The SEC’s handling of the controversy over whether its administrative law judges were properly appointed under the Appointments Clause of Article II of the Constitution continues to amuse, or horrify, depending on your point of view. Putting aside the actual substance of the Appointments Clause issue itself, which will work its way through the courts, when it comes to the mere disclosure of the underlying facts at issue about the appointment of the SEC’s ALJs, the SEC staff has acted with questionable competence, and apparent insubordination. That’s a strong statement, so you can decide for yourself, based on recent events in the In the Matter of Timbervest, LLC administrative proceeding.
You may recall that the Timbervest administrative enforcement action was tried to SEC ALJ Cameron Elliot, who issued an Initial Decision finding for the Division of Enforcement in all respects except that he concluded two of the individual respondents lacked the scienter required for aiding and abetting the firm’s violations, and that the five-year statute of limitations in 28 U.S.C. § 2462 precluded the associational bars sought against the individuals and the revocation of Timbervest’s adviser’s license. Both sides petitioned for review by the Commission, which was granted. Before the Commission itself, the respondents pressed their constitutional challenges to the administrative proceeding, and the Commission asked for further briefing on those issues. See Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt.
Then the Wall Street Journal published a blockbuster article discussing potential issues of fairness in the SEC’s administrative court, including statements by former SEC ALJ Lillian McEwen that she had been pressured to issue rulings more favorable to the SEC staff. See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal. On the basis of that article, the Timbervest respondents sought to pursue additional discovery to obtain evidence relevant to its constitutional challenges. The precise request made is not clear from the record because the SEC failed to post this motion on its docket. But it is apparent that the information sought included data about SEC ALJs Cameron Elliot and Brenda Murray (who was the original ALJ designated to hear the case before it was transferred to Mr. Elliot), as well as information about the allegations made by Ms. McEwen. The Commission responded with an Order Requesting Additional Submissions and Additional Briefing, stating that “The Commission’s consideration of the Appointments Clause challenge would be assisted by the submission of additional material for inclusion in the record and by the submission of additional briefing.” It then “ORDERED that the Division of Enforcement shall . . . file . . . an affidavit from an appropriate Commission staff member, with supporting exhibits if appropriate, setting forth the manner in which ALJ Cameron Elliot and Chief ALJ Brenda Murray were hired, including the method of selection and appointment.”
A week later, the Commission issued another Order Concerning Additional Submission and Protective Order, in which it “invited” ALJ Elliot to provide an affidavit addressing whether he was ever aware of ALJs being subjected to such pressures. See SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ.
The responses to these Orders were remarkable. In response to the second Order, Mr. Elliot declined to provide the affidavit “invited” by the Commission. That certainly raised the possibility that the content of such an affidavit would be problematic. See SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission. But that at least was consistent with the SEC’s Order, which made it clear it was not mandating that ALJ Elliot provide the affidavit.
The Division of Enforcement’s response to the first Order was even more extraordinary. It refused to provide the ordered “affidavit . . . setting forth the manner in which ALJ Cameron Elliot and Chief ALJ Brenda Murray were hired, including the method of selection and appointment,” instead providing an affidavit only containing “the factual information the Division believes legally relevant to resolving Respondents’ Article II-based constitutional claims,” which said only that “ALJ Elliot was not hired through a process involving the approval of the individual members of the Commission.” In further explanation, the Division justified failing to comply with the Commission’s Order because “the Division believes that the facts set forth in the affidavit — i.e., facts relating to ALJ Elliot’s hiring — are sufficient for the Commission’s consideration of Respondents’ Appointments Clause challenge.” The precise language of the affidavit was: “Based on my knowledge of the Commission’s ALJ hiring process, ALJ Elliot was not hired through a process involving the approval of the individual members of the Commission.” See Division’s Notice of Filing, with Attached Affidavit of Jayne L. Seidman.
The Division described “the hiring process for Commission ALJs,” as administered by OPM, and told the Commission: “It is the Division’s understanding that the above process was employed as to ALJ Elliot, who began work at the agency in 2011. As for earlier hires, it is likely the Commission employed a similar, if not identical, hiring process. But the Division acknowledges that it is possible that internal processes have shifted over time with changing laws and circumstances, and thus the hiring process may have been somewhat different with respect to previously hired ALJs. For instance, Chief ALJ Murray began work at the agency in 1988 and information regarding hiring practices at that time is not readily accessible.”
