General Counsel Liability in SEC Matters
In-house attorneys for public companies may face personal liability for securities violations when they act in an executive capacity or fail to fulfill their gatekeeper responsibilities. There are various legal theories under which the SEC or DOJ can pursue enforcement actions against counsel, including aiding and abetting fraud, making material misstatements, and engaging in schemes to defraud investors. General Counsel must understand their unique position of authority and ensure they maintain independence and adherence to professional responsibilities.
Enforcement actions against counsel can be both civil and criminal, and they are often pursued in parallel. The SEC’s Office of the Whistleblower receives tips from within organizations that can trigger investigations, and General Counsel must be prepared to respond effectively. A gatekeeper’s responsibilities include ensuring accurate disclosure, preventing the company from making misleading statements, and taking appropriate steps if they discover potential violations. When under scrutiny, attorneys must navigate the complex interplay between their professional obligations to the company and their personal legal liability.
Gatekeeper Responsibilities of In-House Counsel
General Counsel and other in-house attorneys hold the responsibility of ensuring corporate compliance with federal securities laws and regulations. They are not mere functionaries; they are gatekeepers who play a critical role in preventing fraud and protecting investors. Their duties include:
- Advising on disclosure obligations: General Counsel must ensure that public filings and statements are materially accurate and comply with reporting requirements. Inaccuracies or omissions can expose the company and the attorney to liability.
- Overseeing internal controls: Counsel should be involved in the development and maintenance of internal controls over financial reporting. Weaknesses in these controls can lead to violations of Rule 13b2-2, among others.
- Investigating red flags: When potential misconduct surfaces, General Counsel must investigate and, if appropriate, report violations to the board or Audit Committee. Attorneys cannot ignore or cover up known violations.
- Ensuring auditor independence: In-house attorneys must avoid conduct that would impair auditor independence, such as making false statements to auditors or failing to disclose material information.
- Maintaining independence: Counsel must maintain professional independence and cannot act as advocates for improper conduct. They must report concerns internally and, if necessary, resign if they cannot prevent misconduct.
Personal Liability Theories for General Counsel
The SEC and DOJ pursue in-house attorneys under various legal theories, both civil and criminal. Some common allegations include:
1. Aiding and Abetting Fraud
Under Section 20(e) of the Exchange Act, the SEC can pursue those who knowingly provide substantial assistance to a violation. General Counsel can be liable for aiding and abetting fraud if they participate in the filing of false reports or misleading statements. The burden on the SEC is lower than proving primary liability.
2. Material Misstatements and Omissions
Attorneys may be liable under Rule 10b-5 for making material misstatements or omissions in connection with securities offerings or public filings. A “material” statement is one that a reasonable investor would consider important in making an investment decision.
3. Scheme Liability
General Counsel can face liability for engaging in a “scheme to defraud” under Rule 10b-5(a) and (c). Scheme liability is broader than solely making false statements and can apply to conduct or practices that deceive investors.
4. Improper Disclosure
Under Rule 13a-14 and 15d-14, public companies (and their officers) must maintain effective disclosure controls and procedures. General Counsel responsible for certifications or disclosures that are materially inaccurate may face liability.
5. Auditor Independence Violations
Under Rule 13b2-2(a), it is unlawful to make materially false statements or omit material facts necessary to make statements not misleading to auditors. General Counsel who interfere with or mislead auditors can be pursued under this theory.
6. Criminal Violations
The DOJ can pursue criminal charges against in-house attorneys for conduct constituting securities fraud, wire fraud, or conspiracy. Criminal liability carries the potential for incarceration and other severe penalties.
The SEC’s Approach to Enforcement Against In-House Counsel
The SEC’s Division of Enforcement and the DOJ’s Criminal Division have increasingly focused on holding in-house attorneys accountable. Several factors are driving this trend:
- Expanded Whistleblower Programs: The SEC’s Office of the Whistleblower has received tips against in-house attorneys, leading to investigations and enforcement actions. Tips from within the company are often the most damaging.
- High-profile Prosecutions: High-profile prosecutions of in-house attorneys for misconduct related to disclosure, internal controls, and auditor independence have created a chilling effect.
- Aggressive Investigations: The SEC and DOJ pursue parallel investigations, meaning civil and criminal cases can be pursued simultaneously. In-house attorneys must be prepared to defend themselves on both fronts.
- Focus on Gatekeepers: There is a belief that holding in-house attorneys accountable will ensure better corporate compliance. Enforcement agencies have targeted gatekeepers for their unique role in preventing fraud.
SEC and DOJ Enforcement Actions Involving General Counsel
The SEC and DOJ have brought several prominent cases against General Counsel and in-house counsel in recent years. These cases illustrate the legal theories and the types of conduct that can lead to enforcement actions.
In this case, the SEC alleged that the General Counsel participated in a fraudulent scheme to inflate the company’s financial statements. The SEC claimed that Powers approved the recognition of revenue in violation of GAAP and made materially false and misleading statements in public filings and to auditors.
The SEC pursued the General Counsel of a public company for failing to prevent and participating in a scheme to inflate earnings. The SEC alleged that Bradley failed to maintain effective disclosure controls and procedures and misled auditors.
In this matter, the SEC alleged that the General Counsel of a public company made materially false statements to auditors and failed to report misconduct to the Audit Committee. The SEC claimed that Lee’s conduct contributed to the company’s financial reporting violations.
4. SEC v. Ryan C. Gilbertson
The SEC alleged that the General Counsel of a public company engaged in a scheme to defraud investors by participating in a fraudulent stock sale. The SEC claimed that Gilbertson made materially misleading statements in connection with the sale.
Responding to and Defending Against Enforcement Actions
If in-house counsel become aware of a potential SEC or DOJ investigation, or receive a subpoena, it is critical to respond effectively and proactively. The consequences of an enforcement action can be severe, including loss of professional license, financial penalties, and, in criminal cases, imprisonment. Counsel should consider the following steps:
- Engage Experienced Defense Counsel: In-house attorneys must retain experienced defense counsel to represent their interests. Experienced counsel understand the complexities of representing attorneys and can help navigate the unique challenges of these cases.
- Consider Cooperation: In some cases, cooperation with the SEC or DOJ can mitigate penalties. However, the decision to cooperate should be made with experienced counsel, as cooperation can also expose the attorney to liability.
- Maintain Independence: In-house attorneys must maintain their professional independence and prioritize their obligations to the company and its shareholders.
- Preserve Documents: In the event of an investigation, in-house attorneys must ensure that all relevant documents are preserved.
- Consider Parallel Proceedings: In-house attorneys must be aware of the potential for parallel proceedings by the SEC and DOJ. Defense counsel must coordinate efforts to ensure the best possible outcome.
Spodek Law Group Defends General Counsel and In-House Attorneys
At Spodek Law Group, we have a team of experienced SEC defense attorneys who have a deep understanding of the unique challenges faced by General Counsel. Our legal team has experience defending in-house counsel in a variety of matters, including:
- Internal Investigations: We assist General Counsel in responding to and conducting internal investigations into potential violations of federal securities laws.
- SEC Investigations: Our legal team has experience representing in-house counsel during SEC investigations, responding to subpoenas, and negotiating settlements.
- DOJ Investigations: We have defended in-house attorneys in criminal investigations by the DOJ, including grand jury proceedings.
- Litigation: Our legal team has experience representing in-house counsel in federal court, including defending against enforcement actions brought by the SEC and DOJ.
