February 20, 2016

ETHICS CORNER: Ethics of Practice for Government Agency Counsel

Simon M. Lorne

Much has been written, including in this column, about the ethical duties of private practitioners since Judge George Sharswood delivered his lectures at the University of Pennsylvania in the 1850s and the ABA developed the Canons of Ethics in 1908. Less, but still a fair amount, has been written about the ethical obligations of prosecutors. Very little, however, has been written about the ethical obligations of agency counsel (including both executive agencies and so-called independent agencies), or, for that matter, other agency personnel who are lawyers – yet it is in agency roles that some of the most vexing questions may arise. 

Consider an extended hypothetical – like most such, drawn from real experiences. 

John Banker is the CEO of Pacific Southnorth, Inc. (PSI), a medium-sized, publicly held bank holding company. The bank greatly expanded its mortgage origination and servicing business in 2005 and, predictably, suffered significant losses in 2007–2008. The SEC commenced an examination of Banker and PSI in 2009 and in 2012 provided each of them with a Wells notice. Following a review of the respondents’ Wells submission the Division of Enforcement recommended to the SEC that an action be filed against them, alleging violation of various provisions of the securities laws in connection with inadequate disclosures in the company’s public filings. After reviewing the evidence, the SEC general counsel determined that in her view, there was insufficient evidence to convince a court that there were violations of law.

In discussions with the director of the Division of Enforcement, the general counsel presents her conclusions, and is met with the argument that, based on discussions with counsel, the director is virtually certain that Banker and the company will settle rather than litigate.

What are the general counsel’s obligations as a lawyer? Does it make a difference if the director believes (or does not believe) in good faith that a plausible case against the defendants could be presented in court? Is it relevant that if a case is brought, the Enforcement Division is responsible for the trial of SEC civil actions, while the Office of the General Counsel is responsible for appeals from trial court decisions? A number of the questions here and in the discussion that follows have been considered from the perspective of prosecutorial ethics, but agency lawyers, and the agency general counsel in particular, may be in a different position for a number of reasons, not least because the proceedings are civil rather than criminal. Assuming the director is also a lawyer (more than a fair assumption by historical standards) are the director’s obligations different from those of the general counsel? Is the director in the position of a businessperson who happens to have started out as a lawyer? Or does the director’s role as overseer of the trial unit mean that ethical precepts – whatever they might be – are fully applicable? And what of the role of lawyers in the Enforcement Division, either on the investigative team or in the trial unit? 

The director also argues that there has been a great deal of pressure from the media and Congress to bring cases against “people like Banker and PSI, who were responsible for the financial crisis,” pointing out that the support of the media and Congress is important for the agency’s funding and its ability to protect the public.

Do these considerations affect the obligations of the lawyers? Is the broader (presumed) societal good of agency efficacy a legitimate consideration in determining whether to initiate a given case? Is the likelihood of settlement to be viewed differently in light of those considerations? 

Assume the case is presented to the commission in a closed meeting. The enforcement director argues that the case should be brought and the general counsel argues to the contrary. By a three-to-two vote, the commission authorizes the Enforcement Division to file the action. After the meeting, the chair meets with the general counsel and tells her, “Don’t be upset that you lost the argument and we authorized the case. I actually thought you made the stronger argument and are probably right. But I have an agency to run, and I’m worried about the morale of the people in enforcement. The last two times you argued against bringing a case, we agreed with you and didn’t authorize it. I have to let them win some of the time. Besides, I know they’ve worked very hard trying to put together a case for a couple of years. I can’t deprive them of the opportunity to present the case in court, especially if it’s likely to get settled anyway. 

Does this affect her obligations in any way? What might she be able to do about it anyway? Is the morale of the staff a valid consideration in authorizing a case? If it happens that the chair is a lawyer, does the chair have any relevant professional responsibility? And what of the other commissioners? 

Assume that it happens to be the case that the general counsel comes from the small town where PSI is based. On a visit to her parents, before the case was presented to the commission, her father – who is a physician and an old friend of John Banker, one of his patients – tells her he’s been reading about the investigation, and while he knows she’ll “do what she’s supposed to do,” he hopes there’s no case because Banker is in poor health, and is worried sick. He expresses concern that if an actual case were to be filed, there would be a very good chance the stress would kill Banker.

Any effect on the general counsel’s obligations? 

Assume the case against Banker and PSI turns on a close legal question relating to the interpretation of a commission rule. As a practical matter, SEC settlements have much of the force of legal decisions – the SEC’s enforcement staff treats them much like legal precedent, and many in the private sector adjust their behavior to avoid the factual pattern described in the settlement. Thus, the settlement has the very real effect of reinforcing the commission’s interpretation of its rules.

What role should this consideration (and the description of the effect of settlements is entirely accurate) have? Is a settlement that is effectively forced on a company a legitimate way of reinforcing the commission’s interpretation of its rules? And harbor no doubts – it is exceedingly difficult for a financial institution to litigate cases with a regulatory agency, no matter how strongly it might feel about its position. Again, what is the role of lawyers in all of this, and what professional obligations might they have? 

Assume (instead of the proposition advanced above) that John Banker is quite healthy and wealthy (if not wise), and that while PSI would settle a case, it is perfectly clear that as an individual he will litigate it. (“He’s prepared to spend every last penny of his considerable fortune defending this case if he has to,” his lawyer had told the enforcement director with a very big smile. “He wouldn’t mind taking it to the Supreme Court, and I’d certainly welcome that opportunity.”)

Would it be appropriate for the general counsel, fearful of a court decision that would undermine the commission’s interpretation of the rule, to urge that the commission proceed against PSI only, which cannot effectively defend itself, and drop Banker from the case? (Note that from the perspective of the commission and its rule, an even worse result would be winning at trial, and then losing on appeal on the issue of the rule interpretation.) The proper answer cannot be that actions should only be brought against those effectively unable to defend themselves – the impoverished and those highly sensitive to adverse publicity – but how can we effectively avoid that result? 

If a case is authorized and PSI is in the position of drafting settlement documents additional questions arise. Recognize (1) the practical precedential effect of settlements, as described above, and (2) that a settling defendant has much less interest than the commission and the general counsel in the description of the facts and legal conclusions contained in the settlement documents. What, if any, obligations of professional responsibility pertain to the drafting of the settlement documents, which will often include a court injunction or an order of the commission. 

While there is not space here for full analysis, additional questions arise as to selecting the forum in which the case is brought – federal court or an administrative tribunal. That determination has received considerable recent scrutiny. The commission has at times suggested that it only brings relatively “routine” cases that do not present novel questions of law before the administrative tribunals, in which the administrative law judges are SEC employees, procedural rules are relatively lax, and initial appeals are taken to the same SEC that authorized bringing the case. That is, more complex cases are reserved for proceedings in federal courts. Is that (or should it be) an ethical mandate? 

Most or all of the difficult ethical questions described above, and others like them, result from the commission’s dual role as rule maker (the legislative function) and enforcer (the executive function), coupled with the practical effect of settlements in the modern administrative state. Entirely legitimate goals and concerns of an agency create incentives that may seem inappropriate for the lawyer viewed solely as a litigator and officer of the court. These are issues worthy of deliberation.

Simon M. Lorne

Vice chairman and chief legal officer of Millennium Management LLC

Simon M. Lorne is vice chairman and chief legal officer of Millennium Management LLC, a New York–based alternative asset manager and is a former general counsel of the U.S. Securities and Exchange Commission. “Ethics Corner” is sponsored by the Professional Responsibility Committee, and is edited by Robert Evans III, a partner at Shearman & Sterling LLP.