This submission was a stunning act of insubordination, bordering on contempt. It plainly declined to address the specific issues ordered by the Commission, and did so on the presumptuous basis that “the Division believes” the information ordered by the Commission was not necessary for the Commission to decide the issues raised by the respondents. If the Division wanted relief from the Order, it should have moved for it to be revised. It was impermissible to ignore the command based on what the Division — at this point simply a party in the proceeding — believed should have been requested. But even beyond this, the affidavit the Division provided was misleading. It did not even attempt to state the facts of Mr. Elliot’s hiring. Instead, it was only “based on” “knowledge of the Commission’s ALJ hiring process,” and the Division’s Notice was founded on an unsupported “understanding” that the normal process was used. So, even in the single respect the Division responded to the Order, it did so based on presumption, not investigation. The combination of brazenly ignoring the Order, and then providing an affidavit not founded on facts, is conduct that should be reprimanded, if not sanctioned. If a respondent had acted this way in response to a Commission Order, there would be more than silence from the Commission.
That isn’t the end of the story, because it turns out the assumption used to support the affidavit, and the Division’s purported “understanding” of what occurred, was unfounded, which could have been learned with only a modicum of effort. ALJ Elliot is now presiding over another case being challenged on constitutional grounds, In the Matter of Laurie Bebo and John Buono. In that case, at a hearing on June 18, 2015, ALJ Elliot raised the issue of the circumstances of his hiring, and the Division’s filing in Timbervest, and noted the “the Division’s description of how I was hired was erroneous.” He went on, “The crucial language is in the first full paragraph on page 2. . . . I have informed the chief ALJ. I brought it to her attention that it was wrong. Of course she knew because she hired me, so she already knew that it was wrong. I also informed Jayne Seidman, who is the woman who gave the affidavit.” He went on, “I certainly don’t want the Division to be, you know, embarrassing themselves by saying things that are wrong. . . .”
The next day, the parties asked that ALJ Elliot state “what you believe the inaccuracies to be.” He explained that the SEC’s affidavit assumed he was newly hired as an ALJ by the SEC, but that was not correct because he had been an ALJ in the Social Security Administration. That meant that he was hired “through the process that essentially everyone else goes through,” responding to a posting on the federal government’s job-posting website. “I saw a posting on USA Jobs when I was at Social Security. I sent in my resume, I had an interview, I got an offer; it’s as simple as that. What’s described in the Division’s notice of filing in Timbervest is if you’ve never been an ALJ before. And as I said, I did in fact go through that process, just not when I was hired by the SEC.” He went on, “I think when I was hired by the SEC, the Office of Personnel Management did have to approve my transfer from Social Security to SEC. . . . So OPM does actually get involved in every ALJ’s hiring, to my knowledge.” When asked with whom he interviewed, he responded: “I interviewed with Judge Murray, with Jayne Seidman, . . . and an attorney with the general counsel’s office, whose name escapes me at the moment.” He also said “I pulled out one of my forms that I got from HR, and it appears that someone in HR did sign off on my hiring. . . . I’m not saying that the person who signed the paper itself was my appointment. . . . Whether that constitutes my appointment or not, I don’t know.” When asked if he knew who appointed him, or the actual act that constituted his appointment, he responded: “I would have to say no, I don’t know. I have an educated guess, but it’s really just an educate guess. No, I don’t know the answer.”
This response makes it clear that records available at the SEC, could have informed the Division that the affidavit it provided was inaccurate. Numerous people knew that ALJ Elliot was initially hired to serve at the Social Security Administration, apparently including the affiant, Ms. Seidman, but this fact was ignored. Presumably the Division did not find it convenient actually to search the SEC’s own HR records before submitting the erroneous affidavit. The difference here may not be material, which was ALJ Elliot’s stated view, but that is surely not within the Division’s purview to decide. When asked for the facts, the Division (a) declined to seek them out, and (b) made an inaccurate filing instead.
The Division finally corrected the record in the Timbervest case on June 23, with the filing of an additional Notice: SEC June 23 Notice in Timbervest Administrative Proceeding. That Notice attached the transcript of comments made by ALJ Elliot in the Bebo hearing, but otherwise said the Division still had not taken steps to confirm whether these recollections were accurate, including, apparently, not even seeking to obtain documents that could clarify the record. Interestingly, although the Division’s original, inaccurate, Notice is posted on the docket, the mea culpa corrective Notice, with the excerpted portions of the Bebo transcript, is strangely missing, just like Timbervest’s original motion for discovery.
Of course, as ALJ Elliot noted, at a minimum the Division of Enforcement is “embarrassing themselves by saying things that are wrong.” If this weren’t the government seeking to impose major penalties and other sanctions, we could dismiss them as “The Gang That Couldn’t Shoot Straight” (credit to Jimmy Breslin, RIP).
But what happened here is much worse. The Commission, sitting in its adjudicatory capacity, ordered that the Division provide certain information. The Division refused to do so, declined to seek relief from the order, and instead substituted erroneous information, which a modest amount of diligence would have shown was certainly incomplete, if not inaccurate. If the Division were held to the standards of performance it routinely applies to those it investigates and prosecutes, there would be meaningful repercussions, if not outright accusations of reckless misconduct.
I won’t hold my breath.
June 30, 2015
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