We previously discussed the challenge brought by Laurie Bebo, the former CEO of Assisted Living Concepts, Inc. (“ALC”), against an SEC administrative enforcement action brought against her: New Challenge to the Constitutionality of an SEC Administrative Proceeding Filed in Bebo v. SEC. We now provide an example of why SEC procedures create at least the appearance of bias, and likely more than that, in these proceedings.
You see, the SEC Commissioners have already entered into a settlement with Bebo’s co-respondent, John Buono, who was the CFO of ALC who reported to Ms. Bebo. As is typical in these administrative cases, the settlement agreement results in a filing in which the SEC literally makes “findings” consented to by the settling respondent, laying out what supposedly happened and why it was unlawful. Indeed, the document issued by the SEC is an “Order Making Findings and Imposing Remedial Sanctions.” See the Order just issued in the case captioned In the Matter of Laurie Bebo and John Buono, CPA here: In re Bebo and Buono Administrative Findings. The Order says that it is “not binding on any other person or entity in this or any other proceeding,” but it also plainly is, and is intended to be, “findings” of the Commission justifying the “remedies” — actually penalties — it imposes.
Here, the Order presents 54 paragraphs of detailed factual “findings” and another six paragraphs laying out multiple violations of law “found” by the Commission against Mr. Buono. The Order says that the Commission has already “found” that Mr. Buono “willfully violated” section 10(b) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 10b-5 thereunder, “willfully aided and abetted and caused” violations by ALC of section 13(a) of the 1934 Act and rules thereunder, “willfully violated” SEC Rule 13a-14, “willfully violated” section 13(b)(5) of the 1934 Act, “willfully violated” SEC Rules 13b2-1 and 13b2-2, and “willfully aided and abetted and caused” ALC’s violations of sections 13(b)(2)(A) and 13(b)(2)(B) of the 1934 Act.
The fact that these are “findings,” and not “allegations,” which is what the SEC files in federal court cases, is no mere accident. It is a long-standing practice for administrative settlements. The difference is meaningful in some areas. For example, the existence of “findings” of violations by the SEC creates potential insurance coverage or licensing issues that “allegations” do not. As a result, in some cases settling parties would prefer to settle a case based on allegations in federal court than accept an administrative settlement based on SEC “findings.”
The Commission also imposed severe penalties on Mr. Buono, including permanent bars against him ever serving as an officer or director of a public company, or ever practicing accounting before the Commission (i.e., taking an accounting job with any public company), plus a $100,000 penalty. It thus has already concluded that its “findings” warrant those draconian penalties. (For a 51-year-old professional, likely supporting a family, who has just been effectively barred from the employment for which he is most suited, there is no doubt these are severe penalties.)
Now, Ms. Bebo is being forced to appear at trial before an administrative law judge who reports to the Commission that made these “findings.” And once that administrative judge issues a ruling, Ms. Bebo’s only path of appeal goes through the very same Commission that made “findings” of illegality by her colleague and imposed severe penalties on that basis. (Only after the SEC adjudicates a challenge to the ALJ decision is there an appeal to a federal appellate court, and that appeal requires that court to treat SEC findings with deference.) The Buono findings are not “binding” on Ms. Bebo or the Commission in her case, but the notion that the same people who decided the case against Mr. Buono as they did will ultimately hear the case being litigated by Ms. Bebo strikes at the heart of fundamental concepts of fairness. Does anyone want to take odds that the SEC will not take contrary positions in Ms. Bebo’s case to the ones they already approved in Mr. Buono’s case? Contact me and we’ll work out a bet.
The potential bias arising out of the adjudicators’ “findings” against co-respondents is just one of numerous fairness issues raised by SEC administrative proceedings that may impose severe penalties against persons unregulated by the SEC. Some others were discussed in our previous posts: Ceresney Presents Unconvincing Defense of Increased SEC Administrative Prosecutions, and Opposition Growing to SEC’s New “Star Chamber” Administrative Prosecutions.
January 30, 2015
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