Tag Archives: Article II

Division of Enforcement Continues To Refuse To Comply with SEC Orders in Timbervest Case

Two days ago, we wrote about the Division of Enforcement’s refusal to comply with an SEC adjudicative order in In the Matter of Timbervest, LLC.  Instead of complying with a Commission Order to supply information about the circumstances of the hiring of ALJs Brenda Murray and Cameron Elliot, the Division provided information that it deemed sufficient to address the Appointments Clause issue raised by the respondents.  Then, amazingly, the partial response the Division deigned to supply, based on what it decided was relevant, was wrong, which was learned when ALJ Elliot corrected the errors on the record in a different proceeding.  See SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed.

Well, paraphrasing a former President’s famous one-liner: “There they go again!”

Yesterday, the Division made another filing in the Timbervest administrative proceeding that refused to comply with a Commission Order.  Instead, the Division again told the Commission that it really shouldn’t have asked for the submission it ordered, and declined to respond.  If there were any further evidence needed of the inherent unfairness of the administrative adjudicatory process to respondents, and the inability of the Commission to address fundamental constitutional issues under its own roof, this is it.  The Division would not dare thumb its nose in the face of a district court judge in this manner, even if it were really upset that it was being ordered to make submissions it really preferred not to make.  But here, Mr. Ceresney has no reason for concern because the “chief judge” he is facing — Mary Jo White — is his former law partner, and the person who appointed him head of the Enforcement Division.  Conflict of interest?  Perhaps not, technically.  But how fair would you think this adjudicative forum is if you were in Timbervest’s shoes on the other side of the “v.” from Mr. Ceresney when the Division was allowed to make its own decisions about the extent it would comply with Commission orders?

Here is what happened.  In response to a motion from the respondents, on May 27, 2015, the Commission, sitting in its capacity as adjudicator of the Timbervest enforcement action:

ORDERED that the parties shall file simultaneous supplemental briefs, not to exceed ten double-spaced pages, by July 1, 2015. The briefs shall be limited to the following two issues: (1) whether, assuming solely for the sake of argument that the Commission’s ALJs are “inferior officers” within the meaning of Article II, Section 2, Clause 2 of the Constitution, their manner of appointment violates the Appointments Clause; and (2) the appropriate remedy if such a violation is found.

The Order “assum[ed] solely for the sake of argument” that the Commission’s ALJs are ‘inferior officers'” under Article II, Section 2, Clause 2, and mandated short submissions on two specific points: (1) under that assumption, have the appointments of SEC ALJs violated the Appointments Clause, and (2) “if such a violation is found,” what should be the appropriate remedy?

The parties’ responses were filed yesterday.  The respondents’ submission can be read here: Brief of Respondents In Response to the Commission’s May 27, 2015 Order.  The Division of Enforcement’s submission, personally signed by Enforcement Director Andrew Ceresney, can be read here: Division of Enforcement’s Response to the Commission’s May 27 Order

The respondents submitted what the SEC ordered.  They laid out their argument why the appointment of the ALJ who presided over most of their proceeding violated the Appointments Clause, assuming he was indeed an “inferior officer” under that clause.  They then argued that the violation makes the proceeding and findings of the ALJ invalid, requiring that the Initial Decision be vacated.  If a new proceeding is to be commenced (which they argue is not in the public interest), it must be, they say, before an ALJ properly appointed under the Appointments Clause.

The Division, on the other hand, chose (again) not to submit what the Commission ordered.  The Division’s brief acknowledges that, based on the known circumstances of the appointment of SEC ALJs, if one assumes “for the sake of argument” that the SEC’s ALJs are “inferior officers,” their appointments did not comply with the Appointments Clause:

In response to the Commission’s first question, “assuming solely for the sake of argument that Commission ALJs” who presided over Respondents’ administrative hearing are “‘inferior officers’ within the meaning of Article II, Section 2, Clause 2 of the Constitution,” the Division believes that their manner of appointment would be inconsistent with the terms of the Appointments Clause.

SEC Brief at 1.

But on the second issue — the appropriate remedy in the event such a violation is found — the Division gave no response.  Instead, it argued (again) that SEC ALJs are mere employees, and that therefore no remedy is needed.  In short, the Division refused to comply with the SEC’s Order:

In response to the Commission’s second question, the Division strongly urges the Commission to refrain from fashioning a fix for a non-existent constitutional violation. Rather, and for the additional reasons explained below, the Commission should find that ALJ Elliot was hired in a manner consistent with Article II, Section 2, Clause 2 of the Constitution because he is an employee, and not a constitutional officer, and that there is therefore no Appointments Clause defect to remedy.

