proceeding if Rosen testified that Blumer "threw her out on the street" without removing her name as co-signer on the car leases. Einhorn admitted that such testimony would make Blumer look "a little foolish" and be "a little awkward to explain," but Einhorn did not view it as detrimental to his clients' defense because the testimony was not probative of any issue in the proceeding. Einhorn stated, "Certainly[,] the [law] judge couldn't find that my clients violated the net capital and books and records provision[s] of the federal securities laws because the secretary . . . for Mr. Blumer carried two car leases for cars that he was using."
13 Einhorn testified that he interpreted Altman's statement, "Frankly, probably all this would have gone away if at least something would have happened," to mean that Rosen was "tossed out [of her job at Nextgen] without anything," and that her hostility towards Harrison and Blumer "would have gone away" if she had received a "satisfactory severance package." 8
[subpoena] process, but . . . [m]emory fades and the like.14 And you know[,] I don't know.
MR. EINHORN: So, what you are saying is[,] if they reach some agreement, she would be more favorably inclined?
MR. ALTMAN: That would be my guess as to what her recollection would be, you know.15 I don't have the personal knowledge, and I haven't done a full debriefing of her. I know Fred, I met him, as he may have told you.
MR. EINHORN: Yeah, no, [Fred] told me he likes you.
MR. ALTMAN: I like him. He is a nice guy. This is all silly. I hate to see this happen. Really, it would be terrible.
MR. EINHORN: Okay.
MR. ALTMAN: If somebody just does the right thing,16 and -
MR. EINHORN: But you think they learned about this from others and were pointed to her. They have other people lined up that are -
MR. ALTMAN: No, no. I don't think that is the case.
MR. EINHORN: You don't think they have other people coming to testify?
MR. ALTMAN: No, no, not with respect to what I talked to you about.
14 When asked about Altman's statements, "[I]f [Rosen] gets served, then . . . she is going to be [like] any other human being," and "I . . . can't advise her to evade the [subpoena] process, but . . . [m]emory fades and the like," Einhorn testified that he understood that Rosen "would be very difficult for [Division staff] to find and serve, or . . . if they found . . . and served her, like everybody else, she would have to come . . . to the hearing, but she could have amnesia, she could be 'I don't remember,' 'I don't recall' and 'I don't know.'"
15 Einhorn testified that he understood Altman's statement, "That would be my guess as to what her recollection would be," to mean that if Einhorn's clients gave Rosen a financial package, she "would be more favorably disposed towards [them] and . . . would be difficult to serve [by subpoena], or if served, would not give . . . testimony adverse to" their interests.
16 Einhorn testified that he interpreted Altman's statement, "If somebody just does the right thing," to mean that his clients should "do right" by Rosen and give her a financial package. 9
MR. EINHORN: Okay.
MR. ALTMAN: I think if you cut it off with her, then it is closed. 17 That will be[,] you know[,] killing themselves.
3. The third (second taped) telephone conversation.
The third conversation, which was the second taped conversation, occurred on or about February 7, 2004. Altman initiated the conversation to give Einhorn a "heads up" that Division staff had been calling him and that he, Altman, told the staff that he was not "focusing" on the matter:
MR. ALTMAN: Hi, I just wanted to give you the heads up. Primoff [a Division staff attorney] called me again today.
MR. EINHORN: Yeah?
MR. ALTMAN: Just wants to know what the story was. I said I was not focusing on the matter, I appreciated him following up with me.
MR. EINHORN: Okay. So he is going to call you back and ask you --
MR. ALTMAN: I said, "You are welcome to call me if I don't call you." He said, "Oh, we'll certainly bug you." I said, "I am sure you will. You are welcome to."
MR. EINHORN: Well, I am going to call my client.
MR. ALTMAN: I expect [Primoff] wants to push me sometime before the end of the week.
MR. EINHORN: I am sure. We have got a hearing coming up. My client, Fred Blumer, is going to take the witness stand around March the 8th, so you know . . . [Primoff's] going to want your client for purposes of rebuttal, or impeachment or whatever. Anyway, I don't know what Fred is going to do, but I'll talk to him and let you know.
MR. ALTMAN: Okay, just thought I'd give you the heads up.
17 Einhorn testified that he understood Altman's statement, "[I]f you cut it off with her, then it is closed," to mean, "[d]one deal; nobody else is going to step forward on behalf of the SEC to say that Mr. Blumer's records weren't damaged by a virus that corrupted the files on his computer." 10
4. The fourth (third taped) telephone conversation.
The fourth conversation, which was the third taped conversation, occurred on or about February 9, 2004. Einhorn called Altman to inform him that Blumer would not give Rosen a severance package:
MR. EINHORN: Anyway, I spoke to Fred [Blumer], and he has no control over, you know, anything that you are suggesting. He feels that this is an extortion attempt, trying to, you know, buy [Rosen] a severance agreement. If he gets Jay [Adoni] to do this, her testimony will be more favorable to him. And he just -- he doesn't want to get involved in something like that. So she will do what she wants to do and testify however she wants to testify, and that will have to be it.
MR. ALTMAN: Okay. That's probably unfortunate for you, 18 but --
MR. EINHORN: You know, look --
MR. ALTMAN: -- I am certainly not going to facilitate any untruthful testimony. 19 And,
MR. EINHORN: Well --
MR. ALTMAN: To the extent I am involved in the testimony, the testimony will be as limited as possible, but -
* * *
MR. ALTMAN: My understanding is [Rosen] is going to directly say that there was no -- I don't have my notes in front of me, but, bug in his computer that precipitated any loss of records. The truth is there were no records. She had access to all of them, that was part of the grist of the work of what she did, even though she was technically an employee of Nextgen and not Harrison.
18 Einhorn testified that he understood Altman's statement, "That's probably unfortunate for you," to mean that "this could all go away if [Rosen] got the right [financial] package[,] meaning that either she wouldn't be served, or if served, her testimony would not hurt [his] client."
19 When asked his reaction to Altman's statement, "I am certainly not going to facilitate any untruthful testimony," Einhorn testified, " I don't know what he's talking about when he says something like that. I think it's just self-serving." 11
MR. EINHORN: If Nextgen settled with her, she wouldn't remember that?
MR. ALTMAN: You know, I don't even know -- you know, she was not a registered person, and you know, I don't even know what her address is. The SEC can find her or not find her.
MR. EINHORN: Well, you know, it is up to them. You know, what you are saying, she doesn't have a subpoena, she doesn't have to cooperate, but she will go in there and burn them unless they agree to pay her some severance and make her happy financially. And,
MR. ALTMAN: No. I think they should have done that anyway. I am reinvigorating the offers I made to Jay [Adoni], you know, a year ago.
MR. EINHORN: Well -
MR. ALTMAN: Well, I thought [Adoni] made a misjudgment in doing that, . . . and I think he is probably making a misjudgment now. It is kind of -- you know, think about her testimony. Here is a $60,000 a year secretary who's required to be -- The president [Blumer] is such a bad manager of his own financial affairs that it was required for him to get two car leases, that she co-sign it [sic] and despite repeated demands that she be relieved from that co-obligation, the president denied [Rosen's demands]. It is[,] you know[,] it's just terrible, terrible.
MR. EINHORN: I can tell you why. The guy is separated from his wife, and he has had problems, but that is neither here nor there. Just I don't know why [Rosen] agreed to do it, but you know she agreed to do it, and I am sorry she is not happy with her bargain and things didn't work out for her. But we're not gonna, he doesn't want to buy her silence. Okay?
MR. ALTMAN: That's not what this is about anyway.
MR. EINHORN: What the hell is this about?
MR. ALTMAN: You pays your money, you take your chances. 20 They should have settled with [Rosen] a long time ago. This was another opportunity to do that,
20 Einhorn testified that he understood Altman's statement, "You pays your money, you take your chances," to mean that Blumer and Adoni were "faced with a potential disaster on their hands"; Rosen "was going to bury them" at the hearing for not doing the "right thing" and agreeing to a financial package; and his clients would "suffer the consequences." 12
you didn't do that. There are consequences to that, some of which are controllable, some are not.
MR. EINHORN: Okay. Well. All right. You know, I just feel I am not -- Fred has decided he is not going to buy her silence.
MR. ALTMAN: Fred has nothing to do with this decision. 21 Come on, Irv.
MR. EINHORN: You got the wrong guy here. You got the wrong guy here. I deal with Fred Blumer and no one else.
MR. ALTMAN: I am sure you do. I am sure you do. But, you know, [Blumer] runs an hour's worth of that business by himself. That is just the reality of it. It has been the economic reality of it. And he doesn't have the financial wherewithal to get her off the co-signing of the lease[s], but his bank, as you described him [Adoni], does, and he [Adoni] should do that, and he is not doing that.
This reaction doesn't surprise me because Jay [Adoni] doesn't seem to be the kind of guy that you back into a corner and I regret that he is perceiving it this way. What [Adoni] really should do is take care of this gal who worked for . . . many years, and these things all just disappear and everyone goes on with their lives.22 And, you know, it's the stupid things in my experience that end up affecting people in much more significant ways than they should.
MR. EINHORN: Okay. Steve, I can only pass the message along to you. That is all I am doing.23
21 Einhorn testified that he understood that Altman believed that Adoni was "the real power behind the scenes," and that Blumer only needed to get Adoni "to come up with the [financial] package[] and everything would be taken care of."
22 Einhorn testified that he understood Altman's statement, "What [Adoni] really should do is take care of this gal . . . and these things all just disappear," to mean that his clients should "[g]ive [Rosen] the money, [and] it [her adverse testimony] will go away and disappear one way or the other; either . . . ducking service of process, or if served and asked whether there was a [computer] virus, you know, or any kind of bug, you know, I don't remember, I can't recall, I don't know anything about that."
23 When Einhorn was asked what he thought Rosen would do if she did not get a financial package, he stated, "I believe[d] that [Rosen] would seek revenge . . . in order to stick it (continued...) 13
MR. ALTMAN: I hear you. I hear you. It's a colossal, colossal mistake, Irv. 24 Personally, because I like Fred personally. It's regrettable, really regrettable. Just so, so stupid.
5. The fifth and sixth (fourth and fifth taped) telephone conversations.
The fifth telephone conversation, which was the fourth taped conversation, occurred on February 10, 2004, when Einhorn called Altman in response to a message Altman had left asking Einhorn to call him.25 Altman told Einhorn that he was on another telephone call and would call him back.
The sixth telephone conversation, which was the fifth taped conversation, occurred the same day when Altman called Einhorn back. Altman told Einhorn that Rosen was "going in" for an interview with the Division unless there was a "way to figure out some last clear chance to get out of it":
MR. ALTMAN: I just wanted to give you a heads up. The SEC has been badgering me. And,
MR. EINHORN: But they don't have a subpoena, and they don't have anything.
MR. ALTMAN: She is going to go in next week.
MR. EINHORN: Okay.
MR. ALTMAN: That is her call. I have to tell you, this is not -- I don't represent cooperators. Not just typically. I am trying to think back. I don't think I ever have, I just don't do it. I am always on the other side. I represent you know the bad guys or the good guys.
23 (...continued) to Mr. Adoni and my client for what she believed was the shabby treatment she received at their hands. She would get on the witness stand and do everything she could to inflict damage on my client."
24 Einhorn testified that he understood Altman's statement, "It's a colossal, colossal mistake," to mean that Blumer and Adoni were being "stupid" because, "for a little bit of money[,] they could make this problem disappear." By refusing to give Rosen a financial package, they would "bring disaster upon themselves" at the Harrison Proceeding hearing.
25 Einhorn testified that he believed Altman was calling him to "[t]ake another run at getting [Rosen] some money out of this." 14
MR. EINHORN: Or the defendants. You are defense counsel.
MR. ALTMAN: I typically am. I am. I am plaintiff in some cases, but I am definitely a defense counsel.
MR. EINHORN: Umm-hmm.
MR. ALTMAN: So, you know, it is just foreign to me, and it is not -- I don't want to say uncomfortable, but particularly having met Fred [Blumer], it is regrettable, and I just wanted to sort of -- I understand Jay [Adoni]'s -- I think I have a feeling for his personality and psyche, and I certainly understand that his natural first reaction to this is, look, it is a stick-up, what are you doing? I don't get stuck up by anybody, f*** you, so that's why we are not paying. As just as a general business practice, and personality wise and just trying to see -- since I know how bad a result that is for everybody --
MR. EINHORN: Umm-hmm.
MR. ALTMAN: If there's not some other way to figure out some last clear chance to get out of it,26 because, you know, there is no --
MR. EINHORN: What is it gonna take? What is the bottom line? What is it going to take? What kind of package is this? I am a communicator here. What is the package that she wants to, you know, not cooperate or whatever?
MR. ALTMAN: Get her off those leases and, you know, a year's salary, and you can even pay it out over a year. As long as we've got . . .
MR. EINHORN: What will we get if they do that, she won't cooperate or she won't remember?
MR. ALTMAN: Uh, [p]robably both.
MR. EINHORN: Ok. All right. Let me pass it on to the client one more time, and --
* * *
MR. EINHORN: All right. Well, I will make a call to Fred [Blumer] tomorrow.
26 Einhorn testified that he understood Altman to mean that Rosen was "going in and giving an unfavorable interview with the SEC, which would . . . result in her taking the witness stand . . . when the hearing recommences and giving adverse testimony to [his] clients." 15
MR. ALTMAN: I appreciate it.
MR. EINHORN: And tell him what you said and that [Rosen] is going in next week unless something else happens.
MR. ALTMAN: Help me, help me not do this. I don't want to do this.
Altman did not hear from Einhorn again, and they had no further conversations after February 10, 2004. Einhorn testified, and Altman does not dispute, that their conversations did not result in any agreement between Einhorn's clients and Rosen.
F. The Division Subpoenas Rosen to Testify in the Harrison Proceeding.
Unaware of Altman's conversations with Einhorn and unsure whether Rosen would cooperate with them, on or about March 2, 2004, Division staff served Rosen with a subpoena compelling her to appear and testify as a witness in the Harrison Proceeding. On March 3, 2004, after confirming that Rosen had been served, Division staff notified Altman and again asked to interview Rosen before she appeared and testified at the hearing.27 According to Division staff, Altman was still "noncommital."
Division staff eventually spoke to Rosen in a telephone interview on March 8, 2004, the day that the hearing in the Harrison Proceeding resumed. Altman participated in the telephone interview as Rosen's attorney. During the telephone interview, Division staff asked Rosen about Harrison's and Blumer's computer virus defense. Rosen told Division staff that a Harrison information technology manager admitted to her that a letter he signed in support of Harrison's and Blumer's computer virus defense was false. Division staff also asked Rosen about Blumer's accounting practices. Division staff spoke to Rosen once again in person on the morning of March 10, 2004, the day she testified.28 Altman was present at this in-person interview as well.
27 Division staff testified that they deliberately waited until Rosen had been served with a subpoena before notifying Altman because Altman had not yet made Rosen available for an interview and they did not want him to be able to contact Rosen and interfere with service of process. According to Division staff, Altman expressed some surprise that subpoena service by Federal Express was valid in Commission administrative proceedings. In his hearing testimony, Altman acknowledged that he did not offer to accept service of a subpoena on Rosen's behalf.
28 Division staff testified that the information they received from Rosen during the telephone and in-person interviews was "less comprehensive than what we [the staff] thought we would be getting, based on what the NASD told us." According to Division staff, Rosen "didn't either know or didn't remember some of the things that we thought she would know from what the NASD told us." 16
G. Einhorn Uses Altman's Taped Statements to Impeach Rosen on Cross- Examination.
On March 10, 2004, the Division called Rosen to testify as a rebuttal witness in the Harrison Proceeding hearing. Altman attended the hearing as Rosen's counsel, but was not allowed to participate in the proceeding. Before Rosen began testifying, Einhorn requested an off-the-record conference. The law judge, Division staff, and Song's counsel were in attendance, but not Altman. At the conference, Einhorn disclosed for the first time that Altman had called him repeatedly to obtain a financial package for Rosen, and that he, Einhorn, had tape recorded several of the telephone calls. Einhorn stated that he believed Altman had engaged in extortion or blackmail during those calls because Altman demanded a severance payment from Harrison and Blumer to prevent Rosen's testimony from being damaging to them at the hearing. Einhorn told Division staff that if they called Rosen to testify as a witness, he would play the tapes at the hearing and refer the matter to the FBI, but that if they did not call Rosen, he would not pursue the matter further. At the Division's request, Einhorn played the tapes of the calls. Division staff were "very disturbed" by the substance of Altman's conversations. Nevertheless, they concluded that the conversations did not indicate Rosen would be untruthful and elected to proceed with her testimony.
On direct examination, Rosen testified that a Harrison information technology manager admitted to her that a letter he signed in support of Harrison's and Blumer's computer virus defense was false.29 Division staff did not raise the subject of the car leases during her direct testimony because they did not believe that the leases were relevant to the proceeding. On cross- examination, Einhorn asked Rosen about the leases because he wanted to show her "bias and hostility" towards his clients. Einhorn then played the tapes of Altman's conversations on the record.30
H. Altman's Explanations of his Taped Statements.
Altman testified that he first learned of the existence of the tapes during Einhorn's cross- examination of Rosen. Listening to the tapes, Altman could not believe that Einhorn asked him, "What will we [Harrison and Blumer] get if they do that [i.e., give Rosen a severance payment and remove her name from the car leases], she won't cooperate or she won't remember?," and that he replied, "Uh, [p]robably both." Altman had "no memory" of saying those words and could not
29 Division staff testified that Rosen's direct testimony was "less fulsome compared to what [they] had been led to expect" from NASD staff.
30 The tapes were admitted into evidence in the Harrison Proceeding as Respondents' Exhibits 48, 49, and 50. The tapes were admitted into evidence in this Rule 102(e) proceeding as OGC Exhibit 13. Altman challenged the admissibility of the tapes before the law judge, but it appears that he has abandoned this issue on appeal. 17 believe they "fell out of [his] mouth." Altman did not know why he said, "[p]robably both," and admitted that "[t]hose words should have never been said."
But Altman denied that he intended to have Rosen evade service of a subpoena and/or give false testimony in exchange for a financial package from Harrison and Blumer. Altman testified that the sole objective of his telephone conversations with Einhorn was to "appeal" to Einhorn as a "fellow defense counsel" and "convince him to get [Rosen] off the [car] leases and get her some money" so she "wouldn't be a pissed-off ex-secretary," or angry witness, at the hearing. Altman testified, "I was just trying to negotiate [with Einhorn] and say[,] got to be some way, just not make Fred [Blumer] look bad [on the witness stand], that's all I really had to work with. Her testimony is going to be her truthful testimony. She's not going to evade [subpoena] service. But if you paid her, she'll not be pissed-off." In Altman's view, Blumer's conduct in having Rosen co-sign the car leases and keeping Rosen on the leases after her employment ended made Blumer "look bad" and was his "best ammunition" against Blumer.31
Altman testified that he was "shocked," "stammering," and "blubbering" during the fourth (third taped) conversation when he realized Einhorn was interpreting his remarks as proposing "some kind of exchange" of financial benefits for substantive testimony. Altman testified that he told Einhorn, "No," and "That's not what this is about," but admitted that he did not seek to clear up Einhorn's purported confusion by saying, "[H]ey, what's going on, what are you talking about?," "[E]xcuse me, but where are you coming from?," "[N]o, stop it, I don't do that," or similar words. Altman explained, "In my mind, if I said no -- if I had done what I would do in another context, which is raise my voice, scream, yell, curse and slam the phone down, I couldn't do that with Mr. Einhorn in those conversations because if I did, I understood there was no chance that we could get what I was trying to negotiate for, if I told him."
