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The securities bar was taken by surprise when the U.S. Senate approved a measure on April 9 that would give the Securities and Exchange Commission new powers to investigate and punish attorneys. “The Levin amendment is moving too fast for the bar to react,” said Kenneth J. Bialkin, a partner at New York’s Skadden, Arps, Slate, Meagher & Flom, referring to the measure sponsored by Sen. Carl Levin, D-Mich. But Bialkin and several other practitioners are already wary of the proposal, particularly a section that would allow SEC administrative law judges to impose fines on attorneys, accountants, companies and anyone else found to have violated securities laws. Under current law, the SEC can impose administrative fines only against brokers, dealers and investment advisers (“regulated persons” in the parlance of securities lawyers), and must seek court approval to impose fines outside that circle. The Levin amendment would still allow access to the courts, but only after a fine has already been imposed. Bialkin’s concerns are echoed by Donna M. Nagy, a University of Cincinnati law professor and co-author of a forthcoming securities law casebook. “When Congress first gave the SEC the power to impose administrative fines against brokers and dealers in 1990, there was consideration given to including all persons,” she said. “But Congress thought it best to reserve fines against nonregulated persons to federal judges, who are not subject to pressure from politicians or the securities industry.” ABA President A.P. Carlton said that he personally thinks the amendment is an overreaction to Enron and other recent scandals, but that he has only just set in motion the procedures that will lead to an official ABA position. HIGHER FINES The Levin amendment would also boost fines substantially. In floor statements last year, Levin called current fines “a joke” in light of the magnitude of recent scandals. An individual currently faces a maximum fine of $600,000 per violation. Levin’s amendment would up the ante to a maximum of $2 million per violation. Last year, one of Levin’s co-sponsors, Sen. Bill Nelson, D-Fla., highlighted the need for bigger fines by reminding his colleagues that “Global Crossing laid off 1,200 people … while the CEO of that company walked away with hundreds of millions of dollars.” Finally, the Levin amendment would override, in part, the Right to Financial Privacy Act of 1978. The act says that banks may not turn over customer records subpoenaed by government agencies without first notifying the customer. The SEC can get bank records in secret only with court approval. Under the Levin amendment, financial institutions would have to comply with SEC subpoenas without telling the customer if the SEC’s investigation has gone above the staff level and been given the green light by the commissioners. Levin’s proposal is not entirely new: He tried to offer it as an amendment to the Sarbanes-Oxley Act last year before floor managers cut off debate. But the Senate adopted it this year without committee hearings, with little debate and attached it to the otherwise unrelated bill S. 476, the Care Act. The amendment, which has bipartisan sponsorship, was adopted by a voice vote. The Care Act, which grants new tax breaks for charitable donations, passed 95-5. Despite that lopsided vote, the act faces an uncertain future in the House of Representatives. According to Peggy Peterson, the communications director of the House Financial Services Committee, the House is prohibited by the Constitution from considering the act in its present form, because it is a revenue bill not originating in the House. She was not aware of any reaction to the Levin amendment, for or against, by House members, who were in recess last week. MOTIVATING FACTORS Levin was unavailable for comment, but his floor statements indicate that he wanted to give the SEC the wherewithal to carry out duties recently handed to the agency by Congress. In April he explained that, “This [subpoena] authority is particularly important in light of the Patriot Act of 2001, which for the first time requires securities firms to detect and report possible money laundering through U.S. securities accounts. The SEC cannot be expected to effectively monitor these anti-money laundering efforts [if it] must provide advance notice to investigative subjects or obtain court orders granting delayed notification.” Levin said that banking regulatory agencies like the Federal Reserve already have similar authority. John K. Villa, a partner at Washington’s Williams & Connolly with experience of defending financial institutions during the savings and loan scandal, said that the Right to Financial Privacy Act’s notice requirements do not apply when the target of a grand jury subpoena is alleged to be engaged in money laundering. Villa does not find the new subpoena power alarming, but has doubts about the evenhandedness of administrative tribunals: “The long history of litigation before banking administrative tribunals shows that the agency wins a very high percentage of cases.” Stuart Kaswell, general counsel of the Securities Industry Association, said that similar fears were voiced when the SEC was first given the authority to impose administrative fines on regulated persons more than a decade ago. He said that experience has not borne out those fears: “You could argue that this or that case should have been handled differently, but I’m not aware of any perception of widespread abuse at the SEC.” REPAYING VICTIMS Although Levin has not cited this as a factor, the SEC has argued that it needs greater latitude in imposing fines in order better to compensate the victims of securities fraud. In February testimony before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, Stephen M. Cutler, the director of the SEC’s Division of Enforcement, noted that the Sarbanes-Oxley Act allowed the agency to use fines to compensate victims. Prior to that, fines were deposited in the Treasury and only disgorgement money could go to victims. Cutler argued that expanding administrative fines would ensure that more defrauded investors would be helped. He did not, however, request an increase in fines at that time. Susan Hackett, general counsel of the American Corporate Counsel Association, argued that bigger fines would add to the anxieties attorneys are already feeling about their new and often vague duties under the Sarbanes-Oxley Act.

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