The SEC’s long and tortured Theodore Urban case finally came to an end when the Commission reversed the ALJ’s decision and dismissed the case.
Since the case was brought, the SEC has made public statements to try and clarify how it intends to enforce supervisor liability. Recently, SEC Commissioner David Gallagher explained “ if a firm employee in a traditionally non-supervisory role has expertise relevant to a compliance matter, that employee shouldn’t fear that sharing that expertise could result in a Commission action for failure to supervise.”
The Urban case represented another risk of enforcement for in-house counsel. Urban was the general counsel at Ferris Baker & Watts in 2009, and was prosecuted by the SEC for failing to reasonably supervise FBW broker, Stephen Glantz, to detect or prevent Glantz’s violations of the anti-fraud provisions of the federal securities laws.
The SEC presented evidence that Urban first became aware of compliance concerns relating to Glantz in 2003, including Glantz’s use of margin accounts and his trading of one stock. Urban met with Glantz and FBW’s risk committee imposed restrictions on Glantz. The risk committee had several meetings and discovered that Glantz’s clients were not aware of his trading activity. Urban recommended firing Glantz. FBW declined and closely supervised Glantz, who resigned in 2005. The SEC later charged Glantz.
The SEC charged Urban as Glantz’s supervisor because he monitored Glantz’s actions between 2003 and 2005. The ALJ found that, even though Urban did not have a direct supervisory role over Glantz, that Urban had the “requisite degree of responsibility, ability or authority to affect Mr. Glantz’s conduct.”
In his recent speech, Commissioner Gallagher sought to exclude in-house counsel and compliance personnel from supervisor liability because of the disincentive it might create for legal and compliance staff to identify and prevent violations of the securities laws. He noted that such personnel typically operate outside the direct chain of supervisors and responsibilities for day-to-day activities.
Commissioner Gallagher’s speech is a welcome position to the dialogue. There is no question that imposing liability on legal and compliance officers can create perverse incentives when it come to carrying out their responsibilities.
Companies need to address this risk by addressing the role of compliance and legal staff in the company’s overall compliance program. In particular, the company needs to clarify that legal; and compliance personnel do not ever exercise direct supervisory responsibility over employees who may be engaged in misconduct.