The law judge found that Altman's testimony was not "candid and credible" and rejected his explanations of his taped statements. In her view, none of Altman's explanations or defenses could change the plain meaning of his words, which supported a finding that Altman knowingly and intentionally engaged in unethical and improper professional conduct.32 As noted previously,
31 The record shows that Altman had no reason to believe that Division staff were interested in the car leases as impeachment material. As discussed, Division staff knew about the leases from their initial contact with Rosen, but they did not believe that the leases were relevant to the Harrison Proceeding. Similarly, Einhorn thought that the leases were irrelevant to any of the charges against his clients. See supra note 12.
32 For example, to bolster his claim that the car leases were relevant impeachment evidence, Altman contended that the car leases were the focus of his conversations with Einhorn. Altman pointed to his statement in the second (first taped) conversation that Rosen would "testify that there was no virus in the computer, and [...]some other very, very unhelpful stuff with respect to the books and records of the firm." Altman asserted that the "very unhelpful stuff with (continued...) 18
a law judge's credibility findings are entitled to considerable weight absent substantial evidence to the contrary.33 Altman has not shown, nor do we find, substantial evidence contradicting the law judge's adverse credibility findings, which were based, among other things, on hearing Altman's testimony and observing his demeanor.34
I. Subsequent Events.
After the hearing in the Harrison Proceeding, Einhorn withdrew as counsel for Harrison and Blumer and disclosed the tapes to law enforcement authorities.35 In addition, Division staff reported the substance of Altman's tape recorded conversations to the Commission for "possible attorney misconduct."36 In September 2004, the law judge in the Harrison Proceeding issued an initial decision finding that Harrison and Blumer had violated the federal securities laws,37 but that Rosen had been "thoroughly impeached" on cross-examination and was not a reliable witness.38
32 (...continued) respect to the books and records of the firm" referred to the car leases. Altman's argument adds words to the transcript of his taped conversations that do not exist.
33 See supra note 10.
34 We reject Altman's claim that the law judge "displayed a pronounced prejudice against" him. We find no evidence of prejudice or other improper conduct. In all events, our de novo review of the record cures whatever prejudice, if any, that may have existed. See, e.g., Robert Bruce Orkin, 51 S.E.C. 336, 344 (1993) (stating that "our de novo review of this matter cures whatever bias or disregard of precedent or evidence, if any, that may have existed below"), petition denied, 31 F.3d 1056 (11th Cir. 1994).
35 The record does not indicate that any criminal action has been taken against Altman.
36 See 17 C.F.R. § 203.7(e) (authorizing officer conducting formal investigative proceeding to report to Commission "any instances where any witness or counsel has been guilty of dilatory, obstructionist or contumacious conduct during the course of an investigation or any other instance of violation of these rules"). The Commission referred the matter to OGC for investigation, see 17 C.F.R. § 200.21(a) (providing that the General Counsel is responsible for conducting preliminary investigations into potential violations of Rule 102(e) by attorneys), resulting in the initiation of this Rule 102(e) proceeding against Altman.
37 See Harrison Secs., Initial Decision Rel. No. 256 (Sept. 21, 2004), 83 SEC Docket 2986, declared final, Exchange Act Rel. No. 50614 (Oct. 29, 2004), 84 SEC Docket 117.
38 Harrison Secs., 83 SEC Docket at 2996. 19
III.
Rule 102(e) is the primary tool available to the Commission to protect the integrity of its administrative processes.39 It enables the Commission to initiate administrative disciplinary proceedings against professionals who lack integrity or competence, who engage in unethical or improper professional conduct, or who are found to have violated the federal securities laws or rules and regulations thereunder.40 In interpreting the phrase "unethical or improper professional conduct," the Commission has stated that it will hold attorneys who practice before it to the standards to which they are already subject, including state bar rules.41 Although Rule 102(e) and Exchange Act 4C do not specify the mental state necessary to discipline an attorney for "unethical or improper professional conduct,"42 the record establishes that Altman engaged in such conduct with scienter.43
39 Implementation of Standards of Professional Conduct for Attorneys, Exchange Act Rel. No. 46868 (Nov. 21, 2002) (proposed rules), 78 SEC Docket 3240, 3241; see, e.g., Marrie v. SEC, 374 F.3d 1196, 1200 (D.C. Cir. 2004) (stating that Rule 102(e) "is directed at protecting the integrity of the Commission's processes, as well as the confidence of the investing public in the integrity of the financial reporting process"); Touche Ross & Co. v. SEC, 609 F.2d 570, 582 (2d Cir. 1979) (stating that Rule 102(e)'s predecessor, Rule 2(e), "represents an attempt by the Commission to protect the integrity of its own processes"; holding that Rule 2(e)'s provisions were "reasonably related" to the purposes of the federal securities laws and therefore valid).
40 See 17 C.F.R. § 201.102(e)(1)(i)-(iii).
41 See William R. Carter, 47 S.E.C. 471, 508 (1981) (stating, in context of Rule 2(e) proceeding, that "we perceive no unfairness whatsoever in holding those professionals who practice before us to generally recognized norms of professional conduct, whether or not such norms had previously been explicitly adopted or endorsed by the Commission. To do so upsets no justifiable expectations, since the professional is already subject to those norms.") (footnote omitted); see also Implementation of Standards of Professional Conduct for Attorneys, 78 SEC Docket at 3241 n.13 (stating that Rule 102(e) "enables the Commission to discipline professionals who have engaged in improper professional conduct by failing to satisfy the rules, regulations or standards to which they are already subject, including state bar ethical rules governing attorney conduct . . . .").
42 Cf. 17 C.F.R. § 201.102(e)(1)(iv) (expressly setting forth mental state standards for accountants who engage in "improper professional conduct" under Rule 102(e)(1)(ii)).
43 Because we conclude that Altman's conduct demonstrated scienter, we do not decide whether some other culpability standard would also suffice. Although the Commission (continued...) 20
A. Altman Engaged in Unethical and Improper Professional Conduct.
The record shows that during the relevant period, Altman initiated and engaged in a series of telephone conversations with Einhorn in an attempt to obtain a financial package for Rosen, a prospective Division witness in the Harrison Proceeding. The plain meaning of Altman's words, recorded on tape, establishes that he was proposing a quid pro quo: if Harrison and Blumer gave Rosen severance pay (a year's salary or about $60,000) and removed her name as co-signer on the car leases, she would not cooperate with the Division (by avoiding service of a subpoena or not complying with the subpoena) and/or falsely testify that she could not remember relevant facts detrimental to Harrison's and Blumer's computer virus defense.
In the first (untaped) conversation, Altman informed Einhorn that Rosen was hostile towards Harrison and Blumer and had information damaging to them. Altman suggested that if Harrison and Blumer could arrange a severance or compensation package for Rosen, she would be more favorably disposed towards them if called as a witness, or she might not appear as a witness at all. Altman's call "stunned" Einhorn, who interpreted it as an "extortion attempt," seeking money for a witness in return for her favorable behavior and/or testimony.
In the second (first taped) conversation, Altman informed Einhorn that Rosen would testify there was no virus in Blumer's computer. Einhorn knew that this testimony would be "very detrimental" and "harmful" to his clients. Einhorn asked Altman, "So, she hasn't given that testimony?" Altman replied, "That's correct," and indicated that Rosen would not lose her livelihood if she did not cooperate with the Division. Einhorn next asked, "Well, suppose she gets a subpoena to appear at the hearing?" Altman stated that he could not advise Rosen to evade subpoena service, but suggested that, if served, Rosen's memory of the relevant facts might "fade." Einhorn then asked, "So, what you are saying is[,] if they reach some agreement, she would be more favorably inclined?" Altman responded, "That would be my guess as to what her recollection would be," meaning that Rosen's recollection would be more favorable towards Harrison and Blumer if she received a severance payment. Altman further informed Einhorn that he did not think the Division had other witnesses lined up to testify that there was no computer virus. "I think if you cut if off with her[,]" Altman relayed to Einhorn, "then it is closed." Altman thus conveyed to Einhorn, and Einhorn understood, that if Rosen received a financial package from Harrison and Blumer, she would not cooperate with Division staff and/or would testify falsely that she did not remember facts damaging to their computer virus defense.
In the fourth (third taped) conversation, Einhorn informed Altman that Blumer thought Altman was engaging in an "extortion attempt"; Blumer would not agree to pay Rosen; and Rosen would have to "testify however she want[ed] to testify." Altman did not dispute the
43 (...continued) has cautioned against bringing Rule 102(e) attorney disciplinary proceedings based on negligent legal advice, it did so in dicta and the question was not squarely presented in the case. See Scott G. Monson, Exchange Act Rel. No. 28323 (June 30, 2008), 93 SEC Docket 7517, 7522-25. 21 characterization of his proposal as an "extortion attempt." Instead, Altman replied, "That's probably unfortunate for you."44 Einhorn construed Altman's response to mean that Rosen's damaging testimony would "go away" if she received a financial package.
After Altman reiterated that Rosen would testify there was no computer virus, Einhorn asked, "If Nextgen settled with her, she wouldn't remember that?" Altman replied that Rosen was not "a registered person," he did not know her address, and the Division could "find her or not find her." Einhorn stated that Blumer did not want to "buy her silence," to which Altman responded, "That's not what this is about anyway." Einhorn then asked, "What the hell is this about?" Altman answered, "You pays your money, you take your chances. They should have settled with her a long time ago. This was another opportunity to do that, you didn't do that. There are consequences to that, some of which are controllable, some are not." When Einhorn repeated that Blumer would not "buy [Rosen's] silence," Altman insisted that Blumer had "nothing to do with this decision," Adoni controlled the finances, and Adoni should "take care" of Rosen and "these things" would "disappear." Altman thus conveyed to Einhorn, and Einhorn understood, that if Rosen received a financial package, her damaging testimony would "disappear" because she would avoid service of a subpoena and/or falsely claim not to remember relevant facts if served. Einhorn further understood that if Harrison and Blumer did not give Rosen a financial package, they would be taking their "chances" and suffer the "consequences" at the hearing.
In the sixth (fifth taped) and final conversation, Altman stated that he understood Adoni's "natural first reaction" was to construe his proposal as a "stick-up" and refuse to pay Rosen, but that such a position would lead to a "bad" result. Einhorn tried to pin Altman down as to what exactly he was offering from Rosen in return for a financial package from Harrison and Blumer: evading service of a subpoena or falsely testifying that she did not remember relevant facts. Altman answered, "Uh, [p]robably both." Altman's answer left no uncertainty as to the terms of his proposed quid pro quo.
B. Altman Violated New York Ethics Rules.
Altman agreed that, at all relevant times, he understood his ethical obligations and was able to tell the difference between right and wrong and understand the nature and consequences of his actions. Despite what he understood, Altman violated fundamental ethics rules to which
44 On appeal, Altman argues that this statement "was not a clumsy attempt to deny extortion while committing it[,] but rather another (clumsy) attempt at lawful hectoring to obtain things to which Ms. Rosen was arguably entitled while truthfully denying unlawful intent." We find no support in the record for this position and note further that legal argument is not evidence. 22
he was subject as a member of the New York bar.45 Altman's actions in repeatedly seeking financial benefits for his client, a prospective Division witness in a Commission administrative proceeding, in exchange for her evasion of subpoena service and/or provision of false testimony, constituted conduct involving "dishonesty, fraud, deceit, or misrepresentation," in violation of DR 1-102(A)(4). Altman acted knowingly and with an intent to deceive or mislead Division staff and the law judge.46 Altman's objective was to interfere with the truthful disclosure of facts pertaining to Harrison's and Blumer's computer virus defense, and thereby impair the integrity of the Harrison Proceeding.
Altman knew before he first contacted Einhorn that the Harrison Proceeding was ongoing; that the Division wanted to interview Rosen as a prospective witness; that Division staff believed Rosen had information which could rebut Harrison's and Blumer's computer virus defense; and that Einhorn was counsel for Harrison and Blumer. Altman also knew that Rosen would testify there was no computer virus that compromised Harrison's files. Altman further believed that Rosen had other information about the firm's files that would be "very, very unhelpful" to Harrison and Blumer. In his hearing testimony and briefs on appeal, Altman acknowledged that he thought this was an opportune time to renew Rosen's requests for financial benefits from Harrison and Blumer because the pending Harrison Proceeding and the Division's interest in Rosen as a witness gave him some leverage.
At the same time, Altman knew that Division staff had only second- or third-hand information from NASD and himself about Rosen's potential testimony. Altman did not want Division staff to interview Rosen and learn exactly what she knew until he found out if Harrison and Blumer would pay her. As a result, Altman put off the Division staff's multiple requests to interview Rosen by not returning their calls or falsely stating that he was not "focusing" on the matter when he called them back.
With Division staff's efforts to interview Rosen effectively forestalled, Altman repeatedly contacted Einhorn and proposed that, in exchange for a financial package, Rosen would avoid
45 See generally In re Snyder, 470 U.S. 634, 645-46 n.7 (1985) (referring to the duty in DR 1-102(A)(5) as "almost universally recognized"); Carter, 47 S.E.C. at 508 n.65 (describing prohibition embodied in DR 1-102(A)(4) to be of a "fundamental" nature).
46 New York courts have held that scienter is a necessary element of a DR 1 102(A)(4) violation, see, e.g., Matter of Altomerianos, 160 A.D.2d 96, 559 N.Y.S.2d 712 (1st Dept. 1990) (stating that "venal intent," which is a necessary element of a DR 1-102(A)(4) violation, does not include conduct "which lacks an element of scienter, deceit, intent to mislead, or knowing failure to correct misrepresentations which can be reasonably expected to induce detrimental reliance by another") (quoting definition of fraud in "Definitions" section of Code of Professional Responsibility), but not a DR 1-102(A)(7) violation, see In re Latimore, 252 A.D.2d 217, 683 N.Y.S.2d 526 (1st Dept. 1999), appeal and reargument denied, 260 A.D.2d 170, 693 N.Y.S.2d 434 (1st Dept. 1999). 23 service of a subpoena and/or testify falsely if served in the Harrison Proceeding. Altman sought to induce Einhorn's clients to accept this quid pro quo by telling Einhorn that Rosen was hostile towards Harrison and Blumer and would give testimony damaging to them at the hearing unless they did the "right thing" and paid her. While Altman testified that he said, "No," and "That's not what this is about," in response to Einhorn's statements that Blumer would not "buy" Rosen's silence, he admitted that he never said, "[H]ey, what's going on, what are you talking about?," or "[E]xcuse me, but where are you coming from?" In light of Altman's hearing testimony that he was "shocked" that Einhorn interpreted his remarks as proposing a quid pro quo, Altman's refusal to confront Einhorn and say, "[N]o, stop it, I don't do that," or other words of similar import, is persuasive evidence that he acted knowingly and intended for Rosen to avoid subpoena service and/or testify falsely in exchange for financial benefits from Harrison and Blumer.
In the sixth (fifth taped) and last conversation, Altman made the terms of his proposed quid pro quo clear. In response to Einhorn's question, "What will we [Harrison and Blumer] get if they do that [i.e., give Rosen severance pay and remove her name from the car leases], she [Rosen] won't cooperate or she won't remember?," Altman stated that they "[p]robably" would get "both" an attempt to avoid service of a subpoena and false testimony if served. In his hearing testimony, Altman did not offer an explanation for why he stated, "[p]robably both," and our de novo review of the record reveals none, other than that he intended to extract money and other benefits for Rosen in exchange for her favorable behavior and/or testimony. Given the tenor and substance of Altman's conversations with Einhorn, Altman must have known or believed that if his proposal were consummated, Rosen would have testified falsely in the Harrison Proceeding and undermined the Division's case against Harrison and Blumer.
Altman continued to stall Division staff's efforts to interview Rosen for approximately a month after the last conversation while he waited to hear from Einhorn, to no avail. Altman eventually agreed to make Rosen available for an interview and have her appear for testimony in the Harrison Proceeding, but not until the eve of the resumed hearing, after Rosen had already been subpoenaed, and it was apparent that his attempts to strike a bargain with Harrison and Blumer had failed. Altman's actions in preventing Division staff from obtaining relevant information from Rosen until the eleventh hour before she was required to appear and testify in the Harrison Proceeding is further evidence that he acted knowingly and with a high degree of scienter.
In addition to violating DR 1-102(A)(4), Altman violated DR 1-102(A)(5), prohibiting conduct by an attorney that is prejudicial to the administration of justice. Altman's conduct was prejudicial to the administration of justice in the Harrison Proceeding because it disrupted the orderly and efficient progress of the Harrison Proceeding hearing, led to the impeachment of Rosen and the law judge's rejection of her testimony, and, as Altman himself acknowledged in his briefs on appeal, caused Commission staff to "waste their resources."
Furthermore, Altman violated DR 1-102(A)(7), prohibiting conduct by an attorney that reflects adversely on his fitness to practice law. Altman's conduct reflected adversely on his 24 fitness to practice law because he sought to trade Rosen's favorable behavior and/or testimony for financial benefits.47
C. Altman's Primary Contentions on Appeal.
1. This Rule 102(e) proceeding against him should be dismissed.
Altman argues that this proceeding should be dismissed for a variety of reasons. His first reason is that he was not charged with violating the federal securities laws. A federal securities law violation, however, is not a prerequisite to the initiation of a disciplinary proceeding under Rule 102(e) and Exchange Act Section 4C. Those provisions set forth three independent bases on which the Commission may discipline a person licensed to practice as an attorney: first, when the attorney lacks the "requisite qualifications to represent others"; second, when the attorney lacks "character or integrity" or engages in "unethical or improper professional conduct"; or third, when the attorney willfully violates, or willful aids and abets a violation of, the federal securities laws.48
Altman's argument is based on the language from Rule 102(e)(1)(iii) that requires a violation of the federal securities laws or rules or regulations thereunder. The language of Rule 102(e)(1)(iii) does not carry over to Rule 102(e)(1)(ii). The use of the disjunctive "or" indicates that there are alternative bases for bringing Rule 102(e) and Exchange Act Section 4C disciplinary proceedings, and such proceedings are not limited to those attorneys who violate the federal securities laws.
Second, Altman argues that his alleged misconduct did not occur while he was "appearing or practicing" before the Commission. We reject Altman's narrow interpretation of Rule 102's language and find that his argument lacks merit. "[P]racticing before the Commission," as
47 New York courts have found violations of DR 1-102(A)(4), (5), and (7) on similar facts and ordered that the attorney be disbarred. See, e.g, In re Geoghan, 253 A.D.2d 205, 686 N.Y.S.2d 839 (2d Dept. 1999) (attorney who offered to have his client testify falsely in criminal proceeding in exchange for personal injury settlement violated DR 1-102(A)(4), (5), and (7) and was disbarred); see also, e.g., In re Gen, 29 A.D. 3d 230, 813 N.Y.S.2d 78 (1st Dept. 2006) (attorney who offered that his burglary victim client would provide favorable victim's statement, waive civil liability, and refuse to cooperate with district attorney in exchange for $100,000 payment from burglary defendant's family engaged in conduct prejudicial to the administration of justice that reflected adversely on his fitness to practice law and was disbarred).
