SuchGood Friends: TheSEC and the Securities Lawyers
Jenkins, John A.
SuchGood Friends: TheSEC and the Securities Lawyers by John A. Jenkins Kenneth Bialkin is a high-powered New York securities lawyer, a man whose job it is to keep the Securities and Exchange...
...Even when they’re not representing individual clients, they’re afraid to speak out because they want the favors, the occasional bones the Commission can throw their way...
...Lately, several hundred multinational corporations that have made bribes overseas (Lockheed, Gulf, Northrop, and the rest) have used SEC-approved special counsels from the private bar to conduct world-wide investigations of corporate operations and then report back to the stockholders on the full extent of the company’s misconduct...
...I’ve been in cases where I’ve typed up the complaint myself and then given it back to the SEC to review,” the lawyer said...
...It’s cheaper, and the settlements are meaningless anyway...
...The American Stock Exchange, which reported the case, urged the SEC to take action, calling it a “classical example” of insider trading...
...That’s important, because it’s impossible for a small investor to judge the honesty of a stock transaction on his own-the government has to do it for him...
...When an insider at a corporation has information that regular stockholders aren’t aware of-the corporation is about to raise its dividend, say-he can buy stock at an artificially low price, before sellers find out how well the corporation is doing...
...Inadequate EquiDmen t But Congress, as is its wont, has given the SEC equipment inadequate to carry out its regulatory mandate properly-just 2,000 employees and a budget of $60 million...
...One lawyer told me it’s not unusual for the SEC’s enforcement staff to permit a defense lawyer to draft the agency’s complaint against his client, and then the accompanying consent decree...
...Right away, the chairman of the board, the uncle of a director, some c o m p any employees, and various friends and relatives of company officials bought up blocks of stock (again, the SEC won’t name names...
...One reason lawyers cooperate is that the punishment that results when they bring in a client is a ceremonial slap on the wrist called a “consent decree...
...Undeterred, Butowski has since filed three separate lawsuits in different courts against Hogan & Hartson...
...Also, once the investigation is completed, they can make even more money by suing the corporation they investigated (or its lawyer) for damages on behalf of its stockholders...
...One person who was on the receiving end of that pressure to conform was August Bequai, whose sin was testifying in Congress that the Treasury Department’s Bureau of Alcohol, Tobacco, and Firearms had actively impeded an SEC investigation he had conducted into kickbacks in the liquor industry...
...Its purpose, as set out by Congress in 1934, is to protect investors from being defrauded when they buy stocks and bonds...
...Apparently the SEC didn’t want to create bad blood with Treasury, so it set about severing ties with Bequai...
...They have been to bed so many times with these lawyers, you could easily hold them up as being married...
...The agency’s enforcement division, where its policing actually takes place, has only 200 employees and $4.3 million a year...
...The Commission has, in the past, unofficially blacklisted lawyers who have displeased it,” says Monroe Freedman...
...They want to make sure that people aren’t defrauded, and that the securities industry stays pure...
...Ultimately, Turner sent his charges to the federal judge who was hearing the case...
...As a result, one Washington securities lawyer and SEC alumnus says, “All SEC cases are easy cases...
...In one, a stock exchange notified the SEC that three officers of a corporation (the SEC won’t disclose their names or the corporation’s) had sold their entire stock holdings, amounting to 43 per cent of the outstanding stock, three months prior to the company’s declaring bankruptcy-a clear violation of the law...
...It’s a situation, in other words, in which private lawyers are sanctioned by the SEC to represent their clients, the agency, and the general public, all at the same time...
...Turner came upon the case by accident, but later found out that others at the SEC had known about it and done nothing...
...Some private lawyers work so closely with the SEC that it’s difficult to tell who’s working for whom...
...Most insiders, says one SEC official, “are probably going to get away with it ;” shareholders won’t even know when they’ve been victimized...
...It’s not unusual at all...
...When he last visited Washington on government business, Turner was told he would be thrown out of the SEC building if he tried to visit it...
...The SEC didn’t tell Turner about its charges and didn’t submit any evidence, but the FBI started to investigate him...
...Obviously a company that is, 54 say, bribing foreign governments is better off admitting the sin and getting a no-loss consent decree than covering up and running the risk, however small, of prosecution...
