SEC May Sue Lawyer in Endocare Probe

The Securities and Exchange Commission, broadening its pursuit of professional advisors in corporate fraud cases, is considering suing a lawyer hired to help with an Irvine medical device maker’s internal accounting probe, people familiar with the matter said.

The SEC notified former Brobeck, Phleger & Harrison partner Christopher McGrath, 42, more than a month ago that he might face civil sanctions for his role in an investigation at Endocare Inc., said the sources, who declined to be identified.

Since the collapse of energy trader Enron Corp. in 2001, the SEC has imposed sanctions on lawyers, accountants and investment banks that helped companies mislead investors.

SEC Enforcement Director Stephen M. Cutler said recently that he also was concerned that some lawyers hired to investigate signs of fraud might have helped cover it up.

“This looks like an expansion of the government’s crackdown on gatekeepers, particularly accountants or lawyers who bless a company’s prior conduct,” said William McLucas, a former SEC enforcement chief, who conducted the internal investigation at Enron. “It ratchets up the risk for lawyers doing inquiries that are held out to the public as independent.”

McGrath, now a partner in the San Diego office of Paul, Hastings, Janofsky & Walker, a 950-lawyer firm, didn’t reply to requests for comment.

SEC spokesman John Heine declined to comment. McGrath’s former firm, Brobeck, which filed for bankruptcy protection last year, isn’t under investigation by the SEC, the people said.

Exactly what McGrath did to draw scrutiny isn’t clear. Endocare issued a news release last year saying the probe he conducted found no “intentional wrongdoing by management.”

About a month later, Endocare said it was under investigation by the Justice Department and the SEC, which has since threatened to sue the company and its former managers.

The SEC has encouraged corporate boards to hire outside legal advisors, saying their findings help the agency root out fraud quickly.

An SEC suit against McGrath may define how far lawyers have to go to police a company after assuming the role of investigator, according to former SEC officials, who said the agency had never sued a lawyer over the alleged mishandling of a corporate probe.

If the SEC proceeds with a case against McGrath, other lawyers may balk at taking on company investigations, said Gregory Bruch, a former SEC assistant enforcement director.

“There will be some firms who look at this and say, ‘We will never do another,’ ” said Bruch, a partner at Foley & Lardner in Washington. “They’ll think this forces them to choose between being defense counsel and doing these investigations, which are very difficult and messy.”

Endocare’s audit committee hired McGrath in October 2002 to examine “certain transactions and accounting practices” at the company, according to an affidavit McGrath filed the next year in a shareholder lawsuit in Delaware.

Endocare makes products to treat prostate cancer and impotence.

McGrath was retained after an Endocare finance executive contacted a board member “expressing concerns” about the company’s accounting, according to a letter filed with the SEC in March 2003 by KPMG, Endocare’s auditor.

The executive, Joseph Hafermann, was fired two months after McGrath’s arrival for “misconduct,” Endocare said in December 2002.

McGrath retained accounting firm Deloitte & Touche to examine Endocare’s books. He presented a Deloitte report to Endocare’s board in January 2003, according to Delaware court records.

Spokesmen for Endocare and Deloitte declined to comment.