The SEC is (finally) going after lawyers

Broc Romanek reports that:

In the "Cady Bar the Door" Blog, David Smyth notes recent examples of SEC's Enforcement going after lawyers - just as Director Rob Khuzami promised in a speech last June for defense counsel who engage in "questionable tactics" to gain advantage for their clients involved in SEC investigations. As David mentions in his blog, in his speech, Khuzami noted one hilarious episode in which a witness in investigative testimony - looking for a toe-tapping signal his lawyer had been warned against during a break - "extended [his foot] so far [under the table] that he was almost doing a split."

What's interesting (at least to me) is that SEC still seems to be mostly ignoring transactional lawyers who fail to function as gatekeepers. As I explain in Corporate Lawyers as Gatekeepers (January 6, 2012): 

Corporate lawyers traditionally viewed themselves - and were viewed by the managers who hired them - as advocates, confidents, and advisors, not as gatekeepers like auditors. 

In fact, however, lawyers often play a reputational intermediary role not dissimilar to that of an auditor. A very high profile general counsel or law firm partner, for example, can give a client in trouble the benefit of the lawyer’s reputation for probity and upstanding ethics.

Usually, of course, counsel play a more behind the scenes role, but it is still a gatekeeping role. Specifically, transactional counsel and in-house lawyers are well positioned to intervene by blocking the effectiveness of a defective registration statement or prevent the consummation of a transaction, to cite but two examples. In many recent financial crises, however, lawyers all too often failed to be effective gatekeepers. In the Sarbanes-Oxley Act of 2002 (SOX), Congress directed the Securities and Exchange Commission to adopt rules of ethics governing lawyers who appear or practice before the Commission. 

As adopted, the post-SOX rules give lawyers what purports to be a very “simple” up-the-ladder reporting obligation. As one proponent explained counsel’s duty: “You report the violation [to top management]. If the violation isn’t addressed properly, then you go to the board of directors.”

Despite SOX’s many strictures in this and other areas, however, a new and even more devastating financial crisis came in 2008 when the subprime mortgage market’s troubles nearly brought the entire banking system to its knees. Once again, questions are being asked about the role lawyers played in this crisis. A reassessment of SOX’s legal ethics rules thus is in order.