There are many aspects of legal practice. The one that the public is most familiar with is substance. However, there are other aspects that affect the way we practice law and how lawyers are perceived.
The most obvious legislative changes are new laws passed by the United States Congress and various state legislatures. These lead to legal disputes in which the ambiguities in new laws and in the regulations on interpretation issued by the supervisory authorities are clarified. Legal opinions are another source of change, as judges interpret the law on a case-by-case basis, which can lead to a change in the law. Articles in law reviews are another source of change. Historically, legislative review articles discuss new ideas for changing the law. And then there are the lawyers who act as lawyers and try to change the law if necessary.
One example is Brown v City of Covington, where I was the plaintiff’s chief attorney. We had resigned ourselves to everyone but Covington and the question was whether a community could be sued for violating the anti-fraud provisions of the federal securities law. As a result of the financial crisis in New York City in the mid-1970s, the district court issued a statement in which the anti-fraud provisions of the Securities Exchange Act of 1934, as amended, were interpreted as inapplicable to local authorities. There were approximately five district court opinions following this decision. There were no decisions that were inconsistent with the outcome or rationale of the court.
After reviewing these decisions, we became convinced that the original decision was inconsistent with the overarching principle that no one should be excluded from the anti-fraud provisions of the Federal Securities Act. In our case, we claimed and could prove that the city was knowingly involved in the creation of a false and misleading prospectus. When describing the feasibility of the project and the corresponding expert report in the prospectus, the prospectus failed to indicate that there were two previous feasibility reports and it was concluded that the project was not economically feasible.
About a year after the city made the public offer of these bonds to healthcare facilities, the bonds defaulted because the project was not economically feasible. As a result, the bonds became worthless. We also believed the New York District Judge had misunderstood the law and its underlying regulations. At the time, New York City was in dire financial straits and if the city could be held responsible for fraudulent offers of its bonds it would go bankrupt. Since I was living in New York at the time, this results-oriented decision came as no surprise, and many believed it was a major factor in saving the world’s largest city from bankruptcy.
We filed a motion with the Kentucky Federal District Court judge believing these decisions were wrong and that this was the perfect case to change the law. The district judge wrote a statement denying our request, but noted that, although he believed our position was correct, previous case law had compelled him to deny our request. We asked him to confirm this question for review by the 6th Circle Court of Appeals, which he did. This was a problem that had never been resolved by a federal court.
In the 2: 1 decision, the Sixth Circuit confirmed. But there was a well-founded dissent that took our position. We then applied to the United States Supreme Court for confirmation. While the petition was pending, the case with the city was settled. Very shortly thereafter, the US Congress amended the Securities Exchange Act of 1934 to apply the anti-fraud provisions specifically to local authorities.
The communities were no longer above the law and were now responsible for issuing fraudulent prospectuses to raise money from the public. This is just one example of how lawyers working within the judicial system can influence laws that change the law. As I write this article, I think it is time to tell my grandchildren how, in this case, their grandfather helped change the law so that people who buy municipal bonds now have the option to open municipalities for spending of bonds to be sued under a fraudulent prospectus. This change has also made municipalities and those participating in municipal bond offerings much more cautious. And now I know why I became a lawyer.
Charles Hecht is an entrepreneurial lawyer who had his own law firm for 39 years and who recently joined Balestriere Fariello as a partner. He specializes in innovative solutions for complex litigation, arbitration and securities transactions. He values teamwork, which is one of the reasons he joined a New York boutique law firm. He and his colleagues represent national and international clients in litigation, arbitration, government investigations and securities transactions. You can reach him by email at [email protected]