SEC Brief at 2.  Later in the submission, the Division says:

Because there is no constitutional violation under the Appointments Clause, there is no basis for a “remedy.”  If, however, the Commission holds that SEC ALJs are inferior officers and that their hiring violated the Appointments Clause because they were not hired with the approval of the Commissioners, the Division requests that it be permitted to submit additional briefing about components of any appropriate remedy, such as ratifying SEC ALJs’ prior hiring.  To be clear, the Division does not seek any remedy, including as an alternative measure, at this juncture.  Because of the potential ramifications of such a remedy [fn] and because Congress has set out a scheme, implemented by OPM, for the hiring of these employees, the Division believes that any Commission efforts to superimpose on this scheme a remedy to rectify a problem that does not exist is inadvisable at this time.

[fn]: Such a remedy is not only unnecessary but also fails to resolve the ongoing litigation before the Commission and in district courts around the country given the other constitutional claims raised in this case and others that would not be addressed by such action.  Further, it seems likely to prompt new issues in litigation, whether in this case or others.

SEC Brief at 5-6.

Not to belabor the point, but if the Division believed the submission it was ordered to make was inadvisable at this time, for tactical litigation reasons involving other cases or for whatever other cause, it should have asked for relief from the Order and allows the Commission to decide whether the Order should be revised.  Simply refusing to comply and asking for the right to address the issue later if necessary is contemptuous of the adjudicator (here, the Commission), and of the proceeding itself, which does not permit parties to dictate when they will and will not comply with the administrative court’s orders.

Straight Arrow

July 2, 2015

Contact Straight Arrow privately here, or leave a public comment below:

SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed

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).

Jimmy Breslin - The Gang That Couldn't Shoot Straight

Jimmy Breslin – The Gang That Couldn’t Shoot Straight

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.

Straight Arrow

June 30, 2015

Contact Straight Arrow privately here, or leave a public comment below:

SEC Gambit To Avoid Judge May in Timbervest Case Seems To Have Failed

We previously wrote about the SEC’s desperate effort to avoid the assignment of Timbervest, LLC v. SEC, Civil Action No. 1:15-CV-2106 (N.D. Ga.), to District Judge Leigh Martin May.  See SEC, Desperate To Avoid Judge May, Challenges Related Case Designation in Timbervest Action and SEC Argues Common “Facts” Are Not Common “Issues of Fact” — I Kid You Not.  You recall that Judge May ruled in Hill v. SEC that the appointment of SEC ALJ James Grimes violated the appointments clause of Article II of the Constitution — see Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding.

Well, it appears that the SEC’s motion challenging the “related case” assignment of the Timbervest action to Judge May failed.  There is no order in the docket denying the motion, but a recent scheduling order issued by Judge May suggests she will continue to preside over the case.  See Timbervest v. SEC Scheduling Order.  In the Order, Judge May states that the SEC must respond to plaintiffs’ Motion for a Temporary Restraining Order and/or Preliminary Injunction by June 29, plaintiffs must file a reply brief by July 16, and “the parties will attend a hearing in this matter a hearing” on July 21, in Courtroom 2107.  Courtroom 2107 is listed in the N.D. Georgia directory as Judge May’s courtroom.

In the meantime, in the SEC administrative case brought against Gray Financial Group, In the Matter of Gray Financial Group, Inc. et al., File No. 3-16554, SEC ALJ Cameron Elliot declined to issue a stay of proceedings in response to an unopposed motion founded on the pending federal action for injunctive relief by Gray Financial in the same Georgia federal court, which was also assigned to Judge May.  He said: “Commission Rule of Practice 161 instructs that I ‘should adhere to a policy of strongly disfavoring’ stay requests unless ‘the requesting party makes a strong showing that the denial of the request or motion would substantially prejudice their case.’  17 C.F.R. § 201.161(b)(1).  Respondents have not made such a showing.  I will abide by an injunction if it is issued; however, as of now I have been instructed to resolve this proceeding within 300 days of service of the OIP.”  See Order Denying Unopposed Motion To Stay Administrative Proceeding Against Gray Financial Group.

So, chaos still reigns, and apparently the SEC is unsure about how best to bring it under control.  See SEC Rejects Easy Answers To Admin Court Challenges.  In that article, Law 360’s Stephanie Russell-Kraft reported on a discussion between Judge Richard Berman and a DOJ lawyer representing the SEC.  Judge Berman asked whether, in light of comments by Judge May that it might be easy to cure the appointments clause violation, the similar claims brought before him by Barbara Duka (in Duka v. SEC) could be resolved simply by having the Commission reappoint its current ALJs.  The DOJ lawyer declined to address whether that could be done, leading to the following colloquy:

“Is the commission opposed to an easy fix?” Judge Berman asked.

“The Department of Justice is very actively considering the best litigation approach to address this issue,” Lin answered.