48 15 U.S.C. § 78d-3(a)(1)-(3); 17 C.F.R.§ 201.102 (e)(1)(i)-(iii). 25
defined in Rule 102(f), is not a requisite for the applicability of Rule 102(e).49 The Commission has previously held that
the text of Rule 102(e)(1) contains no requirement that a person must be appearing or practicing before the Commission at the time of the conduct on which the Commission's findings are based. Rule 102(e)(1) provides that a person may be denied the privilege of appearing or practicing before the Commission once the Commission makes one of three findings: (i) that the person does not possess the requisite qualifications to represent others; (ii) that the person lacks character or integrity or has engaged in unethical or improper professional conduct; or (iii) that the person has willfully violated or willfully aided and abetted the violation of any provision of the federal securities laws or rules and regulations thereunder. Denying the person the privilege of appearing or practicing before the Commission is the authorized remedy once the Commission makes one of the findings specified in Rule 102(e)(1)(i)-(iii); appearing or practicing before the Commission at the time of the misconduct is not the precondition to imposing that remedy.50
Even though a finding that Altman was "appearing or practicing" before the Commission while engaging in unethical or improper professional conduct is not required in order for Rule 102(e) to apply to Altman, we conclude that Altman was "appearing or practicing" before the Commission during the relevant period. Altman represented Rosen in relation to the Division's attempts to talk with her as a prospective witness in the Harrison Proceeding, and he spoke to, and exchanged voice mails with, Division staff between January 28 and March 10, 2004, to that end. Altman was Rosen's attorney when Division staff interviewed her by telephone on March 8, 2004 and in-person on the morning of her testimony in the Harrison Proceeding on March 10, 2004. Rosen testified in the Harrison Proceeding that "[e]verything went through [her] attorney," Altman. Thus, at all relevant times, Altman was representing a witness before the Commission, and that conduct constitutes "appearing or practicing" before the Commission. Altman's attempts to distinguish his contacts with Division staff from his contacts with Einhorn do not alter this conclusion because all of those contacts occurred during the course of his representation of Rosen before the Commission. Indeed, it was the specter of his client's testimony in a Commission administrative proceeding that Altman admitted gave him leverage to renew Rosen's requests for financial benefits from Harrison and Blumer.
49 Rule 102(f) states that "practicing before the Commission shall include, but shall not be limited to: (1) Transacting any business with the Commission; and (2) The preparation of any statement, opinion or other paper by any attorney, accountant, engineer or other professional or expert, filed with the Commission in any registration statement, notification, application, report or other document with the consent of such attorney, accountant, engineer or other professional or expert." 17 C.F.R. § 201.102(f) (emphasis added).
50 Robert W. Armstrong, III, 58 S.E.C. 542, 574 (2005). 26
Our conclusion also comports with an important remedial purpose of Rule 102(e), which is for the Commission to "protect the integrity of its own processes."51 Rule 102(e) "provides the Commission with the means to ensure that those professionals, on whom the Commission relies heavily in the performance of its statutory duties, perform their tasks diligently and with a reasonable degree of competence."52 The integrity of the Commission's processes is threatened when an unethical attorney offers to have his client, who is a prospective witness in a Commission administrative proceeding, avoid service of a subpoena or testify falsely in exchange for financial benefits. Disciplining an attorney under Rule 102(e) for such conduct furthers the Rule's remedial purpose of protecting the integrity of the Commission's processes.53
Third, Altman argues that this proceeding should be dismissed because the Commission "has long stated that it did not bring original proceedings against attorney advocates and was not well- equipped to do so, implying that it would not do so." Altman relies on two statements, decades- old, neither of which supports dismissal of this proceeding. The first statement, a 1982 speech by Edward F. Greene, the Commission's then-General Counsel, concerned attorney disciplinary proceedings brought under Rule 2(e), the predecessor to Rule 102(e).54 The views expressed by Greene -- regardless of their content -- cannot be attributed to the Commission.55 Under the Commission's regulations, staff opinions "do not constitute an official expression of the
51 See supra n.39 and authorities cited therein.
52 Touche Ross & Co., 609 F.2d at 582.
53 See Armstrong, 58 S.E.C. at 572 (stating that "disciplining accountants pursuant to Rule 102(e) for effecting a fraudulent scheme by computing the figures and providing the information incorporated into Commission filings furthers the Rule's remedial purpose of protecting the integrity of the Commission's processes").
54 See http://www.sec.gov/news/speech/1982/011382greene.pdf. In the speech, Greene did not state that the Commission lacked authority to bring attorney disciplinary proceedings. Rather, Greene expressed his "initial tentative view " that, "as a general matter," the Commission should bring such proceedings only when an attorney's alleged misconduct is "(I) a violation of established state law ethical or professional misconduct rules, and (ii) has a direct impact on the Commission's internal processes." Id. This case involves allegations that Altman's misconduct violated New York's attorney disciplinary rules and directly impacted a Commission administrative proceeding. As a result, it falls within the scope of what Greene considered to be an appropriate basis for an attorney disciplinary proceeding.
55 Greene emphasized this point in his speech when he stated, "These, of course, are my personal views and not those of the Commission or the staff." Id. 27
[Commission's] views."56 In addition, courts have held that evidence reflecting staff opinions is not relevant in ascertaining the Commission's intent in any given instance.57
The second statement, a 1988 Commission release, addressed arguments about the Commission's purported lack of expertise to conduct public Rule 2(e) proceedings. As relevant here, the release stated, "With respect to attorneys, the Commission generally has not sought to develop or apply independent standards of professional conduct."58 The release also stated that "the Commission, as a matter of policy, generally refrains from using its administrative forum to conduct de novo determinations of the professional obligations of attorneys."59 The release did not state that the Commission would not, or could not, conduct a de novo determination of an attorney's professional obligations in a Rule 2(e) proceeding. It said the Commission generally did not do so, which the case law shows to be true.
Fourth, Altman argues that, while he "understood that he was bound by New York's disciplinary rules, he could not reasonably have expected that the Commission would seek to enforce those rules in the first instance." Rule 102(e) and its predecessor provisions have been in existence since 1935, giving Altman and other attorneys more than adequate notice of the possibility that the Commission might bring disciplinary proceedings against them based on "unethical or improper professional conduct." That the Commission generally has refrained from initiating this type of proceeding does not deprive it of its authority to do so.60 The Sarbanes
56 See 17 C.F.R. § 202.1(d) (stating that, "[w]hile opinions expressed by members of the staff do not constitute an official expression of the Commission's views, they represent the views of persons who are continuously working with the provisions of the statute involved").
57 See, e.g., SEC v. Nat’l Student Mktg. Corp., 68 F.R.D. 157, 160 (D.D.C. 1975) (stating that "[t]he SEC consists of five appointed Commissioners who are assisted by staff members. While Commissioners may in fact respect the staff's recommendations, they are not bound by them nor do such recommendations necessarily reflect the position of the agency itself on any given topic. Similarly, the views of an individual Commissioner will not invariably reflect the position of the agency as a whole"), aff'd, 538 F.2d 404 (D.C. Cir. 1976) (per curiam), cert. denied, 429 U.S. 1073 (1977).
58 Disciplinary Proceedings Involving Professionals Appearing or Practicing Before the Commission, Exchange Act Rel. No. 25893 (July 7, 1988), 41 SEC Docket 448, 452.
59 Id.
60 See United States v. Morton Salt Co., 338 U.S. 632, 647-48 (1950) (holding that powers granted to FTC had not been "lost by being allowed to lie dormant"); Cooley v. FERC, 843 F.2d 1464, 1470 (D.C. Cir.) (stating that "even a prolonged failure to assert an agency power does not destroy it"), cert. denied, 488 U.S. 933 (1988). 28
Oxley Act of 2002 further confirms our application of Rule 102(e) in these circumstances by codifying it substantially verbatim in Exchange Act Section 4C.61
Finally, Altman argues that this proceeding should be dismissed because it is not "reasonable that the Commission may apply different standards of professional conduct to attorneys who are located in different jurisdictions with different rules." Beyond this bare assertion, Altman provides no legal or factual support for his argument. In any event, we believe that Altman's conduct was of the type which "'all responsible attorneys would recognize as improper for a member of the profession.'"62
2. Altman did not intend to exchange Rosen's substantive testimony for financial benefits.
Altman argues that he did not intend to exchange Rosen's substantive testimony for financial benefits because he never spoke to Rosen about the substance of his conversations with Einhorn. This argument fails on its face because Altman was purporting to act on Rosen's behalf. Moreover, Altman offers no evidence to buttress this argument, aside from his own discredited testimony in this proceeding and Rosen's unreliable testimony in the Harrison Proceeding. Furthermore, even if Altman had kept the substance of the conversations to himself, such conduct does not establish a lack of intent to consummate the transaction. We have found that Altman's taped statements indicate that he must have known or believed Rosen would uphold her end of the agreement, and he would live up to the promises he made to Einhorn, if Rosen was paid. Indeed, no other plausible explanation exists for Altman's communications with Einhorn.
Altman also argues that he did not intend to exchange Rosen's substantive testimony for financial benefits because he had no further conversations with Einhorn after February 10, 2004; those conversations did not result in any agreement; and he and Rosen cooperated with Division staff. These facts demonstrate only that Altman failed to convince Harrison and Blumer to agree to his proposal. They do not establish that he lacked the intent to follow through with it.
61 See Armstrong, 58 S.E.C. at 571 n.61 (stating that "Congress embraced our application of Rule 102(e) by codifying the rule substantially verbatim in Section 4C of the Exchange Act as a result of the Sarbanes-Oxley Act of 2002"; stating further that "when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the 'congressional failure to revise or repeal the agency's interpretation is persuasive evidence that the interpretation is the one intended by Congress'") (quoting CFTC v. Schor, 478 U.S. 833, 846 (1986)).
62 Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 666 (1985) (Brennan, J., concurring in part and dissenting in part) (quoting In re Ruffalo, 390 U.S. 544, 550 (1968) (White, J., concurring)). 29
Altman attempts to further this argument by asserting that Division staff already knew the information she had, making her testimony "unchangeable." The Division had only second-hand, or perhaps third-hand, hearsay information about Rosen's testimony. Such information was not perpetuated sworn testimony and was subject to change, modification, or expansion upon further reflection.63
3. The law judge's findings regarding Altman's alcohol abuse were erroneous.
Altman, who admits he suffers from alcohol abuse, argues that the law judge erred in finding that he was not impaired by alcohol in any of his telephone conversations with Einhorn and that his alcohol abuse did not affect his conduct. According to Altman, the evidence shows that he drank most evenings during the relevant period; he had been drinking before at least the last conversation with Einhorn; and years earlier he told his therapist that he had been drinking before that last conversation.
The record shows that alcohol abuse did not cause Altman's conduct or prevent him from forming the intent necessary to engage in the alleged violations. Altman testified that, despite his drinking, he was able to work and was "functioning" at all relevant times. Altman testified that when he was drinking heavily, he had a higher tolerance for alcohol and no loss of functioning at his job that would be noticeable to others. Altman reported he had no blackouts, memory lapses, seizures, or other withdrawal symptoms related to alcohol.
Significantly, Altman testified that he did not claim that he was intoxicated during any of his telephone conversations with Einhorn, nor did he claim that his taped statements were made as a result of alcohol consumption or because he was intoxicated. This testimony was supported by the testimony of OGC's expert witness, who concluded that Altman was not intoxicated or impaired during his conversations with Einhorn. Neither of Altman's two experts contradicted that conclusion. The only evidence that Altman relies on to show that his alcohol abuse contributed, in some unspecified way, to his conduct comes from his own self-serving testimony. As discussed, the law judge rejected that testimony because she found that Altman was not a believable witness.
Altman disputes the law judge's finding that he "changed his position" on the subject of his alcohol abuse because he did not raise it as a defense until his post-hearing brief before the law judge. But Altman does not dispute that he made no claim in his investigative testimony, Wells submission, answer to OGC's order instituting this Rule 102(e) proceeding, or hearing testimony
63 Cf. IBM Corp. v. Edelstein, 526 F.2d 37, 41 (2d Cir. 1975) (per curiam) (stating that "[i]t is the common experience of counsel at the trial bar that a potential witness, upon reflection, will often change, modify or expand upon his original statement and that a second or third interview will be productive of greater accuracy. Little wonder then that a witness being interviewed . . . would not wish to have his initial thoughts taken down by a court reporter as if it were sworn testimony"). 30 that he was intoxicated during any of his conversations with Einhorn, or that any of his statements to Einhorn were caused by his alcohol consumption.
Altman also argues that he "operated at a distinct disadvantage" in his conversations with Einhorn because, among other things, he was "careless," "distracted," and "sometimes had impaired mental faculties." Altman offers no evidence that his carelessness, inattentiveness, or "impaired mental faculties" caused his misconduct. Indeed, he admitted in his post-hearing brief that he did not suffer from any mental condition that caused him to commit the alleged violations, prevented him from forming the intent necessary to do so, or mitigated his responsibility for his own conduct.
4. The law judge improperly relied on OGC's expert's testimony.
Altman argues that the law judge erred in admitting OGC's expert's testimony, except for the expert's diagnosis of alcohol abuse, because such testimony was "irrelevant, often highly prejudicial, and much of it invaded the exclusive provinces of the judge and attorneys." Rule of Practice 320 provides that law judges "may receive relevant evidence and shall exclude all evidence that is irrelevant, immaterial or unduly repetitious."64 Law judges have broad discretion in deciding whether to admit evidence, including expert testimony.65 Having reviewed the report of OGC's expert, we conclude that the law judge did not abuse her broad discretion in admitting portions of it.
Altman also argues that the law judge erred in relying on the excluded or sealed portions of OGC's expert's testimony. We find no support in the record for this argument and, in fact, find the opposite to be true. In her initial decision, the law judge expressly stated, "I have not relied on [OGC's] expert['s] opinions, which are unrefuted and which I find to be accurate, because, except for [OGC's expert's] public finding that Altman was not intoxicated during the phone conversations, they do not impact Altman's conduct that is the basis for this proceeding."66
IV.
The remedial sanctions available to the Commission in Rule 102(e) and Exchange Act Section 4C attorney disciplinary proceedings include a censure, temporary suspension, and permanent disqualification from practice before the Commission.67 OGC requests that we permanently deny Altman the privilege of appearing or practicing before us, to protect the
64 17 C.F.R. § 201.320.
65 See, e.g., Pagel, Inc., 48 S.E.C. 223, 230 (1985).
66 Altman, 94 SEC Docket at 13464 n.42.
67 17 C.F.R. § 201.102(e)(1);15 U.S.C. § 78d-3(a). 31
integrity of our processes and deter similar misconduct.68 In determining the appropriate remedial sanction, we are guided by the public interest factors in Steadman v. SEC:69 the egregiousness of the respondent's actions; the isolated or recurrent nature of the infraction; the degree of scienter involved; the sincerity of the respondent's assurances against future violations; the respondent's recognition of the wrongful nature of his conduct; and the likelihood of future violations.70 We also consider deterrence as a factor.71 Our inquiry into the appropriate remedial sanction "is a flexible one, and no one factor is dispositive."72
Altman's conduct was egregious, recurrent, and reflected a high degree of scienter.73 By suggesting that Rosen, a potential Division witness in the Harrison Proceeding, would evade the
68 Our authority to increase the sanction imposed by the law judge is set forth in Rule of Practice 411(c), which provides that "[t]he Commission may affirm, reverse, modify, set aside, or remand for further proceedings, in whole or in part, an initial decision by a hearing officer and may make any findings or conclusions that in its judgment are proper and on the basis of the record." 17 C.F.R. § 201.411(a).
69 603 F.2d 1126 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981); see Herbert M. Campbell, II, Esq., Initial Decision Rel. No. 266 (Oct. 27, 2004), 83 SEC Docket 4000, 4009 (ALJ decision) (applying Steadman factors in proceeding under Rule of Practice 102(e)), declared final, Exchange Act Rel. No. 50906 (Dec. 22, 2004), 84 SEC Docket 1943.
70 See Steadman, 603 F.2d at 1140.
71 See, e.g., McCarthy v. SEC, 406 F.3d 179, 190 (2d Cir. 2005) (noting that deterrent value is a relevant factor in deciding sanctions); Ahmed Mohamed Soliman, 52 S.E.C. 227, 231 n.12 (1995) (stating that selection of an appropriate sanction involves a consideration of several elements, including deterrence); Lester Kuznetz, 48 S.E.C. 551, 555 (1986) (noting that the sanction of a bar serves the purpose of general deterrence).
72 David Henry Disraeli, Exchange Act Rel. No. 57027 (Dec. 21, 2007), 92 SEC Docket 852, 875, petition denied, 334 Fed. Appx. 334 (D.C. Cir. 2009). Contrary to Altman's argument, we are not required to choose the "least onerous" of sanctions available. See, e.g, Paz Securities, Inc. v. SEC, 566 F.3d 1172, 1176 (D.C. Cir. 2009) (stating that the SEC was not required to choose "the least onerous" of sanctions provided sanctions imposed were "remedial and not excessive or oppressive"); see also, e.g., Kornman v. SEC, 592 F.3d 173, 188 (D.C. Cir. 2010) (rejecting argument that the SEC must show why action less severe than permanent bar would not protect investors).
73 Altman argues that the law judge "unreasonably discount[ed]" the "stresses" he was suffering at the time of his misconduct, namely, his difficulties in dealing with his ex-wife and his desire to spend time with his children who lived with her. The record fails to support Altman's argument that stress caused his misconduct. 32
Division's service of a subpoena and/or falsely claim at the hearing not to remember certain facts damaging to Harrison and Blumer in exchange for a financial package, Altman knowingly and intentionally offered to subvert a Commission administrative proceeding for his client's gain, and violated his fundamental ethical obligations as a New York bar member. Altman's conduct was recurrent because it took place in a series of telephone conversations with Einhorn over a two- week period and in communications with Division staff between January 28 and March 10, 2004.
Altman has not made any meaningful assurances against future violations, nor has he recognized the wrongfulness of his conduct. Although Altman apparently admits that it is inappropriate for an attorney to agree to have a witness testify falsely in exchange for payment, and although Altman acknowledges that it was wrong to make his "[p]robably both" statement in the last taped conversation with Einhorn,74 he denies that he ever actually sought to exchange false testimony for payment, despite his having been captured on tape doing so. Altman's unwillingness or inability to acknowledge that he committed intentional ethical violations, even when confronted with such compelling evidence, demonstrates that he can provide no assurance that he will refrain from future violations.
Furthermore, Altman's occupation as a commercial litigator makes future violations likely.75 A significant failure to perform properly the professional's role has implications extending beyond the particular transaction involved, for wrongdoing by a lawyer . . . raises the spectre of a replication of that conduct with other clients."76
Altman argues that OGC must make a "strong showing" that future violations are likely because a substantial suspension from Commission practice can carry with it severe collateral consequences, "likely" including his suspension from the practice of law in New York for an equivalent amount of time and further damage to his reputation and legal practice. Altman points to no case law which supports his position. We see no basis for applying such a heightened standard here.
Altman argues that his "main concern in these proceedings is not his ability to practice before the Commission -- something he has done rarely and will most likely never do again -- but rather
74 On appeal, Altman trivializes this statement by characterizing it as "simply a thoughtless answer to a very loaded question" that "had no more real meaning to him than does a parent's 'maybe' to an insistent child."
75 See Campbell, 83 SEC Docket at 4009-10 (permanently denying attorney, who was enjoined from violating the federal securities laws, the privilege of appearing or practicing before the Commission, because, among other reasons, he could continue practicing commercial law); Chris G. Gunderson, Exchange Act Rel. No.61234 (Dec. 23, 2009), 97 SEC Docket 24040, 24050 & n.43 (same) (citing Campbell).
76 Carter, 47 S.E.C. at 477. 33
the catastrophic collateral consequences of a lengthy suspension or permanent ban and particularly the effect it will have on New York disciplinary authorities." We are mindful of potential collateral consequences that may result from our decision in this case. We also heed the appellate court's admonition in Kivitz v. SEC77 that an attorney's license to practice "cannot lightly or capriciously be taken from him."78 Nevertheless, we have recognized that "[a]n incompetent or unethical practitioner has the ability to inflict substantial damage to the Commission's processes, and thus the investing public, and to the level of trust and confidence in our capital markets."79 We have warned that "where such individuals engage in professional misconduct which impairs the integrity of the Commission's processes, the Commission has an obligation to respond through the application of" Rule 102(e).80
Based on our consideration of the public interest factors and the factual circumstances presented,81 we conclude that permanently denying Altman the privilege of appearing or practicing before us serves the public interest and is remedial because it will protect the integrity of our prosecutorial and adjudicatory processes, and thereby the investing public, from future harm by Altman.82 Altman's professional misconduct undermined the effectiveness of the
77 475 F.2d 956 (D.C. Cir.1973).
