DLA Piper Partner Deborah Meshulam on the SEC, Gatekeepers and Neither Admit Nor Deny

Stanley Sporkin, the former head of enforcement at the Securities and Exchange Commission (SEC), and later a federal judge, would look over cases of corporate crime and ask — where were the lawyers and accountants? Why didn’t they stop this?

A laser like focus on corporate gatekeepers has always been a neglected aspect of federal law enforcement for one simple reason — lawyers don’t like bringing cases against other lawyers.

But that might be about to change.

“There will be a real focus at the SEC on gatekeepers,” says DLA Piper partner Deborah Meshulam, who chairs the firm’s securities enforcement practice. “Both within a company and third party gatekeepers – lawyers in particular, but also compliance officers.”

In-house lawyers or outside lawyers?

“Certainly in-housecounsel, but also outside counsel as well,” Meshulam told Corporate Crime Reporter in an interview last week. “You see it in some of the penny stock fraud cases. You start to see them going after attorneys who have issued opinions in those cases.”

What about in the bigger corporate cases?

“In those bigger cases, it will be more in-house counsel. But they are looking hard at lawyers both inside as well as outside counsel. I can’t tell you we will see something in 2014. But I do believe that is an area of interest for them.”
Meshulam heads up an 80 lawyer securities practice at DLA Piper. The firm has a similar size white collar and corporate crime practice.

“We are all part of our litigation and global compliance groups,” Meshulam said. “My practice will sometimes move over into the white collar arena. But our white collar group obviously does much more with the Department of Justice. In my practice, the typical area of overlap involves the FCPA. Sometimes I see overlap in insider trading matters and to a lesser extent in financial fraud matters. I will typically be involved in those cases and will frequently be working in tandem with one of my colleagues who is former prosecutor.”

Meshulam also sees more financial fraud cases coming down the pike.

“You will see more of the classic financial fraud cases,” she says. “Not necessarily emanating from the financial crisis, but cases where the SEC is looking at financial statement issues and making claims based on alleged securities law violations in that area.”

How will the new SEC’s whistleblower program affect the practice?

“It poses risks for companies wanting to do the right thing,” Meshulam said. There is no requirement for the whistleblower to go through corporate compliance. It doesn’t give the company a chance to address potential issues on its own and to discern whether in fact there is an issue.”

“With a whistleblower, the risk is all of a sudden you find yourself in a full blown investigation which may or may not be warranted. I have seen over the years of my practice, while there are certainly legitimate complaints, there are whistleblower complaints not grounded in fact. And those are the types of claims that will be heard through the whistleblower proceedings and will create issues when none really exist and lead to expense and time to address those issues.”

What impact is the whistleblower program having on the SEC enforcement program?

“I have seen two impacts,” she says. “First is in the Foreign Corrupt Practices Act arena. Those may have been some of the initial whistleblower complaints that have gained traction. I have represented clients who have had to address those kinds of issues.”

“I have also seen an increasing trend of whistleblowers in the financial fraud arena. And that will continue to grow. Here I’m speaking from my experience in my practice and others in my firm and my colleagues outside the firm.”

What about the SEC’s new policy on neither admit nor deny?

“It is a real change from past practice where one of the chief benefits would be that the settlement would be on a neither admit nor deny basis,” Meshulam says. “Now, there is no real guarantee of that. It is a another factor in the equation. The SEC has said repeatedly that generally they will be adhering to the neither admit nor deny process. But there are certain cases, and we have seen a handful to date – five or six or so – where they have insisted on admissions. They have given four metrics to consider – the numbers of investors harmed, whether the conduct at issue was a significant risk to the market or investors, is the admission going to help investors decide whether to do business with the company, and whether you need admissions to send a message to the market.”

“You have to look at your cases to assess those risks, to see if those types of factors might be present. If in fact admissions become part of settlement, does it make sense to settle? What are the collateral consequences of admissions? Neither admit nor deny has always had collateral consequences at a certain level. Admissions have greater collateral consequences.”

“Is this a case where it might be better to risk a trial of some sort in order to avoid admissions? If not, you have to look at the process of negotiating the admissions and factor in the collateral consequences. And those collateral consequences are not just risks of civil lawsuits, but also in certain cases there can be risks of criminal prosecutions. You have to consider regulatory consequences – Reg D – the bad boy rules, bar orders in the FCPA field in terms of government contracts, various securities offerings.”

“There has been talk about whether the SEC should give exemptions to large businesses that have had to resolve enforcement issues. All of the potential collateral consequences of settlement with the SEC are magnified when you have an admission.”

[For the complete q/a transcript of the Interview with Deborah Meshulam, see 28 Corporate Crime Reporter 25(12), June 23, 2014, print edition only.]

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