How to Fight Fraud Securities Fraud...without the Hysteria

David Feldman |


A series of questions crops up with the news last week that for the third time in the last year, a well-known micro cap securities lawyer has been arrested and charged with securities fraud. What is the responsibility of an attorney representing a public company or investors in or advisors to these companies? The Sarbanes-Oxley Act of 2002, and terules the SEC adopted under it, made it clear that these attorneys cannot stand by in the face of wrongdoing. They must report up the line within their client’s public company any “evidence of a material violation.”  So what would constitute this evidence? If they have, as the SEC puts it, “credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing or is about to occur.” No legalese there! Simply put: If the company or its board do not respond when you report, you must resign as counsel.

The SEC did not adopt a requirement of “noisy withdrawal,” which they were considering, which would have required these attorneys to report the wrongdoing to the SEC if the company did not respond. Attorney-client privilege ultimately won over that, which I agree with. I guess the question becomes, "What is required of a “prudent and competent attorney?”

A Thin Line Between Fighting Fraud and Engaging in a Witch Hunt...

In some cases, fraudster companies deftly hide their misdeeds from advisors and even their attorneys. Assuming the lawyers are not purposely looking the other way, where do we draw these lines? We want to be active advocates and protectors of our clients, and in the case of alleged wrongdoing we more become (arguably rightfully so given that we are ultimately officers of the court) their adversaries.

The SEC has acknowledged that it is going after “gatekeepers” such as attorneys and accountants who know or should know when bad things are happening. In addition, some of the service providers are accused of being active participants in pump and dump and other fraudulent schemes, or knowingly removing legends off their own stock to allow trading when it was allegedly unlawful to do so. I just hope, in each case, the SEC looks very carefully at what a service provider is accused of, and ensures that stamping out fraud doesn't devolve into a witch hunt.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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