78 Id. at 962.
79 Keating, Muething, & Klekamp, 47 S.E.C. 95, 120 (1979) (concurring opinion).
80 Id.
81 Altman argues that several factors mitigate his conduct (e.g., he suffers from alcohol abuse, has obtained treatment, and is now in recovery; he stopped communicating with Einhorn a month before the Harrison Proceeding hearing resumed; he never told Rosen about the substance of his conversations with Einhorn; he had a clean disciplinary record before the events at issue; he has practiced law without incident in the years following the institution of this Rule 102(e) proceeding; he did not profit financially from his conduct; his conduct did not cause "material harm" because the Division won its case in the Harrison Proceeding; and OGC began its investigation in 2004 but waited until 2008 to charge him). None of these factors mitigates his egregious misconduct. See, e.g., Kornman, 592 F.3d at 187-88 (rejecting as mitigating factors the lack of a disciplinary history, personal regret about the misconduct and vow not to engage in such misconduct again, and the absence of harm to Commission or public); Janet Gurley Katz, Exchange Act Rel. No. 61449 (Feb. 1, 2010), 97 SEC Docket 25074, 25109-10 & n.66 (collecting cases) (rejecting lack of profit as mitigating factor); Armstrong, 58 S.E.C. at 579 (rejecting delay in instituting proceeding as mitigating factor in absence of prejudice).
82 Altman suggests that, in lieu of a suspension or disqualification, the Commission "condition Mr. Altman's practice on his continued participation in recovery programs, including (continued...) 34
Commission's enforcement of the federal securities laws in the Harrison Proceeding. Because Altman's actions are fundamentally repugnant to the integrity of the Commission's administrative processes, he must not be permitted to be in a position to engage in professional misconduct in a Commission proceeding again. Other attorneys, who might be encouraged by a more lenient sanction to act in a similar fashion, must also be deterred.
An appropriate order will issue.83
By the Commission (Chairman SCHAPIRO and Commissioners CASEY, WALTER, AGUILAR and PAREDES).
Elizabeth M. Murphy Secretary
82 (...continued) the New York City Bar Association Lawyer Assistance Program, for a period of years, or on other conditions that the Commission could monitor by means of periodic reports from medical professionals or others." Altman points to no authority for our imposing such a requirement, and we are aware of none.
83 We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934 Rel. No. 63306 / November 10, 2010
Admin. Proc. File No. 3-12944
In the Matter of
STEVEN ALTMAN, ESQ.
c/o Jeffrey C. Hoffman, Esq. Hoffman & Pollok LLP 260 Madison Avenue 22nd Floor New York, NY 10016
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Steven Altman be, and he hereby is, permanently denied the privilege of appearing or practicing before the Commission.
By the Commission.
Elizabeth M. Murphy Secretary UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934 Rel. No. 63665 / January 6, 2011
Administrative Proc. File No. 3-12944
In the Matter of
STEVEN ALTMAN, ESQ.
c/o Jeffrey C. Hoffman, Esq. Hoffman & Pollok LLP 260 Madison Avenue 22nd Floor New York, NY 10016
ORDER DENYING MOTION FOR RECONSIDERATION AND A STAY
On November 10, 2010, we issued an opinion and order permanently denying Steven Altman, Esq., an attorney licensed to practice law in New York, the privilege of appearing or practicing before the Commission pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice1 and Section 4C of the Securities Exchange Act of 1934.2 We found that, between January 28 and March 10, 2004, Altman engaged in unethical and improper professional conduct, in violation of New York bar rules, while representing a prospective witness for the Division of Enforcement (the "Division") in a Commission administrative proceeding. Specifically, we
1 17 C.F.R. § 201.102(e)(1)(ii) (providing, in pertinent part, that "[t]he Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter -- to be lacking in character or integrity or to have engaged in unethical or improper professional conduct").
2 15 U.S.C. § 78d-3(a)(2) (providing, in pertinent part, that "[t]he Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person is found by the Commission, after notice and opportunity for hearing in the matter -- to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct"). 2
found that Altman offered to have his client evade the Division's service of a subpoena and/or testify falsely in exchange for financial and other benefits from two respondents in the proceeding. We concluded that Altman's conduct was fundamentally repugnant to the integrity of the Commission's processes and warranted permanent denial of the privilege of appearing or practicing before us.
Altman now moves for reconsideration of our November 10, 2010, opinion and order and for a stay pending judicial review. In his motion, Altman "urge[s] the Commission to not substitute its judgment for that of the ALJ[,] who heard, saw, and experienced first hand" the live testimony and determined to impose a nine-month suspension. According to Altman, "the Commission misperceives the basis for sanctions by eliminating the ability to demonstrate reformation and ignoring the history of the individual at issue, substituting the permanence of terminal execution for the providence of forgiveness and reform." Altman argues that "there is an absence of precedent upon which to evaluate the critical elements of remorse and deterrence in a manner that would permit such a sizeable change in the sanction, without creating the appearance, if not the fact, of the sanction as being punitive. . . ." Altman requests that we defer to the nine-month suspension imposed by the law judge because she was in the best position to determine credibility, remorse, and the "risks and threats of recidivism."
We analyze Altman's motion for reconsideration under Rule of Practice 470.3 The remedy of a motion for reconsideration is designed to correct manifest errors of law or fact or permit the presentation of newly discovered evidence.4 Respondents may not use a motion for reconsideration to reiterate arguments previously made or to cite authority previously available.5 Moreover, we accept only that evidence the movant "could not have known about or adduced before entry of the order subject to the motion for reconsideration."6
Altman's motion fails to meet these requirements. Altman argues, in essence, that the Commission erred by not imposing the same nine-month suspension as the law judge. This argument has no merit. Once the Commission granted the parties' petitions for review, the initial decision ceased to have any force or effect.7 On review, the Commission was vested with all of
3 17 C.F.R. § 201.470.
4 Leslie A. Arouh, 58 S.E.C. 162, 163 & n.6 (2005).
5 Id. at 163 & n.7.
6 Feeley & Wilcox Asset Mgmt. Corp., 56 S.E.C. 1264, 1269 n.18 (2003).
7 Fundamental Portfolio Advisors, Inc., 56 S.E.C. 651, 679 n.44 (2003). 3
the powers which it would have had in making the initial decision.8 The Commission was free to decide the sanction de novo.9 In addition, the law judge, who heard the live testimony, found that Altman was not "candid and credible" and rejected his version of events. Altman provides no other arguments that give us any reason to reconsider our prior decision.
Nor do we see a basis for granting a stay. We generally consider a stay request in light of four factors: whether the party seeking the stay is likely to prevail on appeal; whether the party seeking the stay is likely to suffer irreparable injury if the stay is not granted; whether any other party is likely to suffer substantial harm if the stay is granted; and whether the stay will serve the public interest.10 The party seeking the stay has the burden of demonstrating that a stay is justified.11
Altman's motion fails to address any of the relevant factors. Nevertheless, we have evaluated his stay request in light of the four factors. Given Altman's egregious misconduct, we believe that Altman is not likely to prevail on appeal on the issue of the Commission's asserted abuse of discretion in imposing a permanent denial of the privilege of appearing or practicing before it.12 We therefore conclude that a stay is not warranted.
8 See 5 U.S.C. § 557(b) (stating, in pertinent part, that "[o]n appeal from or review of the initial decision, the agency has all the powers which it would have in making the initial decision except as it may limit the issues on notice or by rule"); see also 17 C.F.R. § 201.411(a) (stating that "[t]he Commission may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, an initial decision by a hearing officer and may make any findings or conclusions that in its judgment are proper and on the basis of the record").
9 See Containerfreight Transp. Co. v. ICC, 651 F.2d 668, 670 (9th Cir. 1981).
10 See Cuomo v. NRC, 772 F.2d 972, 974 (D.C. Cir. 1985).
11 Id. at 978.
12 Courts of appeal review the Commission's factual findings under the "very deferential" substantial evidence standard. Siegel v. SEC, 592 F.3d 147, 155 (D.C. Cir.), cert. denied, 130 S. Ct. 3333 (2010). Under this standard, "[t]he reviewing court may not substitute its own judgment for the agency's choice between two fairly conflicting views, even if that court would justifiably have made a different choice had the matter been before it de novo." Id. Courts of appeal review the Commission's conclusions regarding sanctions to determine whether they are "arbitrary, capricious, or an abuse of discretion." Id.; see also Berger v. SEC, 347 Fed. Appx. 692, 694 (2d Cir. 2009); see generally 5 U.S.C. § 706(2)(A). "The agency's choice of remedy is peculiarly a matter for administrative competence, and [the court of appeals] will reverse it only if the remedy chosen is unwarranted in law or is without justification in fact." Siegel, 592 F.3d at 155. 4
Accordingly, IT IS ORDERED that the motion for reconsideration filed by Steven Altman, Esq., be, and it hereby is, DENIED, and it is further
ORDERED that Altman's request for a stay of the Commission's November 10, 2010 opinion and order permanently denying him the privilege of appearing or practicing before the Commission be, and it hereby is, DENIED.
By the Commission.
Elizabeth M. Murphy Secretary SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART 49 ------X In the Matter of the FINRA : Arbitration between Essex Equity : Holdings USA, LLC (f/k/a Maher : Terminals Holdings Corp.), M. Brian : Maher and Basil Maher, Claimants, : against Lehman Brothers, Inc., : Jeffrey L. Chernick, Peter C. : Gambee, William C. Gourd, Neil J. : Greenspan, Sanford A. Haber and : Mark J. Stevenson, Respondents. : : Decision and Order JEFFREY L. CHERNICK, PETER C. : Index No. 600995/2010 GAMBEE, NEIL J. GREENSPAN, SANFORD : Motion Seq. 001 A. HABER, and MARK J. STEVENSON, : : Petitioners, : : -against- : : ESSEX EQUITY HOLDINGS USA, LLC, : (f/k/a MAHER TERMINALS HOLDINGS : CORP.), M. BRIAN MAHER and BASIL : MAHER, : : Respondents. : ------X
Krebsbach & Snyder , P.C. , New York City ( Barry S. Gold , Theodore A. Krebsbach , and Theodore R. Snyder of counsel), for petitioners.
Law Offices of Michael S. Ross , New York City ( Michael S. Ross of counsel), for respondents.
Hon. James A. Yates, J.S.C.
In 1999, the New York Court of Appeals held, in Kassis v Teacher’s Ins. & Annuity Assoc. , 93 NY2d 611 (1999) , that screening was ineffectual to save a law firm from disqualification when an attorney “side-switches”, i.e., begins employment with the law firm after having worked for an adversary on the same matter, and when that attorney had acquired significant and material confidential information at the first firm. Notwithstanding Kassis , Rule 1.11 of the New York Rules of Professional Conduct(22 NYCRR Part 1200, effective April 1, 2009) (“Rules”) permits a private law firm to avoid disqualification by timely and effective screening when a government official leaves public service to work at the firm even where: (1) the official had acquired confidential government information which could be used to the material disadvantage of an adverse party; and (2) the official has participated personally and substantially in the same matter. The question arises whether Kassis precludes a law firm from continuing to represent a client in a matter, where the government is not a party, after hiring a prosecutor who has acquired significant and material confidential government information and has personally participated in connection with the same matter, if the firm complies with the screening and notice provisions of Rule 1.11. 1
1 The rule seemingly permits an official to participate in a matter without personal disqualification, firm disqualification or the need to screen when the government agency gives consent as long as the official neither uses nor reveals confidential information (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.9[c]; rule 1.11 [a]). However, in the case before the Court, the attorney, Sean Casey, has not sought consent. Casey met with Peter Norling, the Professional Responsibility Officer for the U.S. Attorney’s Office in the Eastern District who advised Casey that he would be prohibited at any subsequent legal job from working on any matter in which he had worked or had supervisory authority while at the U.S. Attorney’s Office. Transcript at 128-30.
2 Petitioners move to disqualify the law firm of Kobre & Kim (“K&K”), from continuing to represent respondents in an arbitration proceeding that respondents commenced at the Financial Industry Regulation Authority (“FINRA”), Case No. 08- 00156. Petitioners argue that disqualification of K&K “is required because Sean Casey, former Deputy Chief of the Business and Securities Fraud Unit of the U.S. Attorney’s Office in the Eastern District of New York, recently joined K&K as a partner.” (Verified Petition ¶ 2). Further it is alleged, and not disputed, 2 that, “While at the U.S. Attorney’s Office, Casey led a criminal investigation ... of Lehman’s sale of auction rate securities (“ARS”) to Respondents, among others. As part of the Investigation, subpoenas were issued under Casey’s name requiring three of the Petitioners to appear and give testimony before a grand jury. The same ARS transactions that were a subject of the federal government’s Investigation are the subject of the pending Arbitration.” (Emergency Affirmation of Barry S. Gold, Esq., ¶ 2) . For the following reasons, Petitioners’ motion to disqualify is granted.
I. Background
A. Underlying Arbitration Action
Respondents allege that in March 2007, respondents “M. Brian Maher and Basil Maher negotiated the sale of their family business,” which specialized in the operation of marine terminals in existence for over 60 years ( Id. , exhibit A [second amended statement of claim] ¶ 27). “By approximately July 26, 2007, [Respondents] had wired a total of US $600 million to Lehman” Id. ¶ 2 ). Respondents then claim that Respondents “invested it in ways that differed radically from” the provided sample investment portfolio and Respondents’ investment objectives given to petitioners ( Id. ¶
2 In this proceeding, Casey, invoking the Federal Rules of Criminal Procedure rule 6, has been appropriately careful not to disclose any information about the investigation. However, there appears to be no contest over the alleged and publicly reported fact that there was such an investigation and that he personally participated in it (Emergency Affirmation of Barry S. Gold, Esq., ¶ 2). That fact, in turn, is “sufficient to raise the presumption that [the attorney] gained confidential information” and “a party seeking disqualification of an attorney on the basis of the substantial relationship test is not required to present evidence that the attorney possesses actual confidences as a result of the prior representation” ( Decora Inc. v DW Wallcovering, Inc. , 899 F Supp 132, 138[SD NY 1995]).
3 2, exhibit A [second amended statement of claim] ¶ 46). As a result, Respondents assert they lost “the ability to access or invest their approximately US $286 million” ( Id. ¶ 2 , exhibit A [second amended statement of claim] ¶ 110).
On January 17, 2008, “K&K, acting as counsel to Respondents, filed the Statement of Claim that commenced the Arbitration on behalf of Respondents against Lehman and Petitioners” (Verified Petition ¶ 19). On September 19, 2008, “Lehman filed for bankruptcy, which, among other things, automatically stayed the Arbitration as against Lehman” ( Id. ¶ 20). Twenty-five days later, on October 14, 2008, K&K asked that the arbitration be placed on “hold” while it considered whether to pursue claims against the remaining parties. Respondents further allege that on October 1, 2009, Casey joined K&K and six days after that, on October 7, 2009 3, K&K informed FINRA that it intended to proceed against Petitioners. (Verified Petition ¶ 21).
B. Procedural History
By Order to Show Cause dated April 16, 2010, Petitioners sought to stay the arbitration and to disqualify K&K from representing respondents in the arbitration. The Court heard testimony on April 26 and 27, 2010 by Casey and Michael Kim, a senior partner at K&K. The Court credits their testimony as truthfully given.
The issue of disqualification is before the Court rather than the arbitration panel because “matters of attorney discipline are beyond the jurisdiction of arbitrators” (Bidermann Indus. Licensing, Inc. v Avmar N.V. , 173 AD2d 401, 402 [1st Dept 1991]). “Issues of attorney disqualification similarly involve interpretation and application of the Code of Professional Responsibility and Disciplinary Rules, as well as the potential deprivation of counsel of the client’s choosing, and cannot be left to the determination of arbitrators selected by the parties themselves for their expertise in the particular
3 Casey testified that he began working at K&K in “mid-October” (Transcript at 28) and a letter in evidence from Robert Henoch, a partner who headed the Essex team, to the U.S. Attorney’s Office says he joined the firm “on or about October 19, 2009 (Letter, Robert Henoch to Peter A. Norling, Asst. U.S. Attorney, Respondents’ exhibit 4). It is unclear precisely when he “joined” the firm and when he “began working” there.
4 industries engaged in” ( Id. [internal citations omitted]).
As well, the Court is mindful of the admonition that:
“Motions to disqualify are generally not favored. They are often tactically motivated; they cause delay and add expense; they disrupt attorney-client relationships sometimes of long standing; in short, they tend to derail the efficient progress of litigation. Thus, parties moving for disqualification carry a ‘heavy burden’ and must satisfy ‘a high standard of proof.’ But if there are doubts ... ‘doubts should be resolved in favor of disqualification.’ Thus, a balance must be struck between being ‘solicitous of a client's right freely to choose his counsel,’ and protecting the ‘need to maintain the highest standards of the profession’ and the ‘integrity of the adversary process.’"
Felix v Balkin , 49 F Supp 2d 260, 267 (SD NY 1999)(internal citations omitted).
Although reference is made to the Rules of Professional Conduct by the parties and throughout this opinion, the Court recognizes that a “ violation of a Rule does not necessarily warrant any other nondisciplinary remedy, such as disqualification of a lawyer in pending litigation. The Rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies.”(Rules of Professional Conduct [22 NYCRR 1200.0] Scope [6], [12].) “[T]he rules contained in the Code of Professional Responsibility, which have been superseded by the Rules of Professional Conduct, provide guidance, but are not binding authority, for the courts in determining whether a party’s attorney should be disqualified during litigation” ( Falk v Gallo , ___ AD3d ___, ___, 2010; 2010 NY Slip Op 3864 [2d Dept 2010][concerning lawyer as witness under Rule 3.7] [emphasis added]); cf. Armstrong v McAlpin , 625 F2d 433, 446 n 26 (2d Cir 1980) (although ABA committee that drafted Code has indicated rules were intended for use in disciplinary proceedings rather than in disqualification proceedings, Court refers to Code for guidance), cited with approval by S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp. 69 NY2d 437, 444-45 (1987); See also People v Abar , 99 NY2d 406 (2003); People v Smart , 96 NY2d 793 (2001); People v Longtin , 92 NY2d 640 (1998); GD Searle & Co., Inc. v Pennie & Edmonds LLP, NYLJ, Jan. 26, 2004, at 18, col 1 (Sup Ct, NY County); Gidatex, S.R.L. v Campaniello Imports, Ltd. , 82 F Supp 2d 119 (SD NY 1999).
II. Discussion
Casey does not dispute that he participated personally and substantially in connection with the matter which is the subject of the arbitration proceeding. As well, he
5 does not contest the allegation that he acquired confidential government information. 4 The Government is not a party to the arbitration. Still, Casey recognizes that he is personally disqualified from participating in the proceeding because Rule 1.11 is not limited to cases where the Government agency is itself a party. Comment 3 to the Rule cautions, in part, that the disqualification provisions apply “regardless of whether a lawyer is adverse to a former client and are thus designed not only to protect the former client, but also to prevent a lawyer from exploiting public office for the advantage of another client. For example, a lawyer who has pursued a claim on behalf of the government may not pursue the same claim on behalf of a private client after the lawyer has left government service...” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11 cmt 4). 5
4 In evidence is a Memorandum, dated December 9, 2009, by Benjamin Leyland, Senior Risk Management Analyst at K&K and Zoe Ehrlich, Chief Administrative Officer, in which they write, after interview of Casey, “As a result of his position, Sean either participated personally and substantially in, was officially responsible for, or gained confidential information regarding various matters at issue for our clients...” (Respondent’s Exhibit 1, p.1), which then references a number of matters, including, apparently, the present arbitration. This is repeated in similar memos dated December 15 and January 14, 2010.
