To protect the integrity of its proceedings and processes, the Securities and Exchange Commission (SEC or Commission) can deny individuals the privilege of appearing and practicing in SEC proceedings. Recently, relying upon New York rules of professional conduct governing lawyers, the SEC barred attorney Steven Altman for alleged unethical conduct stemming from his representation of a witness in connection with an SEC investigation. 

Altman has filed a declaratory judgment action in the US District Court for the Southern District of New York, claiming that the agency unconstitutionally usurped the powers of the New York attorney disciplinary commission in issuing the public lifetime ban. Altman also seeks injunctive relief and has filed a motion seeking an order of mandamus directing the SEC to vacate its decision. Altman alleges that the SEC wrongfully attempted to “federalize” attorney ethics and discipline.

Altman was accused of seeking compensation from investigative targets in exchange for his client’s agreement to evade service of a subpoena and to provide false testimony to avoid damaging those targets of the investigation. One of the targets of the investigation recorded several phone calls with Altman, and these calls were ultimately used during cross-examination of Altman’s client before the Commission. Although initially banned from practicing for only nine months, on appeal the SEC found that “Altman's conduct is fundamentally inconsistent with the effective administration of justice and warrants a permanent denial of the privilege of appearing or practicing before the Commission.”

In its opinion, the SEC explained that it relies heavily on the professionals who practice before the Commission, and the integrity of the process is threatened by attempts at subversion or attempts to provide false testimony. The Commission found that Altman’s conduct was “egregious, recurrent, and reflected a high degree of scienter” and that he violated fundamental attorney professional and ethical obligations. For these reasons, and in reliance on 17 C.F.R. § 102(e), the Commission concluded that “permanently denying Altman the privilege of appearing or practicing before [it] serves the public interest and is remedial because it will protect the integrity of [its] prosecutorial and adjudicatory processes, and thereby the investing public, from future harm by Altman.”

The New York disciplinary commission neither investigated nor took any action against Altman, and yet the SEC cited and relied upon Altman’s alleged violations of New York rules of professional conduct as the basis for some of its findings. Altman’s complaint states “[t]he commission does not have unlimited inherent power to discipline any lawyer who appears before it or participates (however indirectly as the plaintiff did) in any commission proceeding, and its Constitutional and statutory authority to bring actions against and impose sanctions against lawyers is not open-ended.” New York disciplinary proceedings are treated confidentially until such a time as the attorney is found to have violated ethics rules. Altman contends that although the proper regulatory authority has not investigated or sanctioned him, as a result of the publicity generated by the decision, the SEC has penalized him and also ruined his practice and his good name.

The thrust of Altman’s arguments lie in his contention that the Commission has never before relied upon state ethics rules to discipline an attorney under Rule 102(e), and that it is without express congressional authority to do so. Altman cites the history behind Rule 102(e), the fact that the state ethics rules in question have not been adopted by the Commission, and that had Congress intended such rules to apply, it could have ordered the SEC to adopt them, citing Section 307 of the Sarbanes/Oxley Act (17 U.S.C. § 7201, et. seq.), which required the Commission to adopt rules of ethics for attorneys representing issuers. If Altman’s challenge is sustained, it will cast substantial doubt upon the authority of the SEC to regulate attorneys absent congressional mandate or to encroach upon the prerogatives of the appropriate state professional disciplinary authorities.

For more information about the topics raised in this Legal Update, please contact Jay Tharp at +1 312 701 7146, Joseph De Simone at +1 212 506 2559, or Bob Entwisle at +1 312 701 8151.

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