Texas Senator’s Bill Would Make Plaintiffs’ Attorneys in Private Securities Cases Disclose Possible Conflicts Of Interest That Might Have Affected Client Retention

On March 22, Senator John Cornyn (R-Texas) introduced S. 652, which would mandate that plaintiffs’ lawyers in private securities actions reveal via sworn certification any fees or other conflicts of interest that might have impacted their retention of clients. Dubbed the “Securities Litigation Attorney Accountability and Transparency Act,” the bill would mandate that the courts review the certifications and disqualify any lawyers that had wielded such influence from the case.

Some plaintiffs attorneys feel that S. 652 disregards the effect that Private Securities Litigation Reform Act has had on securities cases. The bill has been referred to the Senate Banking Committee.

Meantime, another Texas lawmaker, House Financial Services Committee Chairman Jeb Hensarling , is asking the Securities and Exchange Commission to account for how it used resources in Gabelli v. SEC, a US Supreme Court case that affirmed the statute of limitations standard the regulator must abide by when bringing a civil penalty. Representatives Hensarling and Rep. Scott Garrett (R-N.J.), who chairs the HFSC’s Capital Markets subcommittee, wrote a letter to Commission chairman Elisse Walter expressing worry over how the regulator expends resources on “dubious legal theories” while failing to meet deadlines for rulemaking.

In Gabelli, the Supreme Court found that the five-year statute limitations for government civil liability actions start up when the fraud happened and not when it is found out. The Commission had been seeking the extended statute of limitations. However, the court said that the SEC ran out of time when it sued two investment adviser executives in 2008 in an alleged market timing scam that happened between 1999 and 2002.

While the defendants are the ones who asked the Supreme Court to hear the securities case, it was the SEC that appalled to the U.S. Court of Appeals for the Second Circuit. That court’s ruling, which favored the regulator, is what the nation’s highest court reviewed. Writing for a unanimous court, Chief Justice Roberts noted that unlike most private parties who don’t go around spending their days suspecting they were harmed, the Commission’s main purpose is to expose fraud and it has many tools to do so. The court expressed surprise that given the agency’s mission and the resources at its disposal to do the job, the regulator wasn’t able to discover the possible wrongdoing sooner and institute a civil case against Gabelli Funds within the five-year statute.

Hensarling and Garrett said the SEC should be more productive in the way it uses its resources, including implementing the long awaited Jumpstart Our Business Startups Act. They want the regulator to provide them with the exact number of hours Commission staff spent on Gabelli and how much this cost. They are also seeking an accounting of money paid to outside counsel over Gabelli.

Shepherd Smith Edwards and Kantas, LTD, LLP is a Texas securities fraud law firm that represents individual and institutional investors.

GOP Lawmakers Press SEC on Legal Costs, WSJ.com, March 25, 2013

S. 652: Securities Litigation Attorney Accountability and Transparency Act, GovTrakUS, March 22, 2013
Gabelli v. SEC (PDF)

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SEC Needs to File Securities Fraud Lawsuits Sooner, Rules the US Supreme Court, Institutional Investor Securities Blog, February 28, 2013

Texas Securities Fraud: IMS Securities Settles FINRA Case Alleging Inadequate Supervision of Wholesale Representatives, Stockbroker Fraud Blog, March 27, 2013

Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013