5 “The Appellate Division has not enacted the Preamble, Scope and Comments, which are published solely by the New York State Bar Association to provide guidance for attorneys in complying with the Rules.” Resources on Professional Standards for Attorneys in New York State , http://www.nysba.org/Content/NavigationMenu /ForAttorneys/Professi onalStandardsforAttorneys/Professional_Standar.htm [NY St Bar
6
Nevertheless, K&K contends that it has complied with the screening and notice provisions outlined in Rule 1.11(b) and, therefore, the firm may ethically continue to represent Respondents as long as Casey remains effectively isolated from the matter.
Petitioners counter that “K&K is presumptively disqualified because Casey is disqualified,” relying in part on the holding of Kassis, supra. They assert that “where an attorney is disqualified as a result of having acquired confidential information at a prior position, there is a ‘presumption that the entirety of the attorney’s current firm must be disqualified,’ and to rebut the presumption the law firm must demonstrate that (1) ‘any information acquired by the disqualified lawyer is unlikely to be significant or material in the litigation,’ and (2) an effective screen has been implemented’ . . . Only if the law firm satisfies the first requirement need the court proceed to the second step.” (Petitioners Memorandum of Law in Support at 6 [Apr. 16, 2010].)
Thus, the issues before the Court are: (1) Does Kassis prohibit use of the screening procedure provided by Rule 1.11 in this case and, if not (2) did Respondents meet the requirements of Rule 1.11?
A. Kassis
Assoc., accessed May 6, 2010]).
7 Kassis involved an attorney with “extensive participation” in a matter on which he worked at in his prior law firm, who then switched to another firm that represented the “adversary in the same matter” ( Kassis , 93 NY2d at 619-620). In Kassis , the associate, at his prior firm, “conducted five depositions”, “attended two court-ordered mediation sessions as sole counsel for the client, appeared as [the client]’s attorney at a physical examination . . . , and conversed with [the client] on a regular basis” ( Id. at 614). The Court, referring to the applicable Code of Professional Responsibility (22 NYCRR 1200, Repealed Eff. April 1, 2009) 6 (Code), provisions then in effect, found that, “‘[S]ide switching’ clearly implicates the policies both of maintaining loyalty to the first client and of protecting that client's confidences. These same principles give rise to the general rule that, where an attorney working in a law firm is disqualified from undertaking a subsequent representation opposing a former client, all the attorneys in that firm are likewise precluded from such representation (Id., at 295; see also Code of Professional Responsibility DR 5-105 [D] [22 NYCRR 1200.24 (d)]; DR 5-108 [22 NYCRR 1200.27 (a) (1)])”
Kassis at 615.
6 The Appellate Divisions of the Supreme Court adopted as joint rules the Disciplinary Rules of the Code of Professional Responsibility, effective Sept. 1, 1990, which were promulgated under 22 NYCRR Part 1200 .
8 The associate in Kassis was not a public official who had left government employ. Instead he had moved from one private firm to another. At the time Kassis was decided, under the prior Code (and the ABA Model Rules), there was no provision allowing for screening to avoid disqualification when an attorney moved from one private firm to another. 7 DR 5-105[D] banned continued employment by any attorney in the firm in connection with a matter once the side-switching attorney joined the firm. However, notwithstanding the Code, the Court in Solow v W.R. Grace & Co. , 83 NY2d 303(1994), in denying disqualification, rejected a per se rule of disqualification based on imputed confidences, reasoning that this rule is “unnecessarily preclusive because it disqualifies all members of a law firm indiscriminately, whether or not they share knowledge of a former client's confidences and secrets.” 83 NY2d at 309.
In light of Solow, the Association of the Bar of the City of New York, in an Amicus Brief filed in Kassis , urged screening as a way to avoid disqualification. The Association wrote, “In resolving this case, this Court has the opportunity to articulate a clear standard for determining when screening is a workable alternative to disqualification of an entire firm. Such a standard would comport with past decisions of this Court favoring a client's right to counsel of choice. 1999 WL 33660287 (NY) (Appellate Brief), p 7.
The Court agreed, in part, declaring,
“Moreover, while the disciplinary rules governing lawyers prohibit attorneys who have represented the former client in a matter from switching sides and impute one attorney's personal conflicts of interest to his or her current firm (DR 5-105 [D] 22 NYCRR 1200.24 [d]; DR 5-108 22 NYCRR 1200.27 [a] [1]), they do not establish a mandatory disqualification rule. Indeed, as we stated in S & S Hotel Ventures v 777 S. H. Corp . (69 NY2d 437[1987]), because disqualification of a law firm during litigation may have significant adverse consequences to the client and others, it is particularly important
7 Screening in the context of lateral movement between private firms has been the subject of exhaustive debate. As of September 2009 approximately two dozen states permitted screening, despite the fact that the ABA had discussed, but resisted, incorporating the procedure in its Model Rules. (Gillers, Simon and Perlman, Regulation of Lawyers: Statutes and Standards , at 149 [Aspen Publishers, Concise Edition 2010]). Eventually Model Rule 1.10 was amended, by a narrow vote, to permit screening in 2009. (ABA Model Rules of Professional Conduct, ABA Model Rule 1.10[a][2]). However, the current New York Rules do not permit screening as a way of avoiding disqualification when a lateral move is made between two private firms and when the newly hired attorney has acquired confidential information at the first firm. (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.10 [c]).
9 that the Code of Professional Responsibility not be mechanically applied when disqualification is raised in litigation ( Id. at 444).”
Nonetheless, while rejecting a per se rule of law firm disqualification, the Court declared that there was a presumption of shared confidences and that the movant had to carry the “heavy burden” of proof “that any information acquired by the disqualified lawyer is unlikely to be significant or material in the litigation” (Kassis , 93 NY2d at 618). If, and only if, that burden was met, could the firm continue and,
“[b]ecause even the appearance of impropriety must be eliminated, it follows that even where it is demonstrated that the disqualified attorney possesses no material confidential information, a firm must nonetheless erect adequate screening measures to separate the disqualified lawyer and eliminate any involvement by that lawyer in the representation.”
Kassis at 618.
It is for this reason Petitioners contend screening will not suffice. First, they argue, Casey has not met the “heavy burden” of demonstrating that he is not in possession of significant and material confidential information and, therefore, screening is not available under Kassis . Second, Petitioners claim an appearance of impropriety under the facts of this case precludes approval of the screening process. Lastly, Petitioners argue that the alleged screening which occurred was not timely and effective as required.
B. Does Kassis Prohibit Screening Under Rule 1.11?
At the time Kassis was argued, while the Code of Professional Responsibility did not allow for screening in the case of private attorneys(DR 5-105 [22 NYCRR 1200.24]), it specifically authorized screening for public officers and employees even when they had participated personally and substantially in the same matter or held confidential government information about the matter (DR 9-101[B] [22 NYCRR 1200.45]). The Court of Appeals did not directly address the exception for government officials in Kassis since it was not an issue before the Court .
The efficacy of screening in the limited context of a former prosecutor has been acknowledged and endorsed in ethics opinions for years, both before, ( See e.g. NY St Bar Assn Comm on Prof Ethics Op 502 [1979)[condoning continued representation of a criminal defendant by firm which screened an Assistant District Attorney, who had been aware of the prosecution, from participation]; NY St Bar Assn Comm on Prof Ethics Op 634 [1992] [finding that although former government attorney may not in private practice represent another governmental body in matters in which the attorney participated, lawyers in same firm may do so if in compliance with conditions of DR 9-101 [B]), and after,( NY Eth. Op. 748, 2001 WL 1516692 , NY St Bar Assn Comm Prof Eth ), Kassis was
10 decided and has not been challenged successfully . The Code before 2009 and the current Rules explicitly distinguish treatment of government attorneys and private attorneys. The distinction is not without sound reason:
“The Rules of Professional Conduct are grounded on this basic premise. Governments need and want good young lawyers to devote some time to public service without depriving themselves of the ability to obtain employment thereafter. Recognizing this public purpose, the Rules allow government counsel to do what a lawyer moving from one firm to another cannot do without a client waiver: that is, move from one side to the other, with only notice to the government and parties.”
Barnes ex rel. Estate of Barnes v District of Columbia, 266 F Supp 2d 138 (DDC 2003).
The Appellate Division, Second Department, recently explained the disparity in that Rule 1.11 (a) (2) “represents a balancing of interests” ( In re Coleman , 69 AD3d 846,849 [2d Dept 2010])( citing comment four of Rule 1.11). Comment four states, in pertinent part:
“[T]he rules governing lawyers presently or formerly employed by a government agency should not be so restrictive as to inhibit transfer of employment to and from the government. The government has a legitimate need to attract qualified lawyers as well as to maintain high ethical standards . . . The provisions for screening and waiver in paragraph (b) are necessary to prevent the disqualification rule from imposing too severe a deterrent to entering public service.”
(Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11 cmt 4.)
Aside from the practical exigencies described in Barnes , Coleman and Comment 4, as a matter of principle there is a distinction to be recognized between the case where an attorney switches sides in private litigation and the situation here, protected by Rule 1.11, where the former employer is not a party to the litigation. The government, unlike the situation in Kassis , does not have the prospect of facing a former counsel or his firm in litigation. As long as confidential government information is protected from disclosure, the non-party government agency can stand by unconcerned with the outcome of the litigation. Rule 1.11 provides for written notice to the appropriate government agency to enable it to ascertain compliance with the Rules. (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11[b][1][iv],). In particular, Rule 1.9 prohibits use or disclosure of confidential information and, with adequate and timely notice, the client (the government
11 agency) is in the best position to guard against misuse of their own secrets.
In sum, because: (1) longstanding and unchallenged court rules, endorsed for years by State and City Bar Associations, have authorized screening of government officers to prevent disqualification of an entire firm, (2) the Rule permitting screening was recently re-promulgated (with minor re-formulation, compare Rule 1.11 with its predecessor DR 9-101[b]) notwithstanding the holding in Kassis , (3) the Appellate Division, with the four Departments acting jointly, consciously elected not to enact similar screening provisions in non-governmental situations, unlike the ABA Model Rules, (compare ABA Model Rules of Professional Conduct rule 1.10 with Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.10 ), thereby signaling a specific intention to separate governmental transfers from private transfers; and (4) the case now before the Court does not involve direct switching of sides as in Kassis, it is the opinion of the Court that the holding in Kassis does not deprive Respondents of the ability to avail themselves of a properly conducted screening procedure.
C. Appearance of Impropriety
In Kassis the Court declared that “even the appearance of impropriety must be eliminated” ( Kassis , 93 NY2d at 618). This, in part, was a reiteration of Canon 9 of the repealed Code which provided that “A Lawyer Should Avoid Even the Appearance of Professional Impropriety.” The current Rule 1.11, as adopted in New York, specifically adds, after authorizing screening for government officers, there must be “no other circumstances in the particular representation that create an appearance of impropriety” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11 [b][2]). Notably, the ABA Model Rules do not use the term anywhere within the rules. The addition of this language in the New York Rules, aside from being a carry over from the predecessor DR 9-101[b], is an apparent nod to the caution in Kassis against appearances of impropriety and thereby acts as an additional restraint upon screening, which as explained above, does not generally enjoy wide acceptance in New York.
For that reason, Petitioners also argue that Respondents must be disqualified because the circumstances surrounding Casey’s employment by K&K, lend themselves to an appearance of impropriety, which standing alone requires disqualification. Respondents dispute the logic of this argument, but in any event deny any such impropriety.
Outside the context of Rule 1.11, there is a general recognition that “appearance of impropriety,” without more, is too vague a standard to justify disciplinary measures or disqualification. So, for example, the Appellate Division, Second Department, recently held, “Absent actual prejudice or a substantial risk thereof, the appearance of impropriety alone is not sufficient to require disqualification of an attorney.” Lovitch v Lovitch , 64 AD3D 710, 712 (2d Dept. 2009) (internal citations omitted); see also
12 Christensen v Christensen , 55 AD3d 1453(3d Dept 2008) (“If an attorney's representation of a client “does not violate [an] ethical or disciplinary rule, there can be no appearance of impropriety”) (Develop Don't Destroy Brooklyn v Empire State Dev. Corp. , 31 AD3d 144, 153 [1 st Dept 2006], lv denied 8 NY3d 802 [2007]). In any event, the mere appearance of impropriety alone would be insufficient to warrant disqualification. Rather, it must be shown that a party will suffer actual prejudice or a substantial risk thereof (see id. ; Matter of Stephanie X. , 6 AD3d 778,780 [3d Dept 2004]).
However, given New York’s cautious approach to the acceptance of screening and in light of the specific directive in Rule 1.11 (b)(2), the Court permitted evidence on the question of the appearance of impropriety at the hearing.
The essence of Petitioners’ claim is: (1) the belief, which K&K dispute, that the investigation of the ARS sales to Essex Equities Holdings (“Essex”) by Lehman was referred to the U.S. Attorney by K&K (Respondents contend that it is unclear who initiated the contact and investigation, but don’t deny that there was contact between the Office and K&K 8); (2) Casey led the investigation and, perhaps, personally had conversations with K&K counsel 9; (3) K&K advertises, on its website that it employs a number of former federal prosecutors and writes that, where appropriate and legitimate, the firm looks to “leverage the significant collateral benefits to our civil suit that can result from a parallel government investigation.” ( Http://www.kobrekin.com /practice_areas /institutional-plaintiffs-litigation.html); (4) the arbitration had been “on hold” for almost a year until just six days after Casey joined the firm, at which time K&K expressed an interest in going forward.
8 Mr. Kim testified that his firm did initiate contact with the New York State Attorney General and the SEC. (Transcript at 83, 86)
9 While not testifying to direct conversations, Mr. Kim, having spoken to a partner about contacts between the firm and the U.S. Attorney’s Office, said “there is an inference [Casey} was involved.” Transcript at 100.
13 In sum, Petitioners argue, “A law firm should not be permitted to actively assist a Deputy Bureau Chief in the United States Attorney’s Office in conducting a criminal investigation of the same individual the law firm’s clients are suing, hire him as a partner and continue the representation.” (Petitioners’ Reply Memorandum of Law in Further Support of Their Petition for an Order Disqualifying Respondents’ Law Firms and Staying Arbitration, ¶ 21).
Respondents counter that the claims, in all, are speculative and in particular: (1) Mr. Kim testified that to the best of information he was able to gather from recollections of the Firm’s attorneys, it was the US Attorney’s Office that initiated the contact, not K&K; (2) Casey did not leave the agency to work for K&K, but in fact worked for four months at another firm before becoming a partner at K&K; (3) the re-activation of the arbitration was a matter of coincidental timing, since it was not until their investigation revealed insurance coverage in the Summer of 2009 that the case became economically viable, with Respondents approving re-activation in September, 2009 before Casey joined the firm 10 . In sum, they argue that the underlying facts claimed to support a finding of impropriety are speculative, conclusory and unfounded. (Respondents’ Post- Hearing Memorandum of Law in Further Opposition to Petition for Order Disqualifying Respondents’ Law Firm and Staying Arbitration, ¶¶ 28-31).
The core factual allegations leading to the charge of impropriety are in dispute and, given the necessary secrecy that surrounds the internal workings of the U.S. Attorney’s Office during the course of a criminal investigation, difficult to assess. When facts are in question, the Court of Appeals reminds us,
“[D]isqualification motions present competing concerns. Balanced against the vital interest in avoiding even the appearance of impropriety is concern for a party's right to representation by counsel of choice and danger that such motions can become tactical ‘derailment’ weapons for strategic advantage in litigation (S & S Hotel Ventures Ltd. Partnership v 777 S. H. Corp., 69 NY2d 437, 443). With these considerations in mind, it is clear that a movant must offer more to justify disqualification. Allowing a party seeking disqualification to meet its burden
10 Although it is worth noting that Casey was working for another firm, Mayer Brown, when K&K offered Casey employment as a partner in September, around the time Respondents decided to re- activate the arbitration.
14 by generalized assertions of “access to confidences and secrets” would both make it difficult, if not impossible, to test those assertions and encourage the strategic use of such motions.”
Jamaica Public Service Co. Ltd. v AIU Ins. Co. , 92 NY2d 631, 638 (1998).
Accordingly, “A party's entitlement to be represented in ongoing litigation by counsel of its own choosing is a valued right which should not be abridged absent a clear showing that disqualification is warranted. ( Dominguez v Community Health Plan of Suffolk, Inc. , 284 AD2d 294 (2d Dept 2001) (reversing a court's determination to disqualify based on “conclusory assertions and speculation”). Motions to disqualify must be “carefully scrutinized” ( S & S Hotel Ventures Ltd. Partnership v 777 S.H. Corp . 69 NY2d 437,443 [1987], citing Matter of Abrams, 62 NY2d 183, 196 [1984]).
Separating speculation from demonstrated fact, the most that can be said here is that Casey personally participated to a substantial and material degree in the same matter, that he acquired confidential government information, that he had some level of contact with K&K in connection with the case, and that four months after leaving the agency, he joined the firm as a partner. Although there is some foundation to Petitioners’ suspicions, without more, the Court is unwilling to make the finding, on the claims here, that an appearance of impropriety standing alone prevents the remaining lawyers in the firm, if properly screened, from continuing to represent Respondents.
At the same time, the Court shares the thought contained within Comment 6 to Rule 1.11,
“There may be circumstances where representation by the personally disqualified lawyer’s firm may undermine the public’s confidence in the integrity of the legal system. Such a circumstance may arise, for example, where the personally disqualified lawyer occupied a highly visible government position prior to entering private practice, or where the facts and circumstances of the representation itself create a risk that the representation will appear to be improper. Where the particular circumstances create such a risk, a law firm may find it prudent to decline the representation, but Rule 1.11 does not require it to do so.”
(Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11 cmt 6).
D. The Size of the Firm
Petitioners argue that screening is never available to a small firm. They
15 characterize K&K as a small law firm. (There is some dispute about the precise size of K&K since it is a moving target, but it appears that the firm has anywhere from 33 to 40 attorneys placed in four different locations with about 20 of the lawyers working in the New York office on the same floor with Casey. It has 100 employees in all.) Petitioners argue that the presumption of shared or inadvertently disclosed confidential information cannot be overcome in a law firm where a small number of attorneys necessarily encounter each other and interact. They cite, for example, Kassis where the associate left a 26-member law firm and the Court stated,
“To determine whether the presumption of shared confidences and disqualification has been rebutted, consideration must be given to the particular facts of each case. Where, for example, a disqualified attorney formerly worked in a small law firm characterized by a certain informality and conducive to “‘constant cross-pollination’ ” and a “‘cross current of discussion and ideas' among all attorneys on all matters which the firm handled,” there will be a greater likelihood of acquiring material client confidences.”
(Kassis, 93 NY2d at 617-18 [internal citations omitted]) .
Petitioners point to numerous cases where firms were disqualified and firm size was a considered factor. Cheng v GAF Corp., 631 F2d 1052 (2d Cir 1980)(35 lawyers); Decora Inc. v DW Wallcovering, Inc. , 899 F Supp 132 (SD NY 1995)(44 lawyers); Yaretsky v Blum , 525 F Supp (SD NY 1981) (30 lawyers); Marshall v State of New York , 952 F Supp 103 (ND NY 1997) (15 lawyers); United States v Uzzi , 549 F Supp 979 (SD NY 1982)(11 lawyers). In particular, they cite Crudele v New York City Police Dept. , 2001 WL 1033539; 2001 US Dist LEXIS 13779 (SD NY 2001) for the proposition that screening is “inadequate in the context of a small law firm” (2001 WL 1033539 at *3; 2001 US Dist LEXIS 13779 at *11). From this, and the cases cited within Crudele , Petitioners argue that screening is “inherently ineffective in small firms” (Letter Brief, Barry S. Gold, May 21, 2010, ¶ 3).
