Securities Lawyers Must Adjust To Changes at the SEC, Attorney Says

WASHINGTON, May 14 /PRNewswire/ -- The U.S. Securities and Exchange Commission's fraud case against a major investment banking house highlights more than just the SEC's stepped-up emphasis on enforcement. It also points to procedural changes that regulated companies and their counsel can ill afford to ignore, said veteran securities attorney Thomas J. McGonigle, during a May 7 presentation to legal professionals focused on clients in the securities industry.

"For example, careful examination of a recent major case reveals how the current Commission and its staffs have taken a different view of the Wells process—the process whereby attorneys representing the subject of the investigation have the opportunity to file a legal brief arguing against any enforcement action," explained McGonigle, a shareholder at LeClairRyan, based in the firm's Washington, D.C., office, and a former Branch Chief in the SEC's enforcement division. Likewise, a December speech by Robert Khuzami, director of the SEC's enforcement division, indicates the Commission is sharpening its focus on the potential conflicts of interest that can be created when a single law firm simultaneously represents multiple individuals and/or companies that might be asked to testify for an SEC investigation. "It is no longer business-as-usual at the SEC," McGonigle said, "and securities attorneys would do well to adjust their strategies accordingly."

The veteran attorney discussed these changes during "Handling a Regulatory Investigation," a panel session at the 42nd annual conference of the SIFMA (Securities Industry and Financial Markets Association) Compliance & Legal Society at Washington's Gaylord National Hotel and Convention Center. Also on the panel were moderator Elaine Mandelbaum of Citigroup Global Markets, Gerald Balacek of J.P. Morgan Chase & Co., George S. Canellos of the SEC, Michele Coffey of Morgan, Lewis & Bockius, and Wall Street attorney Bari-Jane Wolfe.

During the panel discussion, McGonigle clarified how the shift in the SEC's approach to Wells submissions might affect the timing of attorneys' responses to potential securities investigations of their clients. There is an important interval, he noted, between the time the Commission authorizes an action and when the action is actually filed. "Historically, most attorneys have wanted to first see whether their Wells submission has been persuasive to the staff and then the Commission," McGonigle explained. "If the Wells submission is unsuccessful, they would then try to use this interval to negotiate a settlement, and to see if they can get regulators to use less onerous language in the complaint they file against the client."

A recent major case shows, however, that the SEC staff is not inclined to give any further opportunity for settlement discussion after the Commission authorized the enforcement action. "This is noteworthy," McGonigle explained, "because if you were to try to settle, say, at the same time that you put in your Wells submission, there is a feeling among most attorneys that your brief will simply not be taken as seriously."

Given the pressure on the SEC today, the Commission staff likely wants to proceed as quickly as possible with complaints, rather than see them delayed by negotiations that previously were regarded as a matter of course. "One of the lessons I draw is that the Commission staff is saying, 'If you want to have settlement talks before the case is filed, you need to do that with the staff before the staff's recommendation goes to the Commission—you cannot count on the interval between authorization and filing as an opportunity for settlement negotiations," McGonigle said. "People generally count on that opportunity, but the Commission staff's view may well be changing."

Securities attorneys might therefore be forced to make hard choices regarding their Wells submissions. If they choose not to seek settlement and rely solely on their Wells, they must be prepared to deal with complaints filed against their clients. A perhaps equally undesirable alternative would be to simultaneously submit the Wells and the settlement offer before regulators file the complaint against the client. "There, of course, you lose your leverage," McGonigle noted. "Not exactly a win-win."

Khuzami's December speech, meanwhile, is an indication that the SEC is looking harder than ever at the conflicts of interests that can be created when the same attorney or firm represents multiple individuals or companies that might be asked to testify. "There has always been a professional responsibility to make sure conflicts of interest be waived, and that they are clearly understood and accepted by all parties involved," McGonigle said. "But today, the Commission staff is particularly concerned that all employees of a firm have the opportunity to be completely candid with the staff. They never want witnesses to testify out of fear—either that they might lose their jobs, or that there might be some other company retaliation against them if they don't toe the line."

Attorneys who fail to adjust to this new sensitivity clearly risk being seen as uncooperative and might even face an adverse reaction from the SEC staff. "Some of the clients who are involved might take the position that they have been treated unfairly because their rights to the attorney-client privilege may not be full and complete, given the conflicts of interest," McGonigle said. "At one time, these prosecutorial sensitivities to multiple representations were acute only on the criminal side. They are becoming a much bigger issue on the civil side."

About LeClairRyan

Founded in 1988, LeClairRyan provides business counsel and client representation in corporate law and high-stakes litigation. With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has more than 300 attorneys representing a wide variety of clients throughout the nation. For more information about LeClairRyan, visit www.leclairryan.com.

SOURCE LeClairRyan