The 2002 Sarbanes-Oxley Act and SEC activism have resulted in more frequent actions against lawyers for securities law violations.
Historically, the SEC tended to limit administrative proceedings and court cases against lawyers to those involving such matters as fraud or insider trading by the lawyer or aiding and abetting of a client’s securities law violations. Thus, the SEC rarely proceeded against lawyers solely for making erroneous legal judgments, even if the judgments may have been negligent or inadvertently contributed to a client’s securities law violation.
Increasingly, the SEC has become more aggressive in proceeding against lawyers— whether employed by companies or in private practice.
The role of lawyers as “gatekeepers” has been underscored by the SEC’s “up the ladder” reporting requirement, adopted as part of the implementation of Sarbanes-Oxley. This requires corporate lawyers to report specified types of legal violations (or potential violations) to senior corporate management under certain circumstances; and the SEC has actively proceeded against lawyers for failures to report as required.
Even apart from Sarbanes-Oxley, the SEC has more often been proceeding against lawyers for making erroneous legal judgments. This has included cases involving little or no indication of intentional, willful or grossly negligent conduct by the lawyers.
Finally, proceedings against lawyers on more traditional grounds have also continued at a brisk pace. This has included, for example, a spate of recent actions based on lawyers’ alleged direct involvement in the backdating of stock options and insider trading.
The SEC probably will continue to ratchet up the pressure on securities lawyers. The extent to which this is wise public policy is, and will continue to be, a matter of much serious debate.