WASHINGTON -- The Securities and Exchange Commission's top lawyer delivered a blistering attack on bond lawyers Saturday, charging they have done little to address pay-to-play problems in the municipal bond market.
In a speech before the American Bar Association's business law section, Simon M. Lorne, the SEC's general counsel, said it is "shocking" that bond lawyers have done little to confront pay-to-play practices and that they appear to be in a "state of denial" about such practices that is "profoundly dangerous" to the legal profession.
Lorne also said that the SEC may soon turn its attention to whether investment advisers are engaging in payto-play practices in the municipal market that should be curbed.
"We thought we'd look at that one when we solved this one," he said in response to a question about investment advisers.
"There is a concern, and we see fallout from that in a number of ways," he said, "It's [a problem] that deserves attention, but it's probably a little bit downstream."
But Lorne's speech to the group was focused on the bond lawyers and their failure to address pay-to-play practices.
Lorne told the group that the municipal finance arena is "unique in the world of securities regulation" and has "been infested with some of the most odious of practices.
"That may be because the field is one in which ultimate success is defined, not by the bottom line of an enterprise, but in voting results for public officials," he said.
Lorne recounted that some years ago, in private practice, he got a call from an investment banker who said that a state political figure had demanded that the firm make a five-figure contribution to his campaign or be excluded from all state finance activities. The investment banker asked Lorne what to do.
"I was shocked by the question," Lorne said. But after considerable research, Lorne said he was forced to tell the investment banker that "the best answer was probably to write the check. There was no clear illegality.
"I did not like giving that answer. I don't know what happened. I assume the check was written," he told the group.
"We need to reform the way in which business is done in the municipal finance area. And what the bar has done in this area to my mind is nothing short of shocking," Lorne said.
While most investment banking firms agreed months ago to voluntarily ban political contributions to state and local officials and to support the adoption of a Municipal Securities Rulemaking Board role aimed at banning pay-to-play practices, the bond lawyers have done little, Lorne said.
The National Association of Bond Lawyers refused to adopt a similar voluntary ban and instead issued a policy statement in February calling for firms to disclose political contributions. So far, only one law firm -- not any of the firms represented on the association's board of directors -- has adopted the policy statement.
The NABL statement says that pay-to-play allegations "are largely unsubstantiated" and that if such allegations are ever "proven" they should be dealt with through general campaign finance reform rather than reform in municipal finance practices.
"I find this 'state of denial' profoundly dangerous to the profession," said Lorne.
While NABL may be technically correct that such allegations have not been proven, Lorne said, "dismissing such reports -- and the resulting public impression -- as the unfortunate product of a mixture of unfounded allegations, a scandal-driven press, and a cynical public does not promote confidence in the profession."
"Whether it is one of perception or reality -- and I believe it is one of reality ... [the problem] must be addressed," he said.
Lorne said he personally believes that disclosure of political contributions is not enough.
"I cannot abide the reluctance of the organized bar to endorse what is to me so clearly necessary a drive when it has already been endorsed by the investment bankers," Lorne said.
"The public deserves better from us. The bar should be at the forefront of this drive, accepting and encouraging voluntary bans while leading the exploration for better, more effective ways to clean up the dirty little practices we find in the municipal finance area," he said.
"The bar should not allow itself, as it now is, to be perceived as fighting to preserve the shoddy practices of the past," he said.
Lorne said he recognizes lawyers want to be free to support political candidates and that minority firms might want to support minority candidates.
But minority firms' "concerns are misplaced when they suggest that [they] need to be able to pay in order to play," he said.
One lawyer said after the speech that he worded Lorne was starting down a "slippery slope" because it is difficult to determine where to draw the line on political contributions.
But Lorne told the lawyer, "I think the slippery slope would be there if I were talking about regulation of the practice from the government side. I'm not.
"I am asking the bar to be more active as the investment bankers were with the voluntary ban," he told the lawyers after the speech in a question and answer session.
"I am asking the bar to put itself in the position of trying in various ways to avoid identification of passing out legal work as a quid pro quo for political activities.
"I don't think the bar should be seen fighting to support that kind of activity," he said.