## Facts

- National Telephone Company was a financially troubled public issuer represented by securities attorneys William Carter and Charles Johnson.
- National pursued a contingent financing device called a lease maintenance plan (LMP) that, if triggered, would result in dissolution and was significant to investors.
- National’s CEO, Hart, controlled disclosure decisions and declined to file a Form 8‑K describing the LMP and omitted LMP-related information from disclosure documents.
- Over an extended period, Carter and Johnson repeatedly urged Hart to disclose the LMP and its consequences, but Hart refused.
- When the LMP was eventually triggered, Hart asked Carter and Johnson to provide a legal opinion stating disclosure was not required.
- Carter and Johnson refused to provide a nondisclosure opinion; Hart then resigned.
- The SEC alleged that, by drafting and participating in issuer disclosure documents while the LMP was not disclosed, the attorneys aided and abetted securities law violations and engaged in improper professional conduct before the SEC.

## Issues

1. Whether issuer’s counsel who are aware of material nondisclosure but continue representation can be found to have aided and abetted violations of § 10(b) and Rule 10b‑5 for purposes of SEC Rule 2(e) discipline.
2. What mental state and conduct standard governs “improper professional conduct” by attorneys in SEC Rule 2(e) proceedings, including whether negligence suffices and what is required once counsel becomes aware of ongoing material nondisclosure.

## Decision

- The Commission reversed the ALJ’s imposition of Rule 2(e) sanctions against Carter and Johnson.
- The Commission found the record insufficient to establish the mental state required for aiding and abetting or for fraud-based professional discipline, given the attorneys’ repeated advice to disclose and their refusal to bless nondisclosure.
- The Commission declined to discipline the attorneys based on an attorney-conduct standard that had not been clearly articulated at the time of the events.
- The Commission announced a forward-looking standard for attorneys practicing before it regarding steps required when counsel learns of material violations affecting SEC filings.

## Legal Principles

- In fraud-based attorney discipline matters, aiding-and-abetting or comparable findings generally require a culpable mental state (at least recklessness or knowing participation), not mere negligence or poor judgment.
- Where a lawyer has substantial responsibility for an issuer’s compliance and learns of ongoing material nondisclosure, continued participation without taking prompt steps to avoid being associated with the misconduct may constitute improper professional conduct before the SEC.
- “Prompt steps” may include renewed efforts to persuade responsible officers, escalation to higher corporate authority, withdrawal from the representation, and, where appropriate, disaffirmance of prior work product associated with misleading disclosures.
- Fair notice limits discipline based on newly articulated expectations; prospective standards may be announced without retroactive sanctions when the governing attorney obligations were not clearly formulated at the time of the conduct.

## Conclusion

The SEC set aside sanctions against issuer’s counsel because the evidence did not show the requisite scienter and because the governing attorney duties had not been clearly stated at the relevant time, while simultaneously establishing prospective expectations that securities counsel with significant compliance responsibility must take prompt action to distance themselves from and seek correction of material nondisclosure in filings.


In re Carter & Johnson, 47 S.E.C. 471 (S.E.C. 1981)