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Attorney Settles SEC Fraud Action Based on Legal Opinion and 10b-5 Letter
Practical Law Legal Update 3-517-1429 (Approx. 4 pages)
Attorney Settles SEC Fraud Action Based on Legal Opinion and 10b-5 Letter
by PLC Corporate & Securities
| Published on 05 Jan 2012 • USA (National/Federal) |
The SEC announced that an attorney agreed to settle an SEC civil injunction action alleging the attorney committed securities fraud under Section 17(a) of the Securities Act and under Section 10(b) and Rule 10b-5 of the Exchange Act. The action was based on the attorney's opinion and 10b-5 letter, and role in reviewing the offering document, in an unregistered bond offering.
On January 3, 2012, the SEC announced that an attorney agreed, without admitting or denying any allegations, to settle an SEC civil injunction action against him alleging securities fraud. The action was based on statements in the attorney's opinion and 10b-5 letter, and his role in reviewing the offering document, in an unregistered bond offering.
According to the SEC's complaint, the attorney acted as counsel to now-defunct Aiken Continental, LLC in a conduit bond offering and related transactions. In the offering, a municipality issued bonds, the proceeds of which Aiken Continental borrowed to acquire Continental Casket, Inc., a company located in the municipality issuing the bonds. Aiken Continental was responsible for making interest and principal payments under the bonds.
According to the complaint, the attorney knew that:
- An Aiken principal had been indicted for bank fraud and money laundering shortly before the bond offering. That principal plead guilty to related offenses and was jailed shortly after the bond offering.
- The same Aiken principal had entered into a loan transaction with an entity the attorney partially owned that gave that entity rights to acquire an equity stake in Continental Casket if the loan was not repaid in a timely fashion.
According to the SEC's complaint, neither of these facts was disclosed in the bond offering document. Despite this, the attorney delivered a letter at the offering's closing that included:
- An opinion paragraph stating, to the attorney's knowledge, no action, suit or proceeding was pending or threatened that, if adversely determined, would materially affect the transaction or Continental Casket's business.
- "Negative assurance" or 10-5 language covering the bond offering document.
In addition, the attorney did not:
- Disclose these facts to the other bond offering parties.
- Suggest that these facts be added to portions of the offering document he reviewed.
Aiken Continental eventually defaulted on its bond obligations, allegedly due to a decline in Continental Casket's business caused by the principal's incarceration.
On the basis of these facts, the SEC alleged in its complaint that the attorney:
- Committed primary violations of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act.
- Aided and abetted Aiken Continental and the principal in their violations of Section 10(b) and Rule 10b-5.
Practitioners have informally reported that they believe this action is the first of its kind to be based on statements in an attorney's opinion and 10b-5 letter. The settlement is subject to court approval. For more information, see the SEC's litigation release.
This action comes after a series of 2011 judicial holdings, including the Supreme Court's decision in Janus Capital Group, Inc. v. First Derivative Traders, which dealt with the potential liability of offering participants other than the issuer in securities fraud actions. For more information on these decisions, see Practice Note, Liability Provisions: Securities Offerings: Limitation of Liability Under Rule 10b-5 to Those Who Actually Make Misstatements. For more information on legal opinions and 10b-5 letters generally, see Practice Note, Legal Opinions in Securities Offerings.