International Law

Ponzi Schemes and Gatekeepers

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Attorneys are often called gatekeepers. "Classical gatekeeping theory introduced by Prof. Reinier Kraakman in his seminal article (Gatekeepers: Anatomy of a Third Party Enforcement Strategy, 2 J.L. Econ. & Org. 53 (1986)).

In that article, Kraakman clarified that a gatekeeping strategy requires gatekeepers "who can and will prevent misconduct reliably, regardless of the preferences and market alternatives of wrongdoers."

The practical difficulty with this theory resides in its obvious collision with the duty of the attorney to keep his clients information confidential.  The attorney could not usually simply rat out his fink client to the appropriate regulator.

So how was it that Proskauer Rose's Thomas Sjoblom resigned from representing Allen Stanford, and was able to spur the SEC investigation forward?

The answer is, partially, found in Zac Lowes' article on SOX and a concept called "noisy withdrawl."

"The SOX Act contains a provision that explicitly states that any attorney before the Securities and Exchange Commission "may" reveal confidential client information to investigators if that attorney believes that doing so will prevent a violation of the law or help rectify losses investors have already suffered, says Bruce Green, a law professor and ethics expert at Fordham University."

Stephen Lubet, the author of Poker Lessons for Trial Lawyers, says "The SOX regulation gave securities lawyers clarification if their state bar associations or state laws did not."

This would be a good opportunity to extend this clarification or guidance to all lawyers performing gatekeeper scrutnity, like those whose prepare Franchise Disclosure Documents.  There is nothing unique about securities attorneys that warrants giving them and only them this important guidance.

Full post as published by Misleading Advertising Law on February 20, 2009 (boomark / email).