Rarely does the mainstream media talk about Rule 205.3 of the Securities Exchange Act, found at 17 C.F.R. 205.3, so the event requires at least some blogging. According to reports in the WSJ, Law Blog and elsewhere, Stanford's attorney, Thomas Sjoblom of Proskauer Rose, alerted the SEC on February 14 via a "note" that “I disaffirm all prior oral and written representations made by me and my associates to the SEC staff regarding Stanford Financial Group and its affiliates.”
What does this mean? When did Proskauer Rose make oral or written representations to the SEC? I assume that Stanford is not a reporting company from the SEC's Memorandum of Law, which has some very interesting legal positions, by the way. So Sjoblom is not talking about ordinary affirmations or opinions that an attorney would proffer in the context of periodic filings. However, the SEC had begun an investigation into Stanford International Bank and the other Stanford companies, so it may be that Sjoblom's initial answers to questions are not complete or accurate in retrospect after further investigation.
So, why is this interesting from a corporate law standpoint? Because the reason that Sjoblom can do this is in the relatively new Rule 205.3, which was promulgated pursuant to Section 307 of the Sarbanes-Oxley Act of 2002.
Section 307 required the SEC to promulgate rules "requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company" and then, if no satisfactory response, "requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors."
As those who followed the melee that followed, the SEC proposed rules that required this "up the ladder" reporting and then also a "noisy withdrawal" from the representation and filing with the SEC if no satisfactory response. I won't retrace the debate, but the final rules are found at 17 C.F.R. 205.1 et seq.
Rule 205.3 does outline an up-the-ladder procedure for an attorney who "becomes aware of evidence of a material violation." And, more importantly for Mr. Sjoblom, allows an attorney, without the issuer's consent, to reveal to the SEC "confidential information related to the representation to the extent the attorney reasonably believes necessary (i)[t]o prevent the issuer from committing a material violation that is likely to cause substantial injury to the financial interest or property of the issuer or investors. . .or (iii)[t]o rectify the consequences of a material violation by the issuer that caused, or may cause, substantial injury to the financial interest or property of the issuer or investors in the furtherance of which the attorney's services were used." So, it sounds like Sjostrom may be telling the SEC more than this single line from the "note" implies.
In this article for American Lawyer, Zach Lowe, opines that "the federal Sarbanes-Oxley Act likely made his decision much easier than it otherwise might have been." Law Blog then takes that a little step further by stating "Lowe reports that SOX actually makes life easier for lawyers in such predicaments, because it explicitly allows them to reveal confidential client information to investigators if that attorney believes that doing so will prevent a violation of the law or help rectify losses investors have already suffered." I think most securities lawyers confronted with these choices would disagree about whether Rule 205.3 makes their life easier. Hard and fast rules make people's lives easier, although their may be some unsatisfying consequences -- criminal defense attorneys that cannot reveal to families where their loved ones' bodies are buried, and other Law & Order-type scenarios. Rules that allow revelations in scenarios marked with terms like "material," "substantial," "may" and "likely" usually make most circumstances a little tougher.
We will stay tuned to see how this unfolds as more facts are known.
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