Legal News

On Legal Ethics and the SEC?s ?Revolving Door?

By Ashby Jones

It’s the way the world works, it seems. Lawyers with experience working for the Securities and Exchange Commission often switch to the private sector, where they often end up representing clients in battles against the nation’s securities regulator. (There’s a similar dynamic at the Justice Department, where assistant U.S. attorneys often go on to work for the types of folks they once prosecuted.)

What to make of this dynamic with the SEC? Click here for a WSJ story out Monday on the situation, by reporter Tom McGinty.

For the most part, legal ethics experts see nothing wrong with the practice, so long as lawyers follow ethical rules and err on the side of disclosure.

But Senator Chuck Grassley (R-IA) says the SEC could include more-stringent limitations than the law requires in employees’ contracts, and more disclosure.

The issue was raised recently in a report issued by the SEC’s Inspector General. The report examined the SEC’s handling of a feud between hedge-fund manager David Einhorn and Allied Capital, which began in 2002 when Einhorn said the company was overvaluing its investments. Allied was represented at meetings with the SEC by two former staffers, Allied executive Joan Sweeney, who had been a staff accountant in the SEC enforcement division in the late 1980s, and former SEC enforcement chief William McLucas, a partner at WilmerHale, according to people familiar with the matter.

Following an investigation, an SEC examiner and accountant who had scoured Allied’s books each concluded that the company had “major problems” that should be referred to the enforcement division, the inspector general’s report says.

But an associate director in the SEC’s compliance office who knew Sweeney pushed back against referring the case to enforcement, the report says.

In interviews with the inspector general, the associate director who had pushed back said he would give “the benefit of the doubt” to anyone who used to work at the SEC. The associate director, who wasn’t named in the report, added, “If you’ve known somebody, or even if they didn’t really know them, but you know they worked here. . . . Well, they should hopefully be doing the right thing,” according to the report.

Following meetings with Allied representatives, including McLucas, the SEC decided not to bring fraud charges it had been considering, the report said.

Full post as published by Law Blog - WSJ.com on April 05, 2010 (boomark / email).