...A journalist who was writing a profile of Sporkin had interviewed him, and Bialkin was afraid some of the things he had said might be published out of context...
...There’s no punishment, and because the corporation has admitted no wrongdoing the consent decree can’t be used as evidence against it if private plaintiffs should later sue for damages...
...I spend my days telling clients to settle...
...Instead of assigning its own agents to investigate corporate wrongdoing, the SEC expects private securities lawyers to bring their clients in, voluntarily, to disclose violations of the federal securities law...
...I have a personal relationship with him,” Bialkin lyter explained, “and I have no objection to his knowing anything that I feel, because I’ve always been very open with him, personally...
...They want the possibility that they might get a hearing that some other lawyer hasn’t been given before the Commission rubber-stamps a staff decision...
...So the Commission feels compelled to turn to other resources to do its job...
...These investigations grow out of SEC consent decrees, and the lawyers who conduct them are paid handsomely for their work-by the corporation under scrutiny...
...j u r is diction,” Playing Ball Another enticement to securities lawyers to play ball with the SEC is the rich reward of special counselship...
...So Bialkin asked for, and received, a copy of the journalist’s tape-recording of the interview, and then secretly sent it to Sporkin in order to reassure the enforcement chief that he hadn’t been disloyal...
...But he continued to follow the SEC’s handling of his old case, and last year he told the commission that the lawyers who had replaced him were withholding evidence from the defense and lying under oath...
...The SEC’s defenders can point with justifiable pride to the commission’s political independence, and to its recent efforts to require corporations to disclose more and more information to their shareholders...
...The SEC checks up on the work of the private lawyers by bringing in other private lawyers in a much sought-after position called “special counsel,” to make sure the errant corporation is now obeying the law...
...in the case of the SEC, however, there’s a strange twist to the relationship...
...When he pushed for an investigation of Hughes and Air West his superiors seemed completely u n i n t e r e s t e d . Eventually Turner became so frustrated that he resigned and went to work for the Nevada U.S...
...its only failing is that it doesn’t get the job of regulating securities done...
...Some of the cases look more serious than that to an outsider...
...The clients come to him because he’s good at straightening things out with the SEC...
...But rules aren’t much good if they aren’t enforced, and the SEC has undercut its good works by actively encouraging private lawyers whose business is to circumvent the SEC to act as its eyes and ears...
...Needless to say,” they added, “the legal fees for such a lawsuit would be very substantial...
...The Blacklist Just as the SEC has a reward system for lawyers who cooperate, it has a punishment system for lawyers who don’t...
...And they certainly don’t want staff members saying to the people with securities work, ‘If you want effective representation before us, don’t go to lawyer X. He’s on our list.’ So they’re under tremendous pressure to conform and to cave in...
...Only after Turner found out what was going on and got some publicity did the FBI close its investigation...
...For four and a half years, Butowsky was special counsel to the International Controls Corporation, a company once controlled by Robert Vesco...
...Another object of the SEC’s ill will was William C. Turner, a young lawyer who, while working for the commission, stumbled onto some shady operations in the Howard Hughes business empire...
...Conversely, if there’s bad news brewing, the insider can unload his stock at a good price, before disaster strikes...
...A year ago, Bialkin was worried that his close relationship with Sporkin might be in jeopardy...
...The SEC doesn’t even know now whether it investigated the case, which was reported to the commission in 1974...
...That’s why the enforcement division has to rely on the private bar to do the lion’s share of the enforcing...
...its present status, says a spokesman, is “not readily ascertainable...
...Turner’s evidence indicated that in 1969, when Hughes took over the company, his employees had defrauded the stockholders of Air 56 West, a regional airline, out of about $50 million by paying the stockholders less than their stock was really worth...
...That would be an intrusion...
...The securities lawyers, surprising as it may seem, go along with this arrangement, and regularly haul their clients before the SEC for discipline...
...The SEC is one of the few regulatory agencies that it would be hard to argue against in theory...
...Attorney’s office...
...In another case, a company informed numerous management and union officials of an important piece of good news before it was made public...
...The SEC appoints the “special counsels” after the signing of consent decrees, to make sure the corporations are really sinning no more...
...Most of the people who deal with the SEC are securities lawyers, and most of them are loyal alumni of the SEC, which was often their first job after law school...
