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Proceedings Dismissed Against Broker-Dealer General Counsel

Scott G. Monson, IC Rel. 28323 (June 30, 2008)

Time since appeal filed - 11 months, 27 days
Times since last brief - 9 months, 2 days
Pages - 10
Footnotes - 29


This is a significant opinion.  The Commission will not discipline lawyers unless they act with scienter.  Mere negligence is not enough.  Here, the Commission found the lawyer was not even negligent.

Monson was formerly general counsel of broker-dealer JB Oxford & Co.  The Order charged Oxford facilitated thousands of late trades at 600 mutual funds for various institutional clients for over a year in violation of Investment Company Act Rule 22c-1.  That rule requires funds, their underwriters, dealers and others to effect transactions to sell and redeem fund shares at a price based on the net asset value next computed after an order.  Monson was charged with violations because he drafted an agreement that permitted Oxford clients to trade late.  The proceedings sought a cease and desist order against Monson.  The ALJ dismissed the case against him.

The Division of Enforcement argued Monson was negligent.  The Commission found otherwise.  Monson was directed to prepare the agreement by an Oxford officer.  He had no previous IC Act experience.  He did not question the provision of the agreement that permitted late trading .  As a result, clients were able to receive stale same day prices for late fund trades.  The ALJ found that Monson had not acted intentionally because he relied on others with extensive operational experience to verify that the late cut-off time in the agreement was consistent with the law.  The Division on appeal argued that a reasonable attorney in Monson's position acting with due care would have verified the propriety of the trade cut-off time in the agreement he drafted.  It claimed that by working on the agreement without knowledge of this area of the law, Monson was negligent.

The Commission pointed out that in 1981 in the William R. Carter case, it found that lawyers should not be liable because the advice rendered ultimately proves wrong. It eschewed finding a lawyer liable for good faith errors of judgment or negligence.  It further noted that it has refrained from bringing enforcement actions against lawyers under its disciplinary Rule 102(e) based on negligence.  

It concluded that "[c]oncerns about the scope of liability that have motivated our restraint with respect to Rule 102(e) actions against lawyers similarly are present in litigated administrative enforcement actions such as this case alleging a lawyer caused another persons violations of the securities laws.  The charges against Monson as framed by the Division - that Monson departed from professional standards of competence in rendering private legal advice to their clients - raise the same risks we identified in Carter and other proceedings: an encroachment by the Commission on regulation of attorney conduct historically performed by the states; interference with lawyers' ability to provide unbiased, independent legal advice regarding the securities laws; and chilled advocacy on behalf of clients in proceedings before the Commission." (footnotes omitted)

The Commission did state that it will pursue enforcement actions against lawyers who act with scienter, render misleading opinions used in public disclosures, or engage in conduct that would case a non-lawyer to be liable.

The Commission concluded that Monson was not even negligent because the record showed that another Oxford official was responsible for determining whether the time cut-off in the agreement was appropriate.  Monson was never asked to evaluate or opine on whether that time was legal.  Further, Oxford did not generally rely on Monson to opine on whether the firm's activities complied with the securities laws, he generally handled customer complaints and litigation and did not act as a general securities law advisor to the firm.


Given the Carter precedent and the fact that Monson did not generally act as a securities law "general practitioner" for the firm the conclusion here is not particularly surprising.  The most interesting issue remains undiscussed in the opinion.  Carter clearly holds that negligent attorneys will not be charged.  Why then did the Commission bring proceedings against Monson in the first place if the sole basis for them was a claim of negligent misconduct?  And why did the Division pursue an appeal using a negligence theory?