It is almost axiomatic that the SEC “enjoys” bringing enforcement actions against lawyers.  The SEC believes that lawyers have a special duty to protect and police the securities markets, and, when a lawyer fails, the SEC is right there to pounce.

In fact, the SEC fined and barred an attorney from practicing before the Commission because the attorney failed to conduct proper due diligence when acting as underwriter’s counsel in misleading municipal bond offerings.  See  The SEC claimed that the lawyer prepared erroneous documents regarding on-going disclosure obligations. The SEC stated the lawyer never went beyond relying upon the issuer’s claims, and ignoring red flags concerning the inaccuracy of the disclosure.

If you are lawyer, you cannot outrun the long-arm of the SEC, please take precautions!

Not too long ago, I tried a case that had, among other issues, the improper use of the advisor’s personal email account. That improper use serves as a valuable lesson of what can go wrong when you deviate from using the firm approved email.

The client emailed complaints about the handling of the account to the advisor’s personal email address. In hindsight, the client appears to have done so to manipulate the situation. He was successful.

The advisor responded from his personal email without forwarding the complaint to the compliance department. Compounding that issue, the email he sent was construed to contain admissions of wrongdoing. We lost the trial.spying.jpg

The reasons are obvious why personal email should never be used for business purposes. For one, there is no oversight. Second, it can and will put you in an awkward position vis-à-vis the client and the firm.

What makes this situation even more pronounced is the reason why the advisor gave the client his personal email address in the first place. The client would not stop sending hardcore porn and racist humor to the company email address.

From my perspective, this was a client (regardless of account size) who had trouble written all over him. Rather than report the client and take some more drastic action (such as firing the client or barring the use of email), the advisor took an easy way out and paid dearly for that mistake.

Don’t give your clients your personal email address. If you do, report anything in the nature of a complaint to the firm before trying to respond. It is better to take the heat over using personal email than possibly admit to liability.  Don’t get caught with your pants down!*

* photo from

The U.S. District Court for the Southern District of New York dismissed a New York law malpractice and fraud claims by convicted inside trader Winifred Jiau against her former attorney.  See Jiau v. Hendon,

Prosecutors contended that in her role as an employee of an expert network company, Jiau obtained inside information about public companies through professional and personal contacts and sold the information to portfolio managers at hedge funds, who traded on the inside data.  A jury convicted Jiau on conspiracy and securities fraud and the defendant then sued her lawyer for malpractice.  The court found no claim.

Although this turned out well for the lawyers, it should remind everyone of the potential dangers in these representations.

The number of cases brought by the SEC against attorneys under its Rule of Practice 102(e) will continue to climb.

In the wake of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the number of SEC cases against attorneys, pursuant to Rule 102(e) or through cease-and-desist actions, has risen. The SEC’s Office of the General Counsel now is receiving referrals about potential attorney misconduct from the Enforcement Division on a regular basis.  Under Rule 102(e), the SEC may censure or bar persons from appearing or practicing before it for various reasons, including, but not limited to, “negligent conduct” or “unethical or improper professional conduct.”  OGC handles  Rule 102(e) complaints while the Enforcement Division may file other types of actions against attorneys for securities law violations.

In sum, attorneys are being targeted by the SEC’s in full measure.

A firm faced with a regulatory investigation should hire outside counsel to bring objective analysis to the situation. Although it may seem simple, the question that must first be addressed is who the lawyer represents.

If the firm itself is the subject of the inquiry, then the firm needs representation. However, that same lawyer should not represent any individual employees who are subject to the review as well because there could be conflicts of interest between the firm and the employee.

In this situation, the company’s lawyer should advise the individual that they should retain their own counsel. Depending upon the situation, the firm should consider whether to pay for that separate counsel.

Similarly, the communications between the company lawyer and the firm should be limited to those in the firm who are part of what has been termed the “legal control” group. In other words, the group should comprise of individuals who are specifically designated to address the regulatory issue before the firm. By keeping the communications between the firm and its counsel limited, there is less likelihood of any attorney-client privilege being inadvertently

Although this may all seem to be promoting the legal profession, there is much more to the story. How a firm handles an investigation of a regulatory issue may say more about the firm than the issue itself. Will the firm portray the image that it is simply trying to sweep everything under the carpet by keeping the review in-house? Or, will the firm be able to meet the regulatory review and be able to say and demonstrate that it took an objective approach to address the situation.

How you decide this matter may have a large bearing on what happens as a result of the regulatory review. Think twice before you decide.

* photo from

We routinely report enforcement actions directed against lawyers because it simply never goes away. Attorneys are a major target for federal and state securities regulators.  Regulators salivate over “getting” attorneys, because they receive notoriety and money from the attorney’s malpractice carrier for investors. 

Additionally, the SEC’s new cooperation initiative may result in even more enforcement actions against attorneys.  Attorneys need to understand that some of their clients will be looking to accuse them to obtain credit for cooperation.  Clients do not owe attorneys any fiduciary duty although attorneys do not have the same protection.

In short, attorneys need to protect themselves.

Fox Rothschild is proud to be the host sponsor of IMPACT 2013 Venture Summit – the most established venture summit in the Northeast. This year’s conference will be held October 22 and 23 at the Ritz-Carlton, Philadelphia and Crystal Tea Room.

 As the premiere event of the Philadelphia Alliance for Capital and Technologies (PACT), IMPACT draws more than 1,000 of the region’s top investors, entrepreneurs, advisors and business leaders in the Greater Philadelphia region. This day-and-a-half event, now in its 20th year, offers access to emerging companies, networking opportunities with business community leaders and panel sessions that offer relevance, value and expert knowledge. 

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Regulators seem to believe that lawyers and their law firms act like ostriches when it comes to their clients and Ponzi schemes.  For example, a law firm paid $25 million to settle malpractice claims over legal services rendered to certain hedge funds and related entities controlled by a Ponzi Scheme artist, Arthur Nadel.  See SEC v. Nadel, M.D. Fla., 09-00087, 8/28/12, and

Although the law firm continues to maintain its innocence, it settled with the Court appointed receiver over allegations that it failed to detect red flags from the fraudster’s activities during their representation of him between 2002 and 2009.  See Scoop Real Estate LP v. Holland & Knight LLP, Fla. 12th Cir. Ct., 2009-CA-014877, 2009, and  In his pleadings, the receiver argued that, if the firm acted sooner, things would have been different.  For its part, the law firm merely said that it wanted to end the litigation. 

In short, the lesson that lawyers and law firms must learn is that they have to implement systems to detect such potential frauds, or these law suits will undoubtedly become a terrible “cost of doing business.”