Annual Meeting 2008

Lawyers Could Be Targeted in SEC Subprime Cases

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In the 1990s, a reference to Kaye Scholer became shorthand for the power of federal regulators to punish law firms for misleading tactics in their representation of a client, in this case a failed lender.

The law firm—its full name was Kaye, Scholer, Fierman, Hays & Handler—agreed to pay the U.S. Office of Thrift Supervision a $41 million fine to settle the agency’s suit.

Now the specter of Kaye Scholer is being raised once again, this time by panelists at an ABA Annual Meeting panel on the subprime crisis.

“I think the law firms may not have learned the lesson that Kaye Scholer learned in the 1980s,” said Tom Curran, a New York lawyer and former prosecutor. “Lawyers, smart people though they are, are not immune from any of this.”

This time the Securities and Exchange Commission may be the plaintiff in civil complaints that target lawyers for their role advising lenders and securitizing loans for sale to investors.

Reid Muoio, assistant director of the SEC’s division of enforcement, isn’t foreclosing the possibility. While private securities plaintiffs aren’t permitted to bring aiding and abetting claims, the SEC has congressional authorization to do so.

“It can be expected that if we can identify problems, we will then ask, ‘Where were the lawyers?’ ” he said in an interview after the discussion. A typical aiding-and-abetting scenario might be a law firm that aids misrepresentation in a prospectus for a mortgage-backed security, he said. He cautioned that he was speaking for himself and not the SEC.

During the panel discussion, Muoio said the SEC has opened 48 investigations in the subprime mortgage mess and assigned more than 100 lawyers to the cases. The possibility of aiding-and-abetting actions—against lawyers and others—won’t be considered until the probes are further along, he said.

The program was sponsored by the ABA Section of Business Law.

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