“I’m asking you if [appointing the judges] would solve this issue,” Judge Berman pressed, pointing out that the case pending before him had nothing to do with the SEC’s litigation strategy.

“It’s not like if we pursue one of these options this case or other cases will go away,” Lin answered, adding that changing the way it appoints its judges is not a “meaningful way” to address Judge May’s decisions or a “practical way” for it to approach its long-standing administrative court scheme.

“The commission has to consider all the cases it has,” she said later, to which Judge Berman replied, “I don’t.”

Meanwhile, the SEC’s administrative proceeding against Laurie Bebo continues to be tried, even while the appeal of Ms. Bebo’s injunctive action moves forward in the Seventh Circuit.

The ship is plainly adrift.

Straight Arrow

June 23, 2015

Contact Straight Arrow privately here, or leave a public comment below:

SEC Argues Common “Facts” Are Not Common “Issues of Fact” — I Kid You Not

Yesterday, we described the SEC’s desperate attempt to nullify the assignment of the case Timbervest, LLC v. SEC to Judge Leigh Martin May.  That was based on the argument that the other cases already before Judge May identified as “related cases,” Hill v. SEC and Gray Financial Group v. SEC, were not actually “related cases” because “the cases do not ‘involve the same issue of fact,’” and they “do not arise out of the same event or transaction.”  See SEC, Desperate To Avoid Judge May, Challenges Related Case Designation in Timbervest Action.  Timbervest argued this was wrong because “they all arise out of the same facts concerning how SEC administrative law judges (‘ALJs’) are hired and what authority and powers SEC ALJs possess,” and the factual differences in the underlying SEC allegations in each case have no bearing on the constitutional issues raised in the respective complaints in these actions.

Today, the SEC filed its response.  It can be read here: SEC reply in opposition to related case designation.  It acknowledges that the cases have some common “facts” but argues that common “facts” are not common “issues of fact.”  In the SEC’s words, “At best, Plaintiffs’ argument boils down to the contention that these cases involve some of the same ‘facts,’ rather than ‘issues of fact.’”  The SEC’s argument turns on the assertion, made without citation, that an “issue of fact” must be a “dispute of fact,” and because the SEC will not dispute the common “facts” in these cases, they cannot be considered “issues of fact” because they will be undisputed.  (“their arguments ignore the distinction between a mere ‘fact’ and an ‘issue of fact,’ i.e., a dispute of fact”).  The best the SEC can do to support this view is a cite to Black’s Law Dictionary, which is quoted as saying: “An ‘issue of fact’ is ‘[a] point supported by one party’s evidence and controverted by another’s.'”  I don’t have a copy of Black’s Law Dictionary handy, but I guarantee you this purported definition had nothing to do with the assignment of cases to district court judges.

I have to chuckle.  No wonder lawyers are not often trusted by ordinary folks.  They concoct these arguments whether they make sense or not.  What ordinary person out there would think that two paragraphs with identical facts would not have the same “issues of fact”?  In any case, that doesn’t really matter here because it is patently obvious that in the context at issue here — how to assign a newly-filed case — a court (actually, a clerk of court) cannot possibly apply the standard the SEC passionately espouses because there is no way to determine at that stage which “facts” will or will not be “disputed.”  At this stage, there is only one source that can be used to assign the case — the allegations in the complaint.  If the allegations in the complaint involve factual contentions that materially overlap the facts alleged in another pending case, then the “related case” designation should be appropriate.  Last I checked, no clerk of court sought input from the defendant in an action about what factual allegations would be disputed before making a “related case” assignment.  Got a cite for that, SEC?

I wonder whether, having made this cute argument, the SEC will argue against being judicially estopped from disputing any of the facts alleged in the complaint when it files its Answer.  SEC counsel has now represented there are no material “disputed” facts, right?

I also wonder what Judge May is thinking about all of these machinations conjured up by the SEC solely to avoid having her preside over the Timbervest complaint?  If she has a sense of humor, she’ll chuckle as well, and move on to the job of deciding whether the few important facts that differ between Timbervest v. SEC and Hill v. SEC — which involve the different status of the respective administrative actions when the complaints were filed — alters the jurisdictional analysis in her Hill opinion.

Straight Arrow

June 18, 2015

Contact Straight Arrow privately here, or leave a public comment below:

SEC, Desperate To Avoid Judge May, Challenges Related Case Designation in Timbervest Action

The SEC really wants to avoid Judge Leigh Martin May — the Northern District of Georgia judge who ruled in Hill v. SEC that the appointment of SEC ALJ James Grimes violated the appointments clause of Article II of the Constitution — like the plague.  The Commission filed a motion in Timbervest, LLC v. SEC seeking nullification of the assignment of the Timbervest action to Judge May as a case related to Hill