2011 ST. STEPHENS WOODS DRIVE
CROWNSVILLE, MARYLAND 21032
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December 17, 2002
Securities & Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Attn.: Jonathan G. Katz
Secretary of the Commission
Re: File No. S7-45-02
Dear Mr. Chairman and Honorable Commissioners:
I am writing to offer my comments on the SEC rule proposals to implement Section 307 of the Sarbanes-Oxley Act of 2002. The views set forth herein are my own and do not necessarily represent the views of any of my clients, my law firm or any of my colleagues.
As some of you know, for the first part of my professional career I served at the SEC, with my last position as Associate Director of the Division of Enforcement. Since 1982, when I left Federal service, I have been in private practice. During my career with the SEC, I handled a number of cases against lawyers and accountants and regularly taught at both Georgetown University Law School and George Washington Law Center, including a graduate course in professional responsibility in corporate and securities practice at Georgetown. Indeed, I was the Commission's principal trial counsel in its case against National Student Marketing and two nationally known law firms that was filed in 1972 and resulted in a number of important decisions about the responsibility of professionals, including attorneys and accountants.
I personally applaud the Congress and the Commission for enacting Section 307 of Sarbanes-Oxley. Further, I think that most of the Commission's proposed rules establish important principles that need to be followed by the Securities Bar. However, I think that the proposed rules, insofar as they require lawyers to report information beyond the confines of the corporate client, go too far, and fail to recognize the limits of Section 307 and the very narrow circumstances under which such reporting "over" the ladder, as opposed to "up the ladder," might actually be necessary. In my experience, there are few, if any, circumstances where a client when confronted with a lawyer's threatened or actual resignation will not put a stop to the offending conduct. Frankly, I think there is no need for any formal rules in this respect.
I believe that the Commission's rule proposal and its excellent discussion of the confusion engendered by the existing Bar rules goes a long way towards clarifying what attorneys are required to do when, under extraordinary circumstances, threatened or actual withdrawal does not prevent wrongdoing by a client. I believe that an official Statement of Policy by the Commission, rather than some formal rule on this subject, will more than suffice to accomplish the Commission's objectives. Moreover, an alternative route would avoid some of the more difficult issues arising from forced disclosures with little assurance - in the absence of express statutory authority on point - that those disclosures do not somehow waive the attorney-client privilege completely.
I think that there are extremely limited circumstances under which a lawyer practicing before the Commission should ever be required to report client conduct to the Commission without the client's express consent: namely, where a lawyer's services are being used to perpetrate a crime or fraud which is ongoing and which the client refuses to abate. One such situation was the subject of the Commission's complaint in the National Student Marketing case. There, two law firms had been publicly identified with the client's conduct, and rendered legal opinions to facilitate the consummation of a $40 million merger, despite their awareness that the underlying financial statements which had previously been sent to shareholders were no longer accurate. To my knowledge, there is little evidence that reporting to the Commission, in any form, is a necessary supplement to actual or threatened resignation. As you know, in National Student Marketing, both law firms involved never threatened to resign, and never called upon the client to rectify the alleged illegal conduct. I seriously doubt that the transaction would have proceeded if either White & Case or Lord, Bissell & Brook had threatened resignation or had resigned.
Frankly, I believe the ordinary principals of tort law recognized in Fischer vs. Kletz, 266 F. Supp. 180 (S.D.N.Y. 1967), already require corrective action under limited circumstances, and Bar rules to the contrary are simply wrong and confusing to lawyers in practice. I have frequently written on this subject and include a copy of my most recent article, tracing some of this history to the Commission's present rule proposal. The enclosure will be published shortly in the Washington and Lee Law Review.
In addition, I also want to address the proposed rules' apparent suggestion that even lawyers practicing before the SEC in a Commission investigation or SEC proceeding may have a duty to report to the SEC information that the client has not authorized be disclosed. To the extent the proposed rules may call for this, I respectfully disagree and strongly recommend the final rules make clear that no such duty exists.
I would welcome the opportunity to expand on the above. Thank you for considering my comments.