The administrative enforcement action brought by the SEC against Laurie Bebo, the former CEO of Assisted Living Concepts, Inc. (“ALC”) is serving as a case study showing why it is highly improper to use the administrative forum to prosecute serious fraud claims against individuals or entities not subject to SEC regulatory authority. We previously discussed elements of unfairness in this proceeding in our post In re Bebo Shows Why SEC Administrative Proceedings Have Fairness Issues. A new ruling by the administrative law judge in that case shows once again how the administrative forum tilts the field significantly (and unfairly) in favor of the SEC in comparison to federal courts, to the point that due process of law is threatened.
The SEC filed a motion in limine to allow it to introduce a broad range of hearsay evidence: 16 sworn declarations and three deposition transcripts. By all appearances, none of these documents would be admissible as evidence in federal court because there is no apparent exception to the hearsay rule that would allow the SEC to avoid live testimony, subject to live cross-examination. Ms. Bebo opposed the motion. Administrative Law Judge Cameron Elliot ruled that the evidence would be admitted under a provision of the SEC Rules of Practice allowing an ALJ to admit into evidence the prior sworn statement of a witness, other than a party, if “it would be desirable, in the interests of justice, to allow the prior sworn statement to be used.” SEC Rule 235(a)(5), 17 C.F.R. § 201.235(a). This notwithstanding the fact that the Rules of Practice state: a “presumption that witnesses will testify orally in an open hearing.” ALJ Elliot’s order can be read here: In re Bebo Ruling on Introduction of Hearsay Evidence.
ALJ Elliot apparently thought it was important that Ms. Bebo did not “dispute the truth of the Declarants’ statements or of the Deponents’ testimony.” Yet, he accepted that counsel for Ms. Bebo “did not participate in any interviews of the Declarants, and so far has been able to speak to only one Declarant.” In other words, in the ALJ’s view, Ms. Bebo was saddled with the extreme burden of disputing the truth of statements without ever having access to the declarants, which seems bizarre. Since the “truth” of statements is heavily dependent on context and possible equivocation, it is a near-impossible burden to challenge “truth” without access to context.
Keep in mind that this is not just a private party drafting an affidavit and asking another person to sign. It is the Government telling people who may have law enforcement exposure themselves that it would like them to sign a document, and perhaps making statements or representations about the case to encourage them to do so. Most folks will do what they can to keep the Government off their backs.
The end result is that statements of many witnesses are now coming into evidence even though the respondent has had no opportunity to develop an understanding of what those witnesses said, and may say, outside of the four corners of declarations carefully drafted by SEC lawyers. Moreover, because deposition discovery is not generally available in these administrative proceedings, Ms. Bebo’s counsel is placed in the impossible situation of deciding whether to call these witnesses into court to examine them without having any understanding of what they may say, or of ways in which the SEC-drafted declarations could be misleading or deceptive because of important omissions.
This could never happen in federal court. The SEC would have to identify these people as potential witnesses and they could be noticed for depositions. Those depositions might show that what the witnesses have to say is not as clear-cut as the SEC contends – or may even vary significantly from what the SEC says. In all likelihood, the SEC would have to decide whether to bring these witnesses into court to testify, and to take the risk that their proffered witnesses would provide unhelpful testimony in response to non-leading questions and the right of cross-examination. Even if the SEC were permitted to introduce such declarations into evidence – which is highly unlikely – the defense would be in a position, based on pretrial discovery, to decide which should be brought in as live witnesses. In short, the advantage to the SEC created by ALJ Elliot’s ruling allowing SEC-drafted declarations as evidence in this case is palpable.
ALJ Elliot blithely ignores these issues, notwithstanding that even under SEC Rules of Practice that are less demanding than the Federal Rules of Evidence, he is obligated to allow this to occur only if “it would be desirable, in the interests of justice.” There is precious little discussion in his opinion of how justice is served by putting the respondent behind the 8-ball with respect to 16 witnesses by allowing into evidence hand-crafted statements by SEC lawyers signed by people who need never appear in court. (Is the ALJ truly ignorant of how these declarations are typically crafted to leave out things that may be helpful to the opposition?) ALJ Elliot simply takes no cognizance of the burden this imposes on the defense, and the near-impossibility of overcoming that burden without full, fair, and open discovery in advance of trial. He merely says that “it will not be unreasonable or unduly burdensome to place on Bebo the burden of calling the Deponents as witnesses,” and it is not “a violation of due process to admit undisputed hearsay.” But why does it serve the interests of justice to impose this burden and to admit this evidence? It is the SEC’s burden to show this, and the ALJ’s duty to make appropriate findings in support of his order, but, incredibly, the ALJ appears to proceed based on the presumption that easing the burden on the SEC at the expense of the respondent is what justice is about.
SEC administrative law judges are used to a regime in which they let the SEC enforcement lawyers cut procedural and evidentiary corners in administrative actions involving respondents associated with SEC-regulated entities. But after the new expansion of ALJ jurisdiction under Dodd-Frank, they are hearing prosecutions of non-regulated persons that often will involve “nuclear” punishments, like lifetime bars from ever serving as an officer or director of any public company. In such cases, they have to learn that justice requires a less “loosey-goosey” approach to adjudicating the claims before them. When a person’s future ability to earn a living and support his or her family is at stake, that person is entitled to considerations of “the interests of justice” that take account of the stakes in the case. ALJ Elliot doesn’t seem to get that; he’s acting as if he’s hearing just another charge against a delinquent broker. The common practice of giving the SEC lawyers the home-court advantage in cases against regulated persons is wrong, and should be stopped. But using those flawed standards in the new higher-profile cases the ALJ’s are now hearing amplifies the problem to the point that due process is threatened.
If ALJ Elliot were focused on fairness and justice, which seems not to be the case, he would have told the SEC: if a witness’s evidence is important to your case but you want to avoid in-court testimony, you should take a deposition that allows full cross-examination by the opponent, and then make your motion to allow portions of the out-of-court deposition into evidence, to which the opponent could respond with fair knowledge about what the witness has to say on the issue. By shifting the burden to Ms. Bebo of showing injustice from the admission of SEC-drafted declarations, ALJ Elliot tilted the playing field against Ms. Bebo, violated the SEC Rules of Practice, and, in my view, violated due process of law. None of this, of course, could happen if the SEC brought its case in federal court, where it should be.
February 9, 2015
Contact Straight Arrow privately here, or leave a public comment below: