The following is an adaptation of remarks by Simon M. Lorne, vice chairman and chief legal officer of Millennium Management LLC and business law advisor to the Professional Responsibility Committee, at its meeting at the Business Law Section’s 2017 Annual Meeting in Chicago.
In my years of practice, I’ve been privileged to occupy a number of different positions, from law firm partner, to the Securities Exchange Commission’s general counsel, to my current role as chief legal officer of a major hedge fund advisor. In all of those roles, I’ve been actively involved with this committee, and particularly with the question of how appropriately to balance the lawyer’s duty of client confidentiality with the ability to perceive, and perhaps to prevent, a course of client conduct that may subsequently be characterized by enforcement authorities—the SEC, the Commodity Futures Trading Commission, the Department of Justice, etc.—as client improprieties. Perhaps obviously, I choose my words carefully. When those authorities do challenge a course of conduct, they are likely to identify it as “fraud,” but it was likely not identified as such by the lawyer at the time, and to so characterize it is to bias the analysis of the lawyer’s obligation. Those questions were surfaced in a number of high-profile SEC cases from the 1970s to the early 1990s. The principal cases from that era are probably SEC v. National Student Marketing Corp., Fed. Sec. L. Rep. (CCH) ¶93,581 (DDC 1972); SEC v. Nat’l Student Marketing Corp., 402 F. Supp. 641 (DDC 1975); SEC v. Nat’l Student Marketing Corp., Fed. Sec. L. Rep. (CCH) ¶96,027 (DDC 1977); In re Carter, Sec. Exch. Act Rel. No. 17,597 (Feb. 28, 1981); and In re Kern, Sec. Exch. Act Rel. No. 29,356 (June 21, 1991).
These issues received focused attention from the securities bar in 2003 when the SEC adopted the Attorney Conduct Rules, Part 205 of Title 17 of the Code of Federal Regulations (the Rules). With that promulgation, law firms throughout the country (and in some foreign climes) adopted policies, established committees, saw to the education of younger attorneys, and in other ways prepared for the potential onslaught of SEC actions charging lawyers with a failure to act properly—generally defined in the rules as escalating attention to the chief legal officer and, if necessary, the board of directors whenever a lawyer “appearing and practicing” before the SEC became aware of “credible evidence” of a violation of the securities laws or breach of fiduciary obligations. Under the SEC’s interpretation of the Rules (although this remains a hotly contested point), the Rules further operated to pre-empt any contrary state law to permit such a lawyer to report a matter directly to the SEC if a matter were not handled appropriately (apparently, as determined by the lawyer’s own judgment) by the highest authority within the corporation.
Then a funny thing happened. Silence.
In what is now 14 years since the adoption of the Rules, the actual number of attorney conduct cases brought by the SEC, including both litigated cases and settled cases, has been . . . zero. There was one Department of Labor case in which the Rules were relevant to the purported wrongful discharge of a lawyer-employee, but that’s been it. See Jordan v. Sprint Nextel Corp., Dep’t. of Labor Admin. Review Bd. Case No. 06-105, ALJ Case No. 2006-SOX-041 (Sept. 30, 2009).
However, the Rules remain in place, and with inactivity on the SEC’s enforcement side (not that any lawyers I know are complaining about that inactivity), I feel comfortable in suggesting that many of the law firm policies and procedures initiated in response to the initial adoption of the Rules have fallen into disuse. It is almost certain that there are a number of lawyers today who have been practicing for as many as 10 years or more who have never even heard of the Rules, and that number only grows as we look at more recent law school graduates.
The enforcement environment will inevitably change, and I would not take much comfort in the notion that the current administration will be softer on enforcement. Historically (although, as the SEC requires us to say in another context, past performance may certainly be no indication of future results), SEC enforcement has often been tougher in Republican administrations, just as regulatory enhancements have been more relaxed. Be that as it may, there will in the future be a corporate fraud—we hope not on the scale of Enron or WorldCom—and there will be lawyers who will have been on the scene, who will have been “appearing and practicing” before the SEC, and who will have become aware of “credible evidence” of the fraud. They will find themselves on the wrong side of an SEC complaint, or perhaps worse, and they will wish that their law firm had been more diligent in impressing upon them the requirements of the Rules.