However, none of the cases cited by Petitioners, or the Court in Crudele , stand for a per se rule against screening. In each of the cases, size was a contributing factor in the decision to disqualify, but there were aggravating factors 11 which, as in Crudele,
11 Cheng v GAF Corp., 631 F2d 1052 (2d Cir 1980) (transfer between private adversaries and former employer specifically objected); Decora Inc. v DW Wallcovering, Inc. , 899 F Supp 132 (SD NY 1995)(screening not timely and attorney continued to work in same department with attorneys involved in continued representation); Yaretsky v Blum , 525 F Supp (SD NY 1981) (attorney continued to work with small group of attorneys at new firm with whom he interacted on a daily basis); Marshall v State of New York , 952 F Supp 103 (ND NY 1997) (untimely screening); United States v Uzzi ,
16 raised “grave concerns about both the possibility of unintentional breaches of client confidences and about the appearance of impropriety” (2001 WL 1033539 at *4; 2001 US Dist LEXIS 13779 at *14). In fact, the Second Circuit, referring to the ruling in Cheng, supra , where a twenty person firm was disqualified, explicitly stated that a per se rule was not intended by that ruling,
“We see no reason why, in appropriate cases and on convincing facts, isolation-whether it results from the intentional construction of a ‘Chinese Wall,’ or from de facto separation that effectively protects against any sharing of confidential information-cannot adequately protect against taint.”
Hempstead Video, Inc. v Incorporated Village of Valley Stream 409 F.3d 127, 138 (2d Cir. 2005).
A per se rule against screening for small firms has not been the law heretofore in New York and would be impractical to adopt. Where would the line be drawn? Would it be inflexible? The better course, and the one the Court chooses to follow, is the one outlined in Comment 7 to Rule 1.11 which permits screening but cautions:
“A small firm may need to exercise special care and vigilance to maintain effective screening but, if appropriate precautions are taken, small firms can satisfy the requirements of [Rule 1.11].”
(Rules of Professional Conduct [22 NYCRR 1200.0]rule 1.11 cmt 7).
E. Whether Respondents Satisfied Rule 1.11
The final question for the Court is whether K&K did in fact “exercise special care and vigilance to maintain effective screening” (comment 7, rule 1.11, supra). Petitioners claim that Casey was not “timely and effectively screened” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11[c]) and the firm did not act “promptly and reasonably ... to notify ... lawyers ... within the firm ... to implement effective screening procedures ... and [to] give written notice” to the U.S. Attorney’s Office, all of which is required by the Rule 1.11(b).
549 F Supp 979 (SD NY 1982)(strong objection by government in the face of evidence that attorney had been exposed to potentially sensitive criminal investigative matters including eavesdropping and pen register materials).
17 The ABA Model Rules do not use the term “effective” in describing screening. New York inserts the word in its version of Rule 1.11, once again demonstrating New York’s cautious, if not reluctant, approval of screening to avoid imputation. Petitioners contend that K&K failed to “timely and effectively” screen Casey in at least three regards: (1) notice of Casey’s “isolation” was belated, unwritten and indirect; (2) notice to the agency was belated and unwritten; and (3) Casey interacted with members of the Essex team on other matters, thereby inviting inadvertent disclosures.
1. Rule 1.11 (b) (1) (i): Notifying Those Within The Firm; Untimely and Unwritten
Rule 1.11 (b) requires the firm to “notify, as appropriate, lawyers and nonlawyer personnel within the firm that the personally disqualified lawyer is prohibited from participating in the representation of the current client.” This notification must be given “reasonably and promptly” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11 [b]). By definition, “screening” requires “timely imposition of procedures within a firm” (Id. rule 1.0[t]).
Kim knew, “prior to the hiring of Casey,” that the firm needed to implement “certain screening procedures” (Transcript at 28). At the time, Ben Leyland, an administrative staff member in charge of implementing “the various processes that relate generally to client satisfaction, risk management, [and] product development . . . wanted to send around memoranda about the screening issues” ( Id. at 103). Kim found it “superfluous” because “it was not really even appropriate to be talking” to the rest of the firm “about not talking to Sean Casey about the Essex matter since these people actually had nothing to do with the Essex matter to start with,” ( Id. at 109).
K&K had “silos or compartments of lawyers and teams” ( Id. at 140), i.e., “there are clearly defined case teams, so there is a specific list of people for each case that are staffed” on that case ( Id. at 26-27). “[W]ho to staff on the case, who to take off or who to add is one that is controlled centrally by both the partner on the case, the partner in charge of the case, as well as the managing partners,” Steven Kobre or Kim, “such that for any particular client matter” only the team assigned to that case may “work on that client matter” (Transcript at 27). If attorneys within a team “wish to involve other lawyers in the firm,” they must obtain “the permission of the partner in charge of that team, as well as” Kobre or Kim, to have “anybody else to work on that particular matter” ( id. ). “In connection with the Essex case,” Robert Henoch was the partner at K&K where “in order for someone on the Essex team to have spoken to someone off the team,” that individual would have required the permission of Henoch and Kobre or Kim ( Id. at 32).
Before Casey started work at K&K, Zoe Ehrlich, K&K’s “Chief Administrative Officer, who is also a lawyer . . . [and] performs a managerial administrative function,” met with Casey “to make sure she would be able to identify any matters” from which Case would have to be screened ( Id. at 29-30, 35). Further, both Kobre and Kim met
18 with Casey on “separate occasions within the first several days of his starting at the firm, and had a formal conversation with him about the importance of not being involved in any cases” within K&K that would have any “overlap with anything he handled” beforehand ( Id. at 31).
On December 9, 2009, a memorandum was issued firm-wide (Respondents’ exhibit 1), which “listed screened-off matters by their identification number ‘code’ (which is how matters are referenced within [K&K]) . . . The memorandum’s recitation of screened matters by code referred to all matters being handled in [K&K] which were investigated or prosecuted by the United States Attorney’s Office for the Eastern District of New York, Casey’s former employer. The memorandum instructed personnel “not to discuss in front of or consult with Sean Casey regarding any aspect of the above- referenced client matters” [listing 34 files by reference number, not name](Memorandum dated Dec. 9, 2009, Respondents’ exhibit 2).
Although Kim described various methods by which the firm isolates or segregates work assignments, the December 9 th Memorandum is the first firm-wide written notification regarding Casey. Since this came two months after Casey began work in the small firm, Petitioners complain that the likelihood of inadvertent sharing of information is significant. 12
In Chinese Auto. Distrib. of America LLC v Bricklin , 2009 WL 47337; 2009 US Dist LEXIS 2647 (SD NY 2009), a firm waited three months before establishing an “ethical wall”. The Court found,
“The delay was too long. ‘To prevent one lawyer's conflicts from being imputed to his firm, the firm must immediately, and effectively, screen that lawyer from any contact with any relevant cases, such that there can be no ‘no doubts as to the sufficiency of these preventive measures.’ Panebianco v First Unum Life Ins. Co. , 2005 WL 975835,*3; 2005 US Dist LEXIS 7314, *8 (SD NY 2005). The “screening measures must have been established from the first moment the conflicted attorney transferred to the firm or, at a minimum, when the firm received actual notice of the conflict.” Mitchell v. Metropolitan Life Ins. Co., Inc. , 2002 WL 441194,*9; 2002 US Dist LEXIS
12 Casey testified that he knew not to discuss the matter with anyone in the firm and that he never did (Transcript at 138). The Court is willing to credit this statement while recognizing the distinction between conscious and inadvertent disclosures.
19 4675, *25(SD NY 2002); accord Papanicolaou v. Chase Manhattan Bank, N.A. , 720 F Supp 1080, 1087 (SD NY 1989) (‘This Court doubts whether any Chinese walls, which are meant to be preemptive, can ever function effectively when erected in response to a motion, and not prior to the arising of the conflict.’); Marshall v. State of New York Div. of State Police , 952 F Supp 103, 111 (ND NY 1997) (‘... a screening device implemented only after a disqualified lawyer has been with a firm will not provide adequate protection of confidences.’); Restatement (Third) of the Law Governing Lawyers § 124, Comment d (i) (‘The required screening measures must be imposed in the subsequent representation at the time the conflict is discovered or reasonably should have been discovered ....’).”
(2009 WL 47337 at *4; 2009 US Dist LEXIS 2647 at *12).
Along the same lines, Comment 10 to Rule 1.0(t)(defining “screening) provides, “In order to be effective, screening measures must be implemented as soon as practicable after a lawyer or law firm knows or reasonably should know that there is a need for screening.” Rules of Professional Conduct (22 NYCRR 1200.0) rule 1.0(t), comment 10.
K&K contends that lawyers 13 in the firm were effectively notified at an earlier state since their usual practice of creating silos of isolation, “compartmentalized” (Respondents’ Post-Hearing Memorandum of Law, ¶ 8), the attorneys and that Casey was personally advised at an early stage of his employ that he was not to discuss any of the matters upon which he had worked. They argue that the procedures and the advice to Casey are the functional equivalent of prompt and reasonable notice to all personnel. It is not. Simply advising Casey not to discuss any of the 34 or so matters which were actively under investigation in the US Attorney’s office involving K&K is not an effective screening measure. Simply telling the other attorneys, as a general rule of office procedure, not to participate in discussions about their cases outside of their “silo” does not approach meaningful compliance with the directive in Rule 1.11(b)(1)(i) that the firm notify attorneys and non-lawyers working on the Essex matter that when the case was discussed Casey was not to be present.
K&K points out, correctly, that there is no explicit requirement that the notification
13 The Rule also requires “appropriate” notice to non- lawyers. There are more than 60 non-lawyers in the firm and at least 3 or 4 work on the Essex case. It is unclear if any of them received notice prior to December. “If the disqualified lawyer works in a small firm...then the notice probably should go to everyone who works in the office, lawyers and non-lawyers alike.” Commentary on Rule 1.11 (b), Simon’s New York Rules of Professional Conduct Annotated (2009 Edition).
20 to other personnel need be in writing. The Rule only calls for prompt notification “as appropriate” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11[b][1][I]). Although the Rules do not require written notice in every case, given the size of the firm and the interaction with attorneys working on the matter, a rule of reason would demand, at the very least, clear and unequivocal direction to other attorneys in the firm. ( See e.g. Id. rule 1.0, comment 9 [“[O]ther lawyers in the firm who are working on the matter should promptly be informed that the screening is in place and that they may not communicate with the personally disqualified lawyer with respect to the matter”]). A writing would have memorialized the terms, timing, scope and form of the notification and given an indication of which personnel received the notification, as well as offering proof that the other lawyers actually had received the notification, all of which would have helped to overcome the claim of impropriety.
In sum, the notice here was vague, untimely and ineffective.
2. Rule 1.11 (b) (1) (iv): Written Notice To Appropriate Government Agency
In order to ensure that confidences are not disclosed or exploited, the Rule requires the firm to “reasonably and promptly....give written notice” to the agency. Remembering that screening is intended to apply only in cases where the agency does not consent to the attorney’s participation (which is the case here), the purpose of the notice is to enable the agency ascertain if the firm itself complies with the Rules protecting its confidences.
On January 27, 2010 K&K sent “formal written (Letter, Robert Henoch to Peter Norling, dated Jan. 27, 2010, ¶ 1 [Respondents’ Exhibit 4]). This is almost four months after Casey began work at K&K and eight months after he left the office to go into private practice. K&K does not argue that this met the standard of “prompt” notification.
Nevertheless, Casey testified that “beginning in July of ‘09,” when he began seriously considering joining K&K, “up through July, August, and September,” he “had at least four conversations with people -- representatives of The United States Attorney’s Office” (Transcript at 130-131). He spoke with Benton Campbell, the U.S. Attorney, Paul Schuman, who is the Chief Assistant United States Attorney, Peter Norling, the professional responsibility officer at the U.S. Attorney’s Office, and “Jay or James McMahon, who is the chief of the business and securities fraud unit” ( Id. at 129, 131). In these conversations, they discussed “what [Casey] could and what [Casey] could not handle” ( Id. at 130-132).
K&K argues that the oral, unrecorded, conversations suffice to meet the Rule. The argument is flawed in two regards.
There is a significant difference between a discussion about Casey’s need to personally disqualify himself as against the firm’s need to enact procedures against
21 inadvertent disclosures. Merely telling personnel within the office that he was going to work for K&K, and that he would avoid conflicts, does not give the Agency sufficient information to ascertain whether the firm is taking measures to protect against inadvertent disclosure or use of confidences. The notice called for by Rule 1.11 should include “a description of the screened lawyer's prior representation and of the screening procedures employed” (Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.11, comment 7B). The discussions Casey describes occurred before he joined K&K, while he worked at Mayer Brown, in July, August and September. It cannot be said that he gave a description of the screening procedures employed at K&K to the US Attorney’s or gave sufficient notice of the matters involved for the agency to ensure compliance with the Rules before Casey even began working at K&K.
As well, the Rules generally are sparing and selective in requiring “written” notice. Frequently, the Rules dispense with the necessity of a writing. A writing is necessary only in a few cases, e.g. matters involving: (1) fees and retainer agreements ( see generally Rules of Professional Conduct [22 NYCRR 1200.0] rule 1.5); (2) consent to conflicts or potential conflicts( see generally Id. rules 1.7, 1.9, 1.10, 1.11, 1.12; (3) sale of practice (rule 1.17); or (4) advertising that affects a client ( Id. rule 7.1). The New York Rule requiring a writing makes sense in the context of notice to an agency in order to avoid the very situation which occurred here, oral conversations between co-workers which, many months later, are recalled but unrecorded and undocumented. Strict adherence to the writing requirement would seem to be the only plausible way to dispel concerns that “the lawyer’s subsequent private client [has obtained] an unfair advantage because the lawyer has confidential government information about the client’s adversary” ( Id. rule 1.11, comment 7A). The requirement of written notice to the agency is not one which can readily be overlooked.
3. Interaction with Other Lawyers
Rule 1.0(t) defines screening as including “isolation” from participation in the related matter. K&K has approximately twenty lawyers working on one floor of an office building in New York. In the seven or so months that Casey has been at the firm, he acknowledges, that he has worked on other matters where he has had some contact with Kim, Henoch and possibly others on the Essex team. Casey admits that he and Henoch, the partner at the head of the Essex team, are good friends. Under that circumstance, rule 1.11, comment 7 warns,
“If a personally disqualified lawyer is working on other matters with lawyers who are participating in a matter requiring screening, it may be impossible to maintain effective screening procedures.”
(Rules of Professional Conduct [22 NYCRR 1200.0]rule 1.11, comment 7).
22 Given the size of the firm and the apparent complexity of the Essex matter anything less than complete isolation understandably contributes to Petitioners’ skepticism about the effectiveness of the screening procedures in place. As the Court observed in Crudele ,
“[T]he degree of both past and present interaction between [the screened lawyer and others working on the matter] raises grave concerns about both the possibility of unintentional breaches of client confidences and about the appearance of impropriety...”
(2001 WL 1033539 at *4 ; 2001 US Dist LEXIS 13779 at *14 ); see also Baird v Hilton Hotel Corp., 771 F Supp 24, 27 (ED NY 1991)(finding that with “daily contacts with ...counsel there remains a danger of inadvertent disclosure...[and an] obvious appearance of impropriety”).
III. Conclusion
K&K failed to comply with the screening requirements of Rule 1.11 to a material degree. Given a combination of factors here: a small firm, a large, publicly noticed and complex matter necessarily involving a team of attorneys within the firm, vague and questionable timing of notice to members of the firm, belated notice to the agency, interaction rather than isolation between the conflicted attorney and others involved in the matter, an overall founded suspicion of unfair advantage, the Court must reluctantly conclude that K&K’s continued involvement would leave a question mark hanging over the validity and integrity of the ensuing arbitration. Petitioners ask the Court to reject what they characterize as Respondents’ “absolutist” approach to the rules (Petitioners’ Post-Hearing Memorandum of Law, ¶ 22). They ask that the Court forgive or overlook shortcomings in the implementation or timing of the procedures employed and to apply a practical or “common-sense” test ( Id . at 20). The Court agrees that an absolutist or hyper-technical approach would be unfair to their client. However, condoning anything less than vigilance and careful adherence to the Rules would be unfair to Respondents and Casey’s former client and would invite future applications for “practical” rather than thoughtful compliance. For the reasons stated, it is hereby:
ORDERED, that petitioners’ motion to disqualify K&K is granted; and it is further
ORDERED, that the arbitration proceeding is stayed for a period of thirty days at which time substitute counsel may appear and be heard as to any further applications for a continued stay; and it is further
ORDERED, that the Clerk will calendar Petitioners’ application to disqualify the Law Offices of Jay Y. Mandel, PLLC, within thirty (30)days; and it is further
23 ORDERED, that the Clerk is directed to enter judgment accordingly.
This constitutes the Decision and Order of the Court.
Dated:
ENTER:
James A. Yates, J.S.C.