...The discipline is usually extremely mild, and cooperation with the SEC can be very good business...
...The SEC did nothing...
...The full SEC eventually turned down its counsel’s request and didn’t press charges against Bequai, but it did widely circulate a memo through headquarters and the nine regional offices that disparaged him...
...The SEC starts with the best of motives,” says Monroe Freedman, a former dean of the Hofstra Law School...
...Because most of us own stocks and bonds one way or another-either directly or through pension plans-we all stand to benefit from the SEC’s efforts to keep the markets free of fraud...
...When a corporation signs an SEC consent decree, it promises to stop doing whatever it was doing wrong-but it doesn’t admit that it was doing wrong in the first place...
...The SEC introduces these documents in court as its own...
...Butowsky asked a federal court for permission to have his law firm represent the company’s shareholders in a lawsuit against Hogan & Hartson...
...But I do not wish to make our friendship a matter of public record...
...But Stanley Sporkin says he doesn’t have the manpower to go after inside traders...
...Although Bequai had told the truth about Treasury and his SEC investigation, the SEC’s general counsel tried to initiate a disciplinary proceeding against him, on grounds of “unprofessional &onduct...
...Consider, for example, the SEC’s sorry record of policing the stock markets for insider trading...
...The SEC is one of several dozen federal agencies that objected last year to a strict District of Columbia bar proposal to stop the revolving door between agencies and law firms...
...What’s in it for the lawyers...
...sometimes all it takes is a phone call to the head of the agency’s enforcement division, Stanley Sporkin, a man as gruff as Bialkin is fastidious...
...A recent case in point involved David M. Butowsky, a prominent New York securities lawyer and former SEC staff member...
...They complain, then, that Congress doesn’t appreciate what an important and costly job that is, and that Congress doesn’t give the Commission the staff that it needs to do the job properly...
...Reprisals like these create an atmosphere in which few private lawyers are inclined to challenge the SEC, and the SEC, because of its staff shortages, is similarly disinclined to challenge the lawyers...
...Hogan & Hartson promptly charged that Butowsky had exaggerated its wrongdoings in his report, so that he would be able to sue the firm later...
...John A. Jenkins is a Washington journalist who has covered the Securities and Ex change Co m rn issio n. It’s fairly common in Washington for regulatory agencies to be beholden to the industries they regulate...
...An obvious problem for them is that in the process of representing a client, they’ve got to play the game...
...These are white collar crimes, pure and simple, and preventing them is an important mission of the SEC’s...
...His 785-page final report on the company said its Washington law firm, Hogan & Hartson, had ignored Vesco’s financial shenanigans instead of reporting them to the proper authorities...
...SuchGood Friends: TheSEC and the Securities Lawyers by John A. Jenkins Kenneth Bialkin is a high-powered New York securities lawyer, a man whose job it is to keep the Securities and Exchange Commission out of the hair of the corporations that are his clients...
...Established systems, whether they make sense or not, die hard...
...As Sporkin puts it, “everybody who goes through a stop light doesn’t get a ticket...
...It wasn’t meant to be that way...
...The SEC settles 90 per cent of its cases (300 cases a year) by conseht decree...
...I always tell people, the District of Columbia is a c o m m o n -1 a w says August Bequai, A former member of the SEC enforcement staff who is now in private practice in Washington...
...Thrown Out In reaction to Turner’s charges, the SEC’s general counsel ordered a Justice Department investigation of Turner, ostensibly because he had leaked confidential documents about the Hughes case to outsiders...
...So the lawyers and the SEC go along with each other, and important cases are ignored...
...It’s an arrangement that keeps the lawyers happy, their clients happy, and the SEC happy...
...The SEC, which is tiny as federal agencies go, relies on the securities bar to act as an adjunct of its own inadequate prosecutorial staff...
...More broadly, without an agency to police the markets investors might lose confidence in the markets and stop buying stocks and bonds, in which case the corporations would be in deep trouble...
...He wasn’t disciplined, but he was excommunicated from the order of former SEC staff members...
...Records revealed after a Freedom of Information Act lawsuit against the SEC bear him out: the commission failed to pursue almost all of the 186 documented insider cases that stock exchanges referred to it for investigation between 1974 and 1976...
...Besides, it brings them no notoriety...
Vol. 9 • February 1978 • No. 12
