Lawyers Who ‘Assisted’ Clients in Late Trading and Market Timing May Be Sued by SEC, Says Enforcement Chief
The head of the SECís enforcement division has indicated that the agency is preparing enforcement actions against lawyers who were perhaps a bit too creative when advising their clients on the legality of late trading and market timing practices. "Based on our current investigative docket, I think you can expect to see one or more actions against lawyers who, we believe, assisted their clients in engaging in illegal late trading or market timing arrangements that harmed mutual fund investors," said SEC Division of Enforcement director Stephen Cutler in a September 20 speech at UCLA School of Law.
A December 2, 2003 Wall Street Journal article reported that some hedge funds obtained legal advice that late trading of mutual funds may have been permissible. The article, which was read with interest in the investment management legal community, named Akin Gump Strauss Hauer & Feld LLP and Piper Rudnick LLP as two firms that provided the "now questionable" advice. Piper Rudnick declined to comment on the Wall Street Journal article. Akin Gump did not return calls asking for comment.
Meanwhile, Piper Rudnick is facing a legal challenge relating to its advice on fund trading. Last month, two former employees of a firm client filed a suit against Piper Rudnick in New York state court, alleging they were harmed by relying on Piper Rudnickís advice regarding mutual fund late trading. In a statement, Piper Rudnick said that the plaintiffs were not clients of the firm. "We believe that the suit is without merit. We have engaged counsel and will defend ourselves," said the firm. Piper is being represented by Washington, D.C. law firm Williams & Connelly.
Turning back to Cutlerís speech: the enforcement chief also warned that the SEC is considering actions against lawyers, both in-house and out-house, "who assisted their companies or clients in covering up evidence of fraud, or prepared, or signed off on, misleading disclosures regarding the companyís condition." He said that a particular focus will be the role of lawyers in internal investigations of their clients or companies.
He emphasized the importance of attorneys and other gatekeepers. "We have seen too many examples of lawyers who twisted themselves into pretzels to accommodate the wishes of company management," he said, listing several examples of "in-house counsel gone astray" in the corporate world. He also noted that close to half of the SECís enforcement actions against lawyers in the past two years have involved outside counsel.
Cutler also warned of SEC enforcement cases against independent directors. He noted that the SEC had brought several cases against outside directors, mentioning examples from both the corporate and fund contexts (specifically, cases against the directors of Heartland Advisers and the more recent case against Robert Colman, a former independent director of the Van Wagoner funds).
"Over the next year," said Cutler, "we intend to continue focusing closely in our investigations on whether outside directors have lived up to their role as guardians of the shareholders they serve." He said that the enforcement staff "will exercise particular scrutiny in considering the role of directors in approving or acquiescing in transactions by company management.