953 Boynton Drive, #5132
Chattanooga, TN 37402
March 19, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
In Re: (1) Request that the SEC return to its former proposal requiring lawyers to report securities fraud to it, and (2) A need for protection of trust beneficiaries
Dear Mr. Katz,
I found no proposal number on the SEC website for reference no. 1 shown above. I hope you will consider my recommendations relative to a proposal currently under study -- but in its original version. Please require all attorneys appearing in SEC hearings to report fraud to the SEC, and allow the SEC to report it to the public. Securities investment firms advertise and draw in clients, therefore they have an added responsibility for which most of them are unlikely to hold themselves accountable.
I urge the SEC to pay close attention to the role lawyers play in the world of securities investment. When dishonest, they are the enablers of dishonesty. We don't have to worry about ethical attorneys, but we can't always identify them. It is because bad ones won't report their participation in fraud, and honest lawyers won't report them either, that high standards have to be set and enforced.
Last year I reported to an SEC public contact office my knowledge of a fraudulent securities activity, and was told there is nothing the SEC can do. That subject didn't originate with a corporation issuing securities; it was trust fraud operating through a securities investment firm. A trustee, on welcome advice of counsel to the trust, harmed the interest of a trust beneficiary, in blatant violation of state trust laws, a defining will, and a court ruling. It succeeded because the securities investment house didn't care what kind of money was sent to it or if anyone was disadvantaged.
Many lawyers won't take cases that involve other lawyers personally, especially where violations of law or ethical standards have occurred; they don't want to have to report their colleagues. The rare trust beneficiary who can resort to the courts jeopardizes his own trust income, and when deliberate irregularity creates steep attorney fees and costs, a trust interest is outweighed and a corrective lawsuit thus is thwarted.
Given the climate of our times, added regulation is difficult for the SEC. Even so, the SEC must strengthen rather than abandon a proposal to require lawyers to report securities fraud to it. I recommend that such requirements include all attorney dealings with securities for any client, notably clients who administer estate and trust securities. To wit:
- Attorneys must be required to sign statements that they will uphold professional ethics by reporting to their own state's professional ethics boards, and to the SEC, all lawyers known to be participants in securities fraud, even where there is only probable cause to suspect it.
- To ensure enforceability of the above, there must be an equivalent of whistleblower protection. Current reluctance to report fraud in all likelihood stems from fear of retribution or undue pressure to honor secret agreements for mutual protection. Lawyers must be assisted in honoring their higher oaths to uphold law and ethics or they won't be able to uphold either.
- We need enforceable penalties for lawyers who threaten or intimidate colleagues who learn of securities wrongdoing, whether exercised in courtrooms or privately.
With respect to my own suggestion for expanded regulation where securities form the bulk of an estate or trust, please consider:
- a requirement on brokerage houses to refuse fraudulent or other irregularly handled trust securities when such facts are reported to them by an attorney, trustee, or beneficiary.
- requirements on attorneys representing an estate or executor, or trust or trustee, to protect beneficiaries so that the beneficiaries:
won't be deprived of their shares,
won't experience deliberate diminishment of a trust interest,
won't be victimized by a trustee who violates or escapes trust laws or lawful terms in a Will, or who conceals founding trust documents and proof of trust securities' value; and
will be supplied with all facts enabling them to determine if the nature of a trust is being altered deliberately to the detriment of their interests.
- that securities investment offices should be required to obtain signatures on guarantees for compliance with law and full securities disclosures to beneficiaries. Those signing should be trustees, successor trustees, and attorneys representing trusts and estates.
I know of an instance where a private trust's securities were manipulated so as to force a beneficiary to pay for costs of separate reinvestment, accumulation of earnings, and accounting. By the guiding document's terms, that person's interest was supposed to remain within a large trust where costs and fees were shouldered by its trustee. It eroded the trust, and increased profit for the investment office.
The public trust erodes. Its reinstitution must be enabled because ongoing financial abuse negatively affects the national character. Another cautionary word: absent reform, Americans will turn to overseas investment.