24 5
the amount of maintenance, support, eq - (3) the total fee is not excessive. uitable distribution, or property settle - (h) Rule 1.5(g) does not prohibit payment to a lawyer ment; formerly associated in a law firm pursuant to a sep - (ii) a written retainer agreement has not been aration or retirement agreement. signed by the lawyer and client setting forth in plain language the nature of the RULE 1.6: relationship and the details of the fee arrangement; or Confidentiality of Information (iii) the written retainer agreement includes a (a) A lawyer shall not knowingly reveal confidential in - security interest, confession of judgment formation, as defined in this Rule, or use such in - or other lien without prior notice being formation to the disadvantage of a client or for the provided to the client in a signed retainer advantage of the lawyer or a third person, unless: agreement and approval from a tribunal (1) the client gives informed consent, as defined in after notice to the adversary. A lawyer shall Rule 1.0(j); not foreclose on a mortgage placed on the (2) the disclosure is impliedly authorized to ad - marital residence while the spouse who vance the best interests of the client and is ei - consents to the mortgage remains the ti - ther reasonable under the circumstances or tleholder and the residence remains the customary in the professional community; or spouse’s primary residence. (3) the disclosure is permitted by paragraph (b). (e) In domestic relations matters, a lawyer shall provide “Confidential information” consists of information a prospective client with a statement of client’s gained during or relating to the representation of a rights and responsibilities at the initial conference client, whatever its source, that is (a) protected by and prior to the signing of a written retainer agree - the attorney-client privilege, (b) likely to be embar - ment. rassing or detrimental to the client if disclosed, or (f) Where applicable, a lawyer shall resolve fee disputes (c) information that the client has requested be by arbitration at the election of the client pursuant kept confidential. “Confidential information” does to a fee arbitration program established by the not ordinarily include (i) a lawyer’s legal knowledge Chief Administrator of the Courts and approved or legal research or (ii) information that is generally by the Administrative Board of the Courts. known in the local community or in the trade, field (g) A lawyer shall not divide a fee for legal services with or profession to which the information relates. another lawyer who is not associated in the same (b) A lawyer may reveal or use confidential information law firm unless: to the extent that the lawyer reasonably believes (1) the division is in proportion to the services per - necessary: formed by each lawyer or, by a writing given to (1) to prevent reasonably certain death or substan - the client, each lawyer assumes joint responsi - tial bodily harm; bility for the representation; (2) to prevent the client from committing a crime; (2) the client agrees to employment of the other (3) to withdraw a written or oral opinion or repre - lawyer after a full disclosure that a division of sentation previously given by the lawyer and fees will be made, including the share each reasonably believed by the lawyer still to be re - lawyer will receive, and the client’s agreement lied upon by a third person, where the lawyer is confirmed in writing; and has discovered that the opinion or representa -
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tion was based on materially inaccurate infor - (3) the representation does not involve the asser - mation or is being used to further a crime or tion of a claim by one client against another fraud; client represented by the lawyer in the same lit - (4) to secure legal advice about compliance with igation or other proceeding before a tribunal; these Rules or other law by the lawyer, another and lawyer associated with the lawyer’s firm or the (4) each affected client gives informed consent, law firm; confirmed in writing. (5) (i) to defend the lawyer or the lawyer’s em - ployees and associates against an accusa - RULE 1.8: tion of wrongful conduct; or Current Clients: Specific Conflict of (ii) to establish or collect a fee; or Interest Rules (6) when permitted or required under these Rules (a) A lawyer shall not enter into a business transaction or to comply with other law or court order. with a client if they have differing interests therein (c) A lawyer shall exercise reasonable care to prevent and if the client expects the lawyer to exercise pro - the lawyer’s employees, associates, and others fessional judgment therein for the protection of the whose services are utilized by the lawyer from dis - client, unless: closing or using confidential information of a (1) the transaction is fair and reasonable to the client, except that a lawyer may reveal the informa - client and the terms of the transaction are fully tion permitted to be disclosed by paragraph (b) disclosed and transmitted in writing in a man - through an employee. ner that can be reasonably understood by the client; RULE 1.7: (2) the client is advised in writing of the desirability Conflict of Interest: Current Clients of seeking, and is given a reasonable opportu - nity to seek, the advice of independent legal (a) Except as provided in paragraph (b), a lawyer shall counsel on the transaction; and not represent a client if a reasonable lawyer would conclude that either: (3) the client gives informed consent, in a writing signed by the client, to the essential terms of (1) the representation will involve the lawyer in the transaction and the lawyer’s role in the representing differing interests; or transaction, including whether the lawyer is (2) there is a significant risk that the lawyer’s pro - representing the client in the transaction. fessional judgment on behalf of a client will be (b) A lawyer shall not use information relating to rep - adversely affected by the lawyer’s own financial, resentation of a client to the disadvantage of the business, property or other personal interests. client unless the client gives informed consent, ex - (b) Notwithstanding the existence of a concurrent con - cept as permitted or required by these Rules. flict of interest under paragraph (a), a lawyer may (c) A lawyer shall not: represent a client if: (1) solicit any gift from a client, including a testa - (1) the lawyer reasonably believes that the lawyer mentary gift, for the benefit of the lawyer or a will be able to provide competent and diligent person related to the lawyer; or representation to each affected client; (2) prepare on behalf of a client an instrument giv - (2) the representation is not prohibited by law; ing the lawyer or a person related to the lawyer
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waived by the affected client or former client under (1) shall comply with Rule 1.9(c); and the conditions stated in Rule 1.7. (2) shall not represent a client in connection with a (e) A law firm shall make a written record of its en- matter in which the lawyer participated person- gagements, at or near the time of each new engage- ally and substantially as a public officer or em- ment, and shall implement and maintain a system ployee, unless the appropriate government agency by which proposed engagements are checked gives its informed consent, confirmed in writing, against current and previous engagements when: to the representation. This provision shall not (1) the firm agrees to represent a new client; apply to matters governed by Rule 1.12(a). (2) the firm agrees to represent an existing client in (b) When a lawyer is disqualified from representation a new matter; under paragraph (a), no lawyer in a firm with which that lawyer is associated may knowingly un- (3) the firm hires or associates with another lawyer; dertake or continue representation in such a matter or unless: (4) an additional party is named or appears in a (1) the firm acts promptly and reasonably to: pending matter. (i) notify, as appropriate, lawyers and non- (f) Substantial failure to keep records or to implement lawyer personnel within the firm that the or maintain a conflict-checking system that com- personally disqualified lawyer is prohibited plies with paragraph (e) shall be a violation thereof from participating in the representation of regardless of whether there is another violation of the current client; these Rules. (ii) implement effective screening procedures (g) Where a violation of paragraph (e) by a law firm is to prevent the flow of information about a substantial factor in causing a violation of para- the matter between the personally disqual- graph (a) by a lawyer, the law firm, as well as the ified lawyer and the others in the firm; individual lawyer, shall be responsible for the vio- lation of paragraph (a). (iii) ensure that the disqualified lawyer is ap- portioned no part of the fee therefrom; (h) A lawyer related to another lawyer as parent, child, and sibling or spouse shall not represent in any matter a client whose interests differ from those of another (iv) give written notice to the appropriate gov- party to the matter who the lawyer knows is repre- ernment agency to enable it to ascertain sented by the other lawyer unless the client con- compliance with the provisions of this sents to the representation after full disclosure and Rule; and the lawyer concludes that the lawyer can adequately (2) there are no other circumstances in the partic- represent the interests of the client. ular representation that create an appearance of impropriety. RULE 1.11: (c) Except as law may otherwise expressly provide, a Special Conflicts of Interest for Former lawyer having information that the lawyer knows and Current Government Officers and is confidential government information about a Employees person, acquired when the lawyer was a public of- ficer or employee, may not represent a private client (a) Except as law may otherwise expressly provide, a whose interests are adverse to that person in a mat- lawyer who has formerly served as a public officer ter in which the information could be used to the or employee of the government: material disadvantage of that person. As used in
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this Rule, the term “confidential government in- RULE 1.12: formation” means information that has been ob- Specific Conflicts of Interest for Former tained under governmental authority and that, at Judges, Arbitrators, Mediators or Other the time this Rule is applied, the government is Third-Party Neutrals prohibited by law from disclosing to the public or has a legal privilege not to disclose, and that is not (a) A lawyer shall not accept private employment in a otherwise available to the public. A firm with matter upon the merits of which the lawyer has which that lawyer is associated may undertake or acted in a judicial capacity. continue representation in the matter only if the (b) Except as stated in paragraph (e), and unless all par- disqualified lawyer is timely and effectively screened ties to the proceeding give informed consent, con- from any participation in the matter in accordance firmed in writing, a lawyer shall not represent with the provisions of paragraph (b). anyone in connection with a matter in which the (d) Except as law may otherwise expressly provide, a lawyer participated personally and substantially as: lawyer currently serving as a public officer or em- (1) an arbitrator, mediator or other third-party ployee shall not: neutral; or (1) participate in a matter in which the lawyer par- (2) a law clerk to a judge or other adjudicative of- ticipated personally and substantially while in ficer or an arbitrator, mediator or other third- private practice or nongovernmental employ- party neutral. ment, unless under applicable law no one is, or (c) A lawyer shall not negotiate for employment with by lawful delegation may be, authorized to act any person who is involved as a party or as lawyer in the lawyer’s stead in the matter; or for a party in a matter in which the lawyer is par- (2) negotiate for private employment with any per- ticipating personally and substantially as a judge or son who is involved as a party or as lawyer for other adjudicative officer or as an arbitrator, medi- a party in a matter in which the lawyer is par- ator or other third-party neutral. ticipating personally and substantially. (d) When a lawyer is disqualified from representation (e) As used in this Rule, the term “matter” as defined under this Rule, no lawyer in a firm with which in Rule 1.0(l) does not include or apply to agency that lawyer is associated may knowingly undertake rulemaking functions. or continue representation in such a matter unless: (f) A lawyer who holds public office shall not: (1) the firm acts promptly and reasonably to: (1) use the public position to obtain, or attempt to (i) notify, as appropriate, lawyers and non- obtain, a special advantage in legislative matters lawyer personnel within the firm that the for the lawyer or for a client under circum- personally disqualified lawyer is prohibited stances where the lawyer knows or it is obvious from participating in the representation of that such action is not in the public interest; the current client; (2) use the public position to influence, or attempt (ii) implement effective screening procedures to influence, a tribunal to act in favor of the to prevent the flow of information about lawyer or of a client; or the matter between the personally disqual- (3) accept anything of value from any person when ified lawyer and the others in the firm; the lawyer knows or it is obvious that the offer (iii) ensure that the disqualified lawyer is ap- is for the purpose of influencing the lawyer’s ac- portioned no part of the fee therefrom; tion as a public official. and
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physical, financial or other harm unless action is savings bank, savings and loan association or taken and cannot adequately act in the client’s own credit union. Such funds shall be maintained, interest, the lawyer may take reasonably necessary in the lawyer’s own name, or in the name of a protective action, including consulting with indi - firm of lawyers of which the lawyer is a mem - viduals or entities that have the ability to take ac - ber, or in the name of the lawyer or firm of tion to protect the client and, in appropriate cases, lawyers by whom the lawyer is employed, in a seeking the appointment of a guardian ad litem, special account or accounts, separate from any conservator or guardian. business or personal accounts of the lawyer or (c) Information relating to the representation of a lawyer’s firm, and separate from any accounts client with diminished capacity is protected by that the lawyer may maintain as executor, Rule 1.6. When taking protective action pursuant guardian, trustee or receiver, or in any other fi - to paragraph (b), the lawyer is impliedly authorized duciary capacity; into such special account or under Rule 1.6(a) to reveal information about the accounts all funds held in escrow or otherwise client, but only to the extent reasonably necessary entrusted to the lawyer or firm shall be de - to protect the client’s interests. posited; provided, however, that such funds may be maintained in a banking institution lo - cated outside New York State if such banking RULE 1.15: institution complies with 22 N.Y.C.R.R. Part Preserving Identity of Funds and 1300 and the lawyer has obtained the prior Property of Others; Fiduciary written approval of the person to whom such Responsibility; Commingling and funds belong specifying the name and address Misappropriation of Client Funds or of the office or branch of the banking institu - Property; Maintenance of Bank tion where such funds are to be maintained. Accounts; Record Keeping; Examination of Records (2) A lawyer or the lawyer’s firm shall identify the special bank account or accounts required by (a) Prohibition Against Commingling and Misappro - Rule 1.15(b)(1) as an “Attorney Special Ac - priation of Client Funds or Property. count,” “Attorney Trust Account,” or “Attorney A lawyer in possession of any funds or other prop - Escrow Account,” and shall obtain checks and erty belonging to another person, where such pos - deposit slips that bear such title. Such title may session is incident to his or her practice of law, is a be accompanied by such other descriptive lan - fiduciary, and must not misappropriate such funds guage as the lawyer may deem appropriate, pro - or property or commingle such funds or property vided that such additional language with his or her own. distinguishes such special account or accounts (b) Separate Accounts. from other bank accounts that are maintained by the lawyer or the lawyer’s firm. (1) A lawyer who is in possession of funds belong - ing to another person incident to the lawyer’s (3) Funds reasonably sufficient to maintain the ac - practice of law shall maintain such funds in a count or to pay account charges may be de - banking institution within New York State that posited therein. agrees to provide dishonored check reports in (4) Funds belonging in part to a client or third per - accordance with the provisions of 22 son and in part currently or potentially to the N.Y.C.R.R. Part 1300. “Banking institution” lawyer or law firm shall be kept in such special means a state or national bank, trust company, account or accounts, but the portion belonging
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to the lawyer or law firm may be withdrawn (ii) a record for special accounts, showing the when due unless the right of the lawyer or law source of all funds deposited in such ac - firm to receive it is disputed by the client or counts, the names of all persons for whom third person, in which event the disputed por - the funds are or were held, the amount of tion shall not be withdrawn until the dispute is such funds, the description and amounts, finally resolved. and the names of all persons to whom (c) Notification of Receipt of Property; Safekeeping; such funds were disbursed; Rendering Accounts; Payment or Delivery of Prop - (iii) copies of all retainer and compensation erty. agreements with clients; A lawyer shall: (iv) copies of all statements to clients or other (1) promptly notify a client or third person of the persons showing the disbursement of receipt of funds, securities, or other properties funds to them or on their behalf; in which the client or third person has an in - (v) copies of all bills rendered to clients; terest; (vi) copies of all records showing payments to (2) identify and label securities and properties of a lawyers, investigators or other persons, not client or third person promptly upon receipt in the lawyer’s regular employ, for services and place them in a safe deposit box or other rendered or performed; place of safekeeping as soon as practicable; (vii) copies of all retainer and closing state - (3) maintain complete records of all funds, securi - ments filed with the Office of Court Ad - ties, and other properties of a client or third ministration; and person coming into the possession of the lawyer (viii) all checkbooks and check stubs, bank and render appropriate accounts to the client statements, prenumbered canceled checks or third person regarding them; and and duplicate deposit slips. (4) promptly pay or deliver to the client or third (2) Lawyers shall make accurate entries of all finan - person as requested by the client or third person cial transactions in their records of receipts and the funds, securities, or other properties in the disbursements, in their special accounts, in possession of the lawyer that the client or third their ledger books or similar records, and in any person is entitled to receive. other books of account kept by them in the reg - (d) Required Bookkeeping Records. ular course of their practice, which entries shall (1) A lawyer shall maintain for seven years after the be made at or near the time of the act, condi - events that they record: tion or event recorded. (i) the records of all deposits in and with - (3) For purposes of Rule 1.15(d), a lawyer may sat - drawals from the accounts specified in isfy the requirements of maintaining “copies” Rule 1.15(b) and of any other bank ac - by maintaining any of the following items: count that concerns or affects the lawyer’s original records, photocopies, microfilm, opti - practice of law; these records shall specifi - cal imaging, and any other medium that pre - cally identify the date, source and descrip - serves an image of the document that cannot tion of each item deposited, as well as the be altered without detection. date, payee and purpose of each with - (e) Authorized Signatories. drawal or disbursement; All special account withdrawals shall be made only
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to a named payee and not to cash. Such with - successor signatory pursuant to this Rule. drawals shall be made by check or, with the prior (3) The Supreme Court may designate a successor written approval of the party entitled to the pro - signatory and may direct the safeguarding of ceeds, by bank transfer. Only a lawyer admitted to funds from such trust, escrow or special ac - practice law in New York State shall be an author - count, and the disbursement of such funds to ized signatory of a special account. persons who are entitled thereto, and may order (f) Missing Clients. that funds in such account be deposited with Whenever any sum of money is payable to a client the Lawyers’ Fund for Client Protection for and the lawyer is unable to locate the client, the safeguarding and disbursement to persons who lawyer shall apply to the court in which the action are entitled thereto. was brought if in the unified court system, or, if no (h) Dissolution of a Firm. action was commenced in the unified court system, Upon the dissolution of any firm of lawyers, the to the Supreme Court in the county in which the former partners or members shall make appropriate lawyer maintains an office for the practice of law, arrangements for the maintenance, by one of them for an order directing payment to the lawyer of any or by a successor firm, of the records specified in fees and disbursements that are owed by the client Rule 1.15(d). and the balance, if any, to the Lawyers’ Fund for (i) Availability of Bookkeeping Records: Records Sub - Client Protection for safeguarding and disburse - ject to Production in Disciplinary Investigations ment to persons who are entitled thereto. and Proceedings. (g) Designation of Successor Signatories. The financial records required by this Rule shall be (1) Upon the death of a lawyer who was the sole located, or made available, at the principal New signatory on an attorney trust, escrow or special York State office of the lawyers subject hereto, and account, an application may be made to the any such records shall be produced in response to Supreme Court for an order designating a suc - a notice or subpoena duces tecum issued in con - cessor signatory for such trust, escrow or special nection with a complaint before or any investiga - account, who shall be a member of the bar in tion by the appropriate grievance or departmental good standing and admitted to the practice of disciplinary committee, or shall be produced at the law in New York State. direction of the appropriate Appellate Division be - (2) An application to designate a successor signa - fore any person designated by it. All books and tory shall be made to the Supreme Court in the records produced pursuant to this Rule shall be judicial district in which the deceased lawyer kept confidential, except for the purpose of the par - maintained an office for the practice of law. The ticular proceeding, and their contents shall not be application may be made by the legal represen - disclosed by anyone in violation of the attorney- tative of the deceased lawyer’s estate; a lawyer client privilege. who was affiliated with the deceased lawyer in (j) Disciplinary Action. the practice of law; any person who has a ben - A lawyer who does not maintain and keep the ac - eficial interest in such trust, escrow or special counts and records as specified and required by this account; an officer of a city or county bar asso - Rule, or who does not produce any such records ciation; or counsel for an attorney disciplinary pursuant to this Rule, shall be deemed in violation committee. No lawyer may charge a legal fee of these Rules and shall be subject to disciplinary for assisting with an application to designate a proceedings.
