SEC Ratchets Up Enforcement Against Attorneys in Microcap Space


Earlier this year, SEC Chairman Jay Clayton fired a warning shot across the bow of practicing securities attorneys: “act responsibly and hold [yourselves] to high standards.” Chairman Clayton specifically called out members of the securities bar advising clients on initial coin offerings (ICOs) that were not being registered with the SEC under the federal securities laws. He cautioned that his staff is “on high alert” for conduct that “may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar.” In other words, Chairman Clayton warned that the SEC was looking to bring enforcement actions against attorneys who failed to live up to their “gatekeeper” responsibilities.

While we have not seen (yet) a barrage of SEC enforcement cases charging attorneys in the ICO space, the Chairman’s shot across the bow in January turned into a direct hit recently for attorneys practicing in the microcap space – low-priced stocks issued by small companies trading on the over-the-counter (OTC) market. As the recent enforcement cases discussed below suggest, the SEC is not hesitating to charge securities attorneys practicing in areas that are most likely to affect retail investors. And while the SEC has from time to time in the past charged attorneys for misconduct, it is a fair question to ask whether the SEC is now specifically targeting attorneys as part of its new enforcement agenda focused on retail investor protection.

Recent Cases Charging Attorneys

In SEC v. Faiyaz Dean, et al., filed May 15, 2018, the SEC charged four individuals, including an attorney, for creating the false appearance that shares of the microcap issuer Biozoom were legally available for sale to the public, and that the price and trading volume of the shares were being determined by the market and not through artificially generated manipulative trading. The Commission described the attorney’s role as furthering the scheme by acquiring stock in order to conceal the defendants’ control of the stock and hide the fact that the stock should not have been immediately available for resale to the public. Dean then allegedly helped create brokerage accounts in which Biozoom shares were deposited and then sold to the public.

In SEC v. Adam Tracy, et al., filed on May 1, 2018, the SEC charged an Illinois-based securities lawyer and his law firm for preparing false registration statements and opinion letters with the Commission in connection with a company’s offering of 10 million shares of common stock on the OTC market. The SEC described the lawyer’s alleged role in purposely concealing the identity of the operator of the company who had previously been convicted of securities fraud. The complaint alleged that Tracy listed the purported CEO and Secretary of the company and forged their signatures, knowing that the convicted felon would continue to be the true head officer of the company. The SEC charged Tracy and his law firm with aiding and abetting violations of securities laws.

Lastly, in SEC v. Diane J. Harrison, et al., filed on April 25, 2018, the SEC charged an attorney with violating securities laws relating to two microcap schemes and undisclosed “blank check companies.” The Commission alleged that an attorney participated in two fraudulent schemes to manufacture public companies for sale premised on a deceptive public float of free-trading securities. In the first scheme, Harrison allegedly created five public companies with the undisclosed intent to sell them based on their status as public companies with a pool of securities available for public trading. In the second scheme, the Commission alleged that Harrison submitted at least 21 false legal opinion letters in support of a fraudulent scheme involving at least 11 undisclosed blank check companies that were actually controlled by two of her clients.


Most of us would agree that the attorney misconduct described in these cases is serious and worthy of an SEC enforcement action. The real concern, however, is that the SEC might be trending towards bringing enforcement actions where it second guesses an attorney’s good-faith legal advice to clients. This concern may be most relevant where an attorney’s legal advice is viewed by the SEC as not being consistent with the agency’s broader policy agenda. Take for example the ICO space, where the SEC’s policy agenda is clear – all ICOs should be registered with the SEC so they are subject to the same disclosure and investor protection measures as initial public securities offerings (IPOs).

The question of whether an ICO should be registered with the SEC turns on the legal question of whether the ICO involves the offering of a security or a non-security product. There is an obvious tension where the SEC favors ICO registration as an investor protection policy, but clients disfavor registration because of legitimate business reasons, such as the time and costs associated with the SEC registration and review process.


It would certainly be unfortunate if the SEC decided to pursue enforcement actions against attorneys who provide their clients with good-faith legal advice that may not be entirely consistent with the SEC’s broad policy agenda. Chairman Clayton was indeed correct when he said that the securities bar plays an important role in protecting the American investor. However, it should not be overlooked that an attorney’s first duty is to provide clients with good-faith legal advice to allow them to pursue a course of action that serves their own business and economic interests.

An earlier version of this article was originally published on Law360.

Joseph Dever is a partner in Cozen O’Connor’s New York office and leads the firm’s securities litigation and SEC enforcement practice. He is a former Assistant Regional Director in the SEC’s Division of Enforcement. William Lesser is an associate at the firm and practices in the securities litigation and SEC enforcement group. Joseph is a Temple Law School graduate of the class of 1995 and William of the class of 2015.

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