When dealing with lawyers — especially on matters as complex as securities law — even the most controlling clients are tempted to go passive.

The instinct is generally rooted in good intention: Stay out of the pro's way and let him work his magic. But, as the experience of James Glaza underlines, it's important to remember that no matter how complex the case, ultimate responsibility for strategic decisions resides with the client.

Glaza Over the Details

Glaza's tale of legal woe began on Jan. 21, 2003, when the SEC Division of Enforcement instituted proceedings (Matter of James F. Glaza, D/B/A Falcon Financial Services, Inc.). The division alleged that Glaza, while a registered rep, sold nonexempt unregistered securities and made material misstatements or omissions in connection with their sale.

Glaza's attorney, Walter Baumgardner, filed an answer denying the allegations on April 2, 2003, and a hearing before an administrative law judge was scheduled for July 7. However, during a teleconference on June 30, Baumgardner and the division's counsel proposed submitting Stipulations of Fact and Conclusions of Law instead of holding a formal hearing. The idea was to try and settle the case expeditiously. Baumgardner told the judge:

I have conferred with my client this morning just to make sure that I was not overstepping my bounds. And he is certain, he said, ‘I would be amenable to [submitting a written stipulation of facts and written briefs]…’ [H]e'll take the cease and desist and the bar from the industry, that's not the problem.

However, because Glaza and the SEC could not agree on the amount of the disgorgement and the civil money penalty to be paid, they agreed to submit written briefs on those issues.

On July 3, the stipulations (which numbered almost 100) and the legal briefs were submitted to the judge, who issued a decision a few months later requiring Glaza to:

  • Cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

  • Sever any association with any broker/dealer.

  • Cease participating in any offering of a penny stock.

  • Disgorge $780,131, plus prejudgment interest.

  • Pay a $110,000 fine.

On Further Review

These terms' sanctions apparently were not to Glaza's liking; on Oct. 3, he hired new lawyers (Anthony Djinis, Paul Bazil and Peter McLeod, of Pickard & Djinis LLP) to file an appeal. The appeal claimed Glaza never intended to stipulate the facts or the relief set forth in the stipulations and always intended to vigorously defend himself against the charges.

Glaza also charges Baumgardner falsely represented his authorization to negotiate the stipulations before the judge. More specifically, Glaza claims that Baumgardner told him that the stipulations merely set forth the division's case and that he would have the opportunity to defend himself fully by means of written briefs.

Glaza claims that, when he expressed hesitation about signing the stipulations, Baumgardner yelled at him for delaying their filing and warned him, “He would only go…to the hearing if he absolutely had to, but was completely unprepared for trial and we'd get killed if he went.”

Glaza attempted to get a second opinion on the matter from other attorneys, but felt “browbeaten” by Baumgardner “into signing the document immediately.”

Glaza eventually got second and third opinions, both of which argued against submitting the stipulations, so Glaza says he immediately contacted Baumgardner to ask him to withdraw them. Baumgardner's reply, according to Glaza, was that the stipulations could not be withdrawn and that “signing the document was the correct thing to do in vigorously defending the case.”

Glaza's contention, of course, is that the reason Baumgardner resorted to the stipulations was because the attorney was not prepared for the hearing. This misrepresentation of the nature and legal effect of filing the stipulations amounted to fraud, Glaza contends.

He further argues that Baumgardner's actions render the stipulations an unenforceable contract.

He also maintains that the negotiation and execution of the stipulations did not follow SEC procedure and is therefore seeking a hearing that might vacate the decision.

Making a Call

The SEC is loath to set aside decisions, absent very compelling circumstances. However, in this case, the SEC saw the need to ensure the fairness and impartiality of its proceedings and to underscore that the heart of the process is the search for truth.

To the extent the stipulations are tainted by fraudulent or improperly coercive conduct, the integrity of the SEC's proceedings could be undermined.

Pointedly, the SEC recognized the seriousness of Glaza's allegation that his lawyer committed fraud and believed it appropriate to give the parties an opportunity to fully brief the issues and legal standards involved. Accordingly, the SEC remanded the matter back to the original judge to determine whether there is a basis for Glaza's allegations, to weigh their credibility and to determine their impact on the overall fairness and integrity of proceeding.

To date, Baumgardner's version of events have yet to be revealed publicly. But even in the absence of his side of the story, it's possible to draw some lessons from Glaza's experience.

First, the fact that the crucial day for this case was the Monday after the Fourth of July weekend cannot have helped the involved parties ensure they were fully prepared or clearly communicating. Scheduling is an important detail.

Glaza could have saved himself a lot of trouble by doing one simple thing: Making sure he understood and agreed to the contents of the document he signed.

In the end, understand that if you are a respondent in a regulatory matter you can't be a spectator or bystander; It's your career at stake. Watch the calendar, ask questions, insist upon answers you understand and never, ever sign anything you don't understand.

Writer's BIO: Bill Singer
is a partner with the law firm of Gusrae, Kaplan & Bruno. rrbdlaw.com