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to harass or maliciously injure another; or formation otherwise protected by Rule 1.6. (3) the lawyer knowingly asserts material factual (d) In an ex parte proceeding, a lawyer shall inform the statements that are false. tribunal of all material facts known to the lawyer that will enable the tribunal to make an informed decision, whether or not the facts are adverse. RULE 3.2: Delay of Litigation (e) In presenting a matter to a tribunal, a lawyer shall disclose, unless privileged or irrelevant, the identi - In representing a client, a lawyer shall not use means ties of the clients the lawyer represents and of the that have no substantial purpose other than to delay or persons who employed the lawyer. prolong the proceeding or to cause needless expense. (f) In appearing as a lawyer before a tribunal, a lawyer shall not: RULE 3.3: (1) fail to comply with known local customs of Conduct Before a Tribunal courtesy or practice of the bar or a particular (a) A lawyer shall not knowingly: tribunal without giving to opposing counsel timely notice of the intent not to comply; (1) make a false statement of fact or law to a tribu - nal or fail to correct a false statement of material (2) engage in undignified or discourteous conduct; fact or law previously made to the tribunal by (3) intentionally or habitually violate any estab - the lawyer; lished rule of procedure or of evidence; or (2) fail to disclose to the tribunal controlling legal (4) engage in conduct intended to disrupt the tri - authority known to the lawyer to be directly ad - bunal. verse to the position of the client and not dis - closed by opposing counsel; or RULE 3.4: (3) offer or use evidence that the lawyer knows to Fairness to Opposing Party and Counsel be false. If a lawyer, the lawyer’s client, or a wit - ness called by the lawyer has offered material A lawyer shall not: evidence and the lawyer comes to know of its (a) (1) suppress any evidence that the lawyer or the falsity, the lawyer shall take reasonable remedial client has a legal obligation to reveal or pro measures, including, if necessary, disclosure to duce; the tribunal. A lawyer may refuse to offer evi - (2) advise or cause a person to hide or leave the ju - dence, other than the testimony of a defendant risdiction of a tribunal for the purpose of mak - in a criminal matter, that the lawyer reasonably ing the person unavailable as a witness therein; believes is false. (3) conceal or knowingly fail to disclose that which (b) A lawyer who represents a client before a tribunal the lawyer is required by law to reveal; and who knows that a person intends to engage, is (4) knowingly use perjured testimony or false evi - engaging or has engaged in criminal or fraudulent dence; conduct related to the proceeding shall take reason - able remedial measures, including, if necessary, dis - (5) participate in the creation or preservation of ev - closure to the tribunal. idence when the lawyer knows or it is obvious that the evidence is false; or (c) The duties stated in paragraphs (a) and (b) apply even if compliance requires disclosure of in - (6) knowingly engage in other illegal conduct or
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conduct contrary to these Rules; RULE 3.5: (b) offer an inducement to a witness that is prohibited Maintaining and Preserving the by law or pay, offer to pay or acquiesce in the pay - Impartiality of Tribunals and Jurors ment of compensation to a witness contingent (a) A lawyer shall not: upon the content of the witness’s testimony or the outcome of the matter. A lawyer may advance, (1) seek to or cause another person to influence a guarantee or acquiesce in the payment of: judge, official or employee of a tribunal by means prohibited by law or give or lend any - (1) reasonable compensation to a witness for the thing of value to such judge, official, or em - loss of time in attending, testifying, preparing ployee of a tribunal when the recipient is to testify or otherwise assisting counsel, and rea - prohibited from accepting the gift or loan but sonable related expenses; or a lawyer may make a contribution to the cam - (2) a reasonable fee for the professional services of paign fund of a candidate for judicial office in an expert witness and reasonable related ex - conformity with Part 100 of the Rules of the penses; Chief Administrator of the Courts; (c) disregard or advise the client to disregard a standing (2) in an adversarial proceeding communicate or rule of a tribunal or a ruling of a tribunal made in cause another person to do so on the lawyer’s the course of a proceeding, but the lawyer may take behalf, as to the merits of the matter with a appropriate steps in good faith to test the validity judge or official of a tribunal or an employee of such rule or ruling; thereof before whom the matter is pending, ex - (d) in appearing before a tribunal on behalf of a client: cept: (1) state or allude to any matter that the lawyer (i) in the course of official proceedings in the does not reasonably believe is relevant or that matter; will not be supported by admissible evidence; (ii) in writing, if the lawyer promptly delivers (2) assert personal knowledge of facts in issue ex - a copy of the writing to counsel for other cept when testifying as a witness; parties and to a party who is not repre - (3) assert a personal opinion as to the justness of a sented by a lawyer; cause, the credibility of a witness, the culpabil - (iii) orally, upon adequate notice to counsel for ity of a civil litigant or the guilt or innocence the other parties and to any party who is of an accused but the lawyer may argue, upon not represented by a lawyer; or analysis of the evidence, for any position or (iv) as otherwise authorized by law, or by Part conclusion with respect to the matters stated 100 of the Rules of the Chief Administra - herein; or tor of the Courts; (4) ask any question that the lawyer has no reason - (3) seek to or cause another person to influence a able basis to believe is relevant to the case and juror or prospective juror by means prohibited that is intended to degrade a witness or other by law; person; or (4) communicate or cause another to communicate (e) present, participate in presenting, or threaten to with a member of the jury venire from which present criminal charges solely to obtain an advan - the jury will be selected for the trial of a case or, tage in a civil matter. during the trial of a case, with any member of
N E W Y O R K S T A T E U N I F I E D C O U R T S Y S T E M 3 3
RULE 7.3: shall be subject to the following provisions: Solicitation and Recommendation of (1) A copy of the solicitation shall at the time of its Professional Employment dissemination be filed with the attorney disci - plinary committee of the judicial district or ju - (a) A lawyer shall not engage in solicitation: dicial department wherein the lawyer or law (1) by in-person or telephone contact, or by real- firm maintains its principal office. Where no time or interactive computer-accessed commu - such office is maintained, the filing shall be nication unless the recipient is a close friend, made in the judicial department where the so - relative, former client or existing client; or licitation is targeted. A filing shall consist of: (2) by any form of communication if: (i) a copy of the solicitation; (i) the communication or contact violates (ii) a transcript of the audio portion of any Rule 4.5, Rule 7.1(a), or paragraph (e) of radio or television solicitation; and this Rule; (iii) if the solicitation is in a language other (ii) the recipient has made known to the than English, an accurate English-lan - lawyer a desire not to be solicited by the guage translation. lawyer; (2) Such solicitation shall contain no reference to (iii) the solicitation involves coercion, duress the fact of filing. or harassment; (3) If a solicitation is directed to a predetermined (iv) the lawyer knows or reasonably should recipient, a list containing the names and ad - know that the age or the physical, emo - dresses of all recipients shall be retained by the tional or mental state of the recipient lawyer or law firm for a period of not less than makes it unlikely that the recipient will be three years following the last date of its dissem - able to exercise reasonable judgment in re - ination. taining a lawyer; or (4) Solicitations filed pursuant to this subdivision (v) the lawyer intends or expects, but does not shall be open to public inspection. disclose, that the legal services necessary to (5) The provisions of this paragraph shall not apply handle the matter competently will be per - to: formed primarily by another lawyer who is not affiliated with the soliciting lawyer (i) a solicitation directed or disseminated to as a partner, associate or of counsel. a close friend, relative, or former or exist - ing client; (b) For purposes of this Rule, “solicitation” means any advertisement initiated by or on behalf of a lawyer (ii) a web site maintained by the lawyer or law or law firm that is directed to, or targeted at, a spe - firm, unless the web site is designed for cific recipient or group of recipients, or their family and directed to or targeted at a prospective members or legal representatives, the primary pur - client affected by an identifiable actual pose of which is the retention of the lawyer or law event or occurrence or by an identifiable firm, and a significant motive for which is pecu - prospective defendant; or niary gain. It does not include a proposal or other (iii) professional cards or other announcements writing prepared and delivered in response to a spe - the distribution of which is authorized by cific request of a prospective client. Rule 7.5(a). (c) A solicitation directed to a recipient in this State (d) A written solicitation shall not be sent by a method
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that requires the recipient to travel to a location of law, provided that the lawyer or law firm shall other than that at which the recipient ordinarily re - not state that the lawyer or law firm is a specialist ceives business or personal mail or that requires a or specializes in a particular field of law, except as signature on the part of the recipient. provided in Rule 7.4(c). (e) No solicitation relating to a specific incident in - (b) A lawyer admitted to engage in patent practice be - volving potential claims for personal injury or fore the United States Patent and Trademark Office wrongful death shall be disseminated before the may use the designation “Patent Attorney” or a 30th day after the date of the incident, unless a fil - substantially similar designation. ing must be made within 30 days of the incident (c) A lawyer may state that the lawyer has been recog - as a legal prerequisite to the particular claim, in nized or certified as a specialist only as follows: which case no unsolicited communication shall be (1) A lawyer who is certified as a specialist in a par - made before the 15th day after the date of the in - ticular area of law or law practice by a private cident. organization approved for that purpose by the (f) Any solicitation made in writing or by computer- American Bar Association may state the fact of accessed communication and directed to a pre-de - certification if, in conjunction therewith, the termined recipient, if prompted by a specific certifying organization is identified and the fol - occurrence involving or affecting a recipient, shall lowing statement is prominently made: “The disclose how the lawyer obtained the identity of the [name of the private certifying organization] is recipient and learned of the recipient’s potential not affiliated with any governmental authority. legal need. Certification is not a requirement for the prac - (g) If a retainer agreement is provided with any solici - tice of law in the State of New York and does tation, the top of each page shall be marked “SAM - not necessarily indicate greater competence PLE” in red ink in a type size equal to the largest than other attorneys experienced in this field of type size used in the agreement and the words “DO law;” NOT SIGN” shall appear on the client signature (2) A lawyer who is certified as a specialist in a par - line. ticular area of law or law practice by the author - (h) Any solicitation covered by this section shall in - ity having jurisdiction over specialization under clude the name, principal law office address and the laws of another state or territory may state telephone number of the lawyer or law firm whose the fact of certification if, in conjunction there - services are being offered. with, the certifying state or territory is identi - (i) The provisions of this Rule shall apply to a lawyer fied and the following statement is prominently or members of a law firm not admitted to practice made: “Certification granted by the [identify in this State who shall solicit retention by residents state or territory] is not recognized by any gov - of this State. ernmental authority within the State of New York. Certification is not a requirement for the practice of law in the State of New York and RULE 7.4: does not necessarily indicate greater compe - Identification of Practice and Specialty tence than other attorneys experienced in this (a) A lawyer or law firm may publicly identify one or field of law.” more areas of law in which the lawyer or the law firm practices, or may state that the practice of the lawyer or law firm is limited to one or more areas
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or right to judicial or appellate review has been ex - (2) information gained by a lawyer or judge while hausted, finding that the lawyer has engaged in an participating in a bona fide lawyer assistance unlawful discriminatory practice shall constitute program. prima facie evidence of professional misconduct in a disciplinary proceeding; or (h) engage in any other conduct that adversely reflects RULE 8.4: on the lawyer’s fitness as a lawyer. Misconduct A lawyer or law firm shall not: RULE 8.5: (a) violate or attempt to violate the Rules of Profes - Disciplinary Authority and Choice of Law sional Conduct, knowingly assist or induce another to do so, or do so through the acts of another; (a) A lawyer admitted to practice in this state is subject to the disciplinary authority of this state, regardless (b) engage in illegal conduct that adversely reflects on of where the lawyer’s conduct occurs. A lawyer the lawyer’s honesty, trustworthiness or fitness as a may be subject to the disciplinary authority of both lawyer; this state and another jurisdiction where the lawyer (c) engage in conduct involving dishonesty, fraud, de - is admitted for the same conduct. ceit or misrepresentation; (b) In any exercise of the disciplinary authority of this (d) engage in conduct that is prejudicial to the admin - state, the rules of professional conduct to be applied istration of justice; shall be as follows: (e) state or imply an ability: (1) For conduct in connection with a proceeding (1) to influence improperly or upon irrelevant in a court before which a lawyer has been ad - grounds any tribunal, legislative body or public mitted to practice (either generally or for pur - official; or poses of that proceeding), the rules to be (2) to achieve results using means that violate these applied shall be the rules of the jurisdiction in Rules or other law; which the court sits, unless the rules of the court provide otherwise; and (f) knowingly assist a judge or judicial officer in con - duct that is a violation of applicable rules of judicial (2) For any other conduct: conduct or other law; (i) If the lawyer is licensed to practice only in (g) unlawfully discriminate in the practice of law, in - this state, the rules to be applied shall be cluding in hiring, promoting or otherwise deter - the rules of this state, and mining conditions of employment on the basis of (ii) If the lawyer is licensed to practice in this age, race, creed, color, national origin, sex, disabil - state and another jurisdiction, the rules to ity, marital status or sexual orientation. Where be applied shall be the rules of the admit - there is a tribunal with jurisdiction to hear a com - ting jurisdiction in which the lawyer prin - plaint, if timely brought, other than a Departmen - cipally practices; provided, however, that tal Disciplinary Committee, a complaint based on if particular conduct clearly has its pre - unlawful discrimination shall be brought before dominant effect in another jurisdiction in such tribunal in the first instance. A certified copy which the lawyer is licensed to practice, of a determination by such a tribunal, which has the rules of that jurisdiction shall be ap - become final and enforceable and as to which the plied to that conduct.
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Public Statement by SEC Official: Letter Regarding Washington State Bar Association's Proposed Opinion on the Effect of the SEC's Attorney Conduct Rules
by
Giovanni P. Prezioso
General Counsel, U.S. Securities and Exchange Commission
July 23, 2003
J. Richard Manning President, Washington State Bar Association 925 Logan Building 500 Union Street Seattle, WA 98101-4073
David W. Savage President-Elect, Washington State Bar Association 1230 SE Bishop Boulevard Pullman, WA 99163-0604
Re: Washington State Bar Association's Proposed Interim Formal Opinion Regarding the Effect of the SEC's Sarbanes-Oxley Regulations on Washington Attorneys' Obligations Under the Rules of Professional Conduct.
Dear President Manning and President-Elect Savage:
The Securities and Exchange Commission ("Commission") has authorized me to submit, on its behalf, these comments on the above-referenced Proposed Interim Formal Opinion, which I understand the Board of Governors will shortly take up at its annual meeting. As you know, earlier this year the Commission issued final rules governing the conduct of attorneys appearing and practicing before it. The Commission is particularly interested in the Proposed Interim Formal Opinion because it interprets the Washington Rules of Professional Conduct in a manner that affects the intended operation of the Commission's rules. As the Board of Governors considers the Proposed Interim Formal Opinion, and as the WSBA RPC Committee contemplates revisions to Washington RPC 1.6, perhaps these comments will aid your deliberations by providing the Commission's perspective on the relevant sections of its new attorney-conduct rules.
Let me note at the outset that actual conflicts between the Washington
http://www.sec.gov/news/speech/spch072303gpp.htm 5/19/2011 SEC Public Statement: Washington State Bar Association's Proposed Statement on the Ef... Page 2 of 3
Rules of Professional Conduct and the Commission's new attorney-conduct rules are likely to be rare, as the Commission's rules do not address the overwhelming majority of attorney conduct, which remains fully covered by applicable state bar rules. Instead, the Commission's rules apply to attorneys only in the limited scope of their "appearing and practicing" before the Commission. See 17 CFR 205.2(a) (defining "appearing and practicing before the Commission").
Despite the narrow scope of the Commission's rules, the Proposed Interim Formal Opinion does identify potential areas of conflict. First, the Proposed Interim Formal Opinion opines that WSBA members appearing and practicing before the Commission are prohibited - under threat of liability and bar disciplinary action - from disclosing to the Commission certain information that the Commission's rules permit them to disclose. Second, the Proposed Interim Formal Opinion opines that a Washington attorney cannot claim to be complying in "good faith" with the Commission's rules under Section 205.6(c) of the rules, if the attorney acts contrary to the Formal Opinion.
In opining that the Washington RPC 1.6 bars attorney disclosures permitted by Section 205.3(d)(2) of the Commission's rules, however, the Proposed Interim Formal Opinion is inconsistent with prevailing Supreme Court precedent. The Court has consistently upheld the authority of federal agencies to implement rules of conduct that diverge from and supersede state laws that address the same conduct. See, e.g., Sperry v. State of Florida, 373 U.S. 379 (1963) (Florida could not enjoin non-lawyer registered to practice before the Patent and Trademark Office from prosecuting patent applications in Florida, even though non-lawyer's actions constituted unauthorized practice of law under Florida bar rules). In particular, where, as here, a conflict arises because a state rule prohibits an attorney from exercising the discretion provided by a federal regulation, the federal regulation will take priority. See Fidelity Fed Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 155 (1982) (holding that a conflict between an agency's regulations and state law "does not evaporate because the [agency's] regulation simply permits, but does not compel," what state law prohibits; state law is preempted because its prohibition removes the "flexibility" provided by the agency's regulation). Thus, Section 205.3(d)(2) of the Commission's rules will take precedence over any conflicting provision of RPC 1.6.
Federal law will also determine whether, under Section 205.6(c) of the Commission's rules, an attorney has complied in "good faith" with the Commission's rules. Section 205.6(c) shields an attorney from discipline and liability under inconsistent state-law conduct rules if the attorney complies in "good faith" with the Commission's conduct rules. Because the issue whether an attorney has acted in "good faith" under Section 205.6(c) requires an interpretation of a Commission rule, states must defer to the Commission's construction. See Barnard v. Walton, 535 U.S. 212, 122 S. Ct. 1265, 1269 (2002) (agency's interpretation of regulation must be sustained if based on a permissible construction). The purposes of the Commission's "good faith" provision would be frustrated by a state-based definition of "good faith" that is inconsistent with the Commission's interpretation. Thus, a conflicting state definition of "good faith" would be preempted. See United States v. Locke, 529 U.S. 108, 110 (2000) ("a federal agency acting within the scope of its delegated authority may pre-
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empt state regulation"); City of New York v. FCC, 486 U.S. 57, 64 (1989) (federal agency regulations preempt any state law that frustrates the purposes of those regulations).
The Commission's rules would also be frustrated if, as contemplated by the Proposed Interim Formal Opinion, the WSBA were to initiate a disciplinary proceeding against an attorney who, in complying in "good faith" with the Commission's rules, did not comply with a conflicting RPC. Even if the WSBA proceeding exonerated the attorney, the proceeding itself would thwart the purposes of the Commission's rules by subjecting attorneys to disciplinary proceedings for attempting in good faith to comply with a Commission rule that conflicts with an RPC.
Please do not hesitate to contact me, or Richard Humes or Tom Karr of our office, if you should have any questions regarding this letter.
Sincerely yours,
Giovanni P. Prezioso General Counsel
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http://www.sec.gov/news/speech/spch072303gpp.htm 5/19/2011
Gordon Eng, associate, Debevoise & Plimpton LLP
Gordon Eng is an associate in the firm’s Litigation Department whose practice focuses on white collar, internal investigations, and commercial litigation matters. Mr. Eng has also represented defendants in Manhattan criminal court on behalf of the Legal Aid Society and is a recipient of the Society's 2010 Pro Bono Award for outstanding service to the Legal Aid Society and its clients.
Mr. Eng was admitted to the bar in New York in 2005 and is admitted to appear before the US District Courts for the SDNY and EDNY, and the 2d Cir. Court of Appeals. He has appeared before the Appellate Division, 2d Department as Special Assistant District Attorney on behalf of Kings County District Attorney.
His published works include: “Regulatory Investigations and the Credit Crisis: The Search for Villains,” co-authored in American Criminal Law Review’s 2009 Annual Survey of White Collar Crime (2009), “Forging Ahead on E-Discovery,” co-authored in the New York Law Journal (2006) and “Old Whine in a New Battle: Pragmatic Approaches to Balancing the Twenty-First Amendment, the Dormant Commerce Clause, and the Direct Shipping of Wine,” Fordham Urban Law Journal (2003).
Mr. Eng is vice chair of New York County Lawyers' Association (NYCLA) Ethics Committee and a founding member of the Advisory Board of the NYCLA Ethics Institute. He is a contributing editor to the publication New York Rules of Professional Conduct (2010), which is edited by the NYCLA Ethics Institute. Mr. Eng is treasurer of the Network of Bar Leaders; a member of NYCLA, American Bar Association, New York State Bar Association and the Litigation Committee of the Asian American Bar Association of New York (AABANY).
Prior to joining Debevoise, Mr. Eng was an international bank lending officer at Manufacturers Hanover Trust Company, a foreign currency trader at Bankers Trust Co., Bank of Tokyo Ltd., Lehman Brothers and JPMorgan Chase and a legal intern at the United States Attorney's Office, Southern District New York, Criminal Division from 2003-2004.
Mr. Eng received his J.D., magna cum laude, from Fordham University School of Law, Order of Coif in 2005 where he was a published member of the Fordham Urban Law Journal. He received his M.B.A. from New York University, Stern School of Business with honors and his B.S. in Economics from the Wharton School of the University of Pennsylvania.
Vincent T. Chang is a Partner at Wollmuth Maher & Deutsch (www.wmd-law.com), specializing in complex litigation in such areas as real estate, insurance, bankruptcy, subprime mortgage securitizations, hedge funds, reinsurance, auction rate securities, bondholder litigation, investment banking, antitrust, and securities. Mr. Chang has frequently litigated and provided client advice in cases involving CDOs, CDS, RMBS, subprime mortgage assets, and other financial crisis cases. Mr. Chang is a graduate of Harvard College, magna cum laude, and Harvard Law School, cum laude. Mr. Chang clerked for the Hon. Robert B. Krupansky, United States Court of Appeals for the Sixth Circuit, and was an associate and then counsel at Davis Polk & Wardwell. Mr. Chang is a past President of the Asian American Bar Association of New York and serves on the Executive Committee of the New York County Lawyers Association (NYCLA). Mr. Chang serves as Secretary to the NYCLA Foundation and serves on the Boards of Directors of NYCLA, the Network of Bar Leaders, the NYCLA Foundation, and Legal Services NYC. He also serves on the Nominating Committee and the House of Delegates of the New York State Bar Association and as one of NYCLA’s representatives to the Judiciary Committee of the New York City Bar Association. Mr. Chang has served as Vice Chairman of two committees of the Antitrust Section of the American Bar Association. Mr. Chang is the Vice Chair of NYCLA’s Federal Courts Committee and the Co-Chair of the National Asian Pacific Bar Association’s Litigation Committee. Mr. Chang has been listed as a “Super Lawyer” in business litigation in New York, a designation limited to 5% of the lawyers in a given state. Mr. Chang has litigated such cases as Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc., Index No. 603755/08, 2010 NY Slip Op 08644 (1st Dep't Nov. 23, 2010); GLC Securityholder LLC v. Goldman, Sachs & Co., et al., 2010 N.Y. App.Div. LEXIS 5193 (1st Dep’t June 17, 2010); Oliveira v. Bessemer Trust Company, N.A., 2010 U.S. Dist. LEXIS 33257 (S.D.N.Y. Mar. 24, 2010); Bruh v. Bessemer Venture Partners, 464 F.2d 202 (2d Cir. 2006).