Lawyers in SEC's cross hairs

"The SEC has increased the pace at which it takes enforcement actions against lawyers. One of the latest chapters in that saga occurred on January 13, 2005, when the SEC charged Google, Inc., for failing to meet the requirements of various exemptions from registration for stock options issued to its employees prior to its Fall 2004 IPO, and charged Google’s General Counsel for having caused the violation.

Without admitting or denying the Commission’s findings, the company and the lawyer settled the SEC charges, agreeing to cease and desist from violating Section 5 of the Securities Act of 1933. The company also settled a related civil action brought by California Department of Corporations. The SEC’s order credits their cooperation during the SEC Staff’s investigation. See http://www.sec.gov/litigation/admin/33-8523.htm.

If it was confusing before, it is now clear: the SEC has changed its approach toward lawyers. At least in some circumstances, the agency will now charge them personally if they recommend a legal strategy that is later deemed to violate the federal securities laws. The SEC appears to be sending at least three messages through this case:

(i) no violations of law are minor, and the costs of violating the securities laws cannot be measured simply by civil litigation costs;

(ii) the quality of legal advice and diligence of the lawyer will be factors in an enforcement review if the SEC Staff believes the advice was wrong; and

(iii) lawyers who chart risky legal strategies for their corporate clients without fully describing those risks to directors approving transactions may be deemed to have made the business decisions themselves, rather than merely to have rendered advice.

From this Fried Frank article. (PDF)