Since 2003, I have been predicting a test case/showdown between lawyers who follow the dictates of the states in which they are licensed to practice law versus the conflicting dictates of the rules and regulations promulgated by the U.S. Securities and Exchange Commission after the Sarbanes-Oxley Act of 2002 went into effect.1 And while I thought I knew how such a test case/showdown would (should) end up,2 a recent judicial development has shaken my certitude (but only a little, because—as we will see—the ruling is wrong).
The SEC vs. the States
Under the SEC’s Sarbanes-Oxley modus operandi, a capital markets lawyer may disclose “material violations” (past, current, future) to the commission. If a lawyer does not handle that “permissive” disclosure obligation correctly, she can be subject to a liability whipsaw: If she fails to disclose to the SEC and she is wrong, the SEC (and possibly the plaintiffs’ bar) can go after her; if she discloses to the SEC and she is wrong, clients and stockholders can sue her. In judging the appropriateness of her conduct, the SEC (with the benefit of hindsight) will judge her under the “reasonable lawyer” standard (i.e., not based upon what she actually knew); and the commission has at its disposal the full panoply of sanctions under the Securities and Exchange Act of 1934 to punish the offending lawyer.
