SEC finds lawyer violated antifraud laws by negligently issuing opinions and improperly advising a client in a municipal bond offering

The SEC continues efforts to hold lawyers to account for violations of the federal securities laws. Earlier this month, the Commission issued an opinion in an administrative proceeding that finds a lawyer negligently violated the antifraud provisions of the Securities Act of 1933 by issuing a legal opinion that the interest on certain municipal bonds were exempt from federal income taxation.

The case is notable because –

I. The Weiss Decision

Weiss acted as bond counsel in an offering of municipal securities by a Pennsylvania township in June 2000. In his capacity as bond counsel, Weiss prepared a legal opinion in which he concluded that interest on the notes would be exempt from federal income taxation. Weiss’s opinion was included in the Official Statement by means of which the municipality sold the notes. In fact, for a variety of reasons, the notes were not tax-exempt. Weiss also gave an opinion to the municipal issuer “affirming that nothing had come to his attention that would lead him to believe that the Official Statement was materially inaccurate or incomplete.”

The Commission found that Mr. Weiss violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. These provisions make it unlawful to make misrepresentations in connection with securities sales. They do not require a showing of intent and are violated even if the person making the statements acted negligently.

The Commission found that Weiss was a primary violator for making the false statements to the issuer that were included in the Official Statement. It further found that Weiss did not exercise even “minimal care” in carrying out his duties. Specifically, the Commission stated that Weiss “did not make adequate inquiry to determine” whether the facts existed that would qualify the notes for tax-exempt treatment. To the contrary, the Commission concluded, Weiss “knew or should have known” of facts that would preclude such treatment. Finally, the Commission found that Mr. Weiss did not explain to the municipal issuer what it needed to do to comply with the IRS regulations.

The Commission ordered Weiss to cease and desist from committing or causing any violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act. It also ordered Mr. Weiss to disgorge $9,509.63, the amount he earned for acting as bond counsel for the transaction.

II. Implications of the Weiss Decision

This case is notable because it is one of the few times that the Commission issues opinions on matters of lawyer liability. Unlike the Commissions order in a settled case, the Weiss decision is entitled to full precedential effect.

It is even more rare for the Commission to opine as to a lawyer’s negligence. The case was originally brought as a fraud case, and the staff of the Division of Enforcement has stated in recent days that it does not intend to bring cases against lawyers who are “merely negligent in giving legal advice.” This case illustrates, though, that one division’s fraud may be another Commission’s negligence.

There is also the issue as to what standard of conduct the Commission will use for determining whether a lawyer’s conduct has been “reasonable.” While comparing Weiss’s conduct to professional standards adopted by the National Association of Bond Lawyers, the Commission was careful to note that compliance with industry standards was only one factor in deciding whether a lawyer acted with “reasonable prudence.”

Please feel free to call any of your regular contacts at the firm or any of our partners and counsel listed under Securities Enforcement in the Our Practice section of our Web site if you have any questions.