Purported Lawyer Barred for Negligent Due Diligence
The SEC barred from the industry a purported lawyer that failed to investigate red flags arising in municipal bond offerings for which he served as underwriter’s counsel. The sponsor of the offerings previously settled an SEC enforcement action pursuant to which he agreed to repay over $86 Million to investors because of misleading disclosures about compliance with municipal disclosure requirements. The SEC faults the lawyer for engaging in a weak due diligence that failed to investigate disclosure red flags that were raised by several parties involved in the transaction. Additionally, the respondent claimed to be a lawyer even though he was not actively admitted to the bar in any jurisdiction. The SEC charges the respondent with fraud in the offer and sale of securities as well as causing the issuer’s legal violations.
OUR TAKE: The SEC will hold gatekeepers such as lawyers accountable for the bad acts of their clients. This case expands gatekeeper liability by charging securities fraud even though the lawyer is not a registrant.