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April 5, 2010 5:22 PM

Report Spotlighting Venable Lawyer Spawns Larger Debate on SEC's "Revolving Door"

Posted by Zach Lowe

Late last month, we told you about a withering report by the Securities and Exchange Commission's inspector general that essentially accused the agency of blowing an investigation of Allied Capital that was prompted by complaints that the equity firm was overvaluing its investments. The investigators handling the Allied case focused instead on fund manager David Einhorn, who during a speech in 2002 announced he was taking a short position on Allied. 

Why did investigators focus on Einhorn and not Allied? One reason, according to the report: Mark Braswell, the SEC official who initially oversaw the case, directed his subordinates to zero in on Einhorn instead of Allied. Braswell left the SEC in 2004 and joined Venable as a partner. Almost immediately after that move, Braswell registered as a lobbyist for Allied, according to the report and this Washington Post story

Now the report has spawned larger questions about lawyers who leave the SEC, join big law firms and then begin representing companies before the SEC. The so-called revolving door at the SEC is front and center in today's Wall Street Journal, which reports that a total of 66 former SEC employees notified the agency in 2008 and the first six months of 2009 that they would be representing clients in SEC matters. About half of those matters were identified as "ongoing nonpublic investigations," the WSJ found. 

The SEC's rules require any former employee to send them a letter if that employee represents a client before the SEC within two years of leaving the agency, the WSJ says. 

The WSJ features several Am Law 100 lawyers, including Andrew Dunbar, who left his position as an enforcement lawyer at the SEC for Sidley Austin in August 2008 and was representing a client before the agency 11 days later. There's also O'Melveny & Myers partner Martin Dunn, who held a senior position at the SEC and thus was required by agency rules to wait one year before representing any client in an SEC matter, the WSJ says. Within just a few weeks of that one-year deadline's passing, Dunn had already filed disclosure letters informing the SEC he would be representing three different clients, the WSJ reports.

And then there's the second part of the Allied investigation. As we reported last month, the SEC took up the Allied matter again after Braswell left for Venable. Allied managed to avoid facing fraud charges even though an SEC investigator and accountant found "major problems" with Allied's books, the inspector general's report says. One reason, according to that report: at least one enforcement official was willing to give former agency employees "the benefit of the doubt."

Who were those former agency employees? Citing sources familiar with the matter, the Journal fingers one: Allied's outside counsel at the time, Wilmer Cutler Pickering Hale & Dorr partner William McLucas, the SEC's former director of enforcement. (The inspector general's report doesn't name McLucas, but it mentions a high-powered Wilmer partner who clearly intimidated SEC staffers. One staffer told the inspector general that the partner's presence meant Allied was "heavily, heavily armed," and that the partner only "gets brought down on high for certain events.")

All of this has some ethics experts in a huff, the WSJ reports. "The training and expertise gained at the SEC is put to use for the benefit of those working against the interest of investors," John Freeman, a professor of business ethics at the University of South Carolina School of Law, told the paper. 

Others, including O'Melveny's Dunn, disagreed. "Everybody I know cares intensely about following the ethics rules," Dunn told the WSJ.

Intrigued by Dunn's comments, we reached out to him to ask a bit more about that first year at O'Melveny--what he did, what he didn't do, and what he told prospective clients. By day's end, we hadn't heard back. We'll let you know if we do.

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