The Wall Street Journal has an entertaining account, if your taste runs to black humor, of how legal chicanery has reached such high levels that the SEC is toying with the idea of going after it directly (hat tip reader Andrea). Officials at the securities watchdog suspect that the way lawyers have instructed clients to behave in its investigations constitutes obstruction of justice:
….some SEC officials have grown frustrated by what they claim is direct obstruction of a few investigations and a larger number of probes where lawyers coach clients in the art of resisting and rebuffing. The tactics include witnesses “forgetting” what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook, agency officials say.
We’re not entirely sympathetic with the SEC’s problem. With the exception of HealthSouth, it has not used false certifications under Sarbanes-Oxley as grounds for going after the certifying officers, who customarily include the CEO and CFO. Sarbox was designed, among other things, to end the use of the “I’m the CEO and I know nothing” defense.
Nevertheless, the SEC’s conundrum illustrates a serious decay standards in the legal profession and in social values generally. Readers of this blog are welcome to take issue, but attorneys tell me that state bar associations will sanction or disbar only small players. The large firms all make a point of being active in the organization. That makes it socially awkward to suggest a
fellow country club member peer might be up to no good, much the less to move forward with charges.
Florida demonstrates how heavy-hitter law firm miscreants go undisciplined by the bar. One particular egregious example of influence-peddaling involves the foreclosure mill Shapiro & Fishman. The firm has been under investigation by the Florida attorney general’s office (initiated under the last incumbent, Bill McCollum). Shapiro & Fishman is a regular user of mortgage assignments prepared by Lender Processing Services, the employer of the notorious robosigner “Linda Greene” and an avid practicer of “surrogate signing” which is NewSpeak for forgery. Nevada and Missouri have indicted LPS employees. The firm is operating under a consent order from the Federal Reserve Board, the FDIC and the OCC.
So to deal with its wee problem, Shapiro & Fishman hired “superlawyer” Gerald Richman. Richman (among other things) was on the Host Committee for a $1500 a ticket fundraiser held on April 30 for three incumbent Florida Supreme justices (3 of the 7 judges are up for “merit renewal” votes this year). It also happens that on May 10, the Florida Supreme Court will hear oral arguments in Pino v. Bank of New York, a foreclosure fraud case. Needless to say, the outcome will be of very keen interest to Shapiro & Fishman.
Now it may sound crass to say that the three justices will be influenced by the participation of Richman, and no doubt well heeled members of the bank side of the foreclosure bar. But research by social psychologist Robert Cialdini says they will be. He has found that a gift as small as a can of soda will make the listener more likely to say “yes” to a sales pitch. And the fundraiser is only an illustration of the influence bigger firms wield. Their partners travel in more elevated social circles, belong to the same clubs, backscratch their colleagues, and may have worked directly together in the past (in law school, as junior members of white shoe firms, and as members of committees in the bar association. The prohibitions against criticizing colleagues in these tight social networks are high.
Any profession that was serious about conduct should have done some serious soul-searching when the robosiging scandal revealed widespread misconduct. But it has taken AGs like the ones in Nevada and Missouri, and courts like New York’s, which imposed certification requirements on attorneys in foreclosure cases, to do anything about it (note that going after LPS is certain to lead it to try to shift blame to the foreclosure mills).
Back to main thread. The SEC is considering going after lawyers who approved certain mortgage bond transactions before the crisis or have been stonewalling investigations:
The SEC enforcement staff has recently reported more lawyers to the agency’s general counsel, who can take administrative action against lawyers for alleged professional misconduct.
So far, it looks like the SEC is just barking. The Journal points out that it lacks the power that the CFTC has to go after attorneys who make “any false or misleading statement of a material fact.” The SEC has gotten one lifetime ban against an attorney who coached his client to have her memory “fade” if she got a year of severance pay and has another case underway. But it also points out that judges have set the bar high as far as criminal prosecutions are concerned (note the SEC can only bring civil cases, so this isn’t an apples to apples comparison).
I’m surprised that this article does not get at one legitimate reason to be leery of this SEC effort: any investigation, to really get at what happened, would have to breach attorney/client privilege, unless it had already been compromised. This is critical to the legal process working correctly. Further erosion of attorney-client privilege hurts clients far more than lawyers, which is why the bar won’t take this wake-up call as seriously as it should.
These are all bad remedies for the real problem: the lack of secondary liability. As we wrote in ECONNED:
Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.
Unfortunately, fraud now seems to have become such a large percentage of the GDP that lawmakers would no doubt see it as dangerous to employment and growth to restrict it. And the SEC is so preoccupied with winning cases (as opposed to making miscreants afraid that they might be dragged into court and have their dirty linen exposed) that the risk is high that they will file an election-year “we need to look tough” case, and be deterred, as they were with the Bear Stearns hedge fund prosecution, if it goes against them.
Put it another way: if the usually limp-wristed SEC is so upset with legal misconduct that it is considering action, even if that action is likely to add up to very little, it shows how deep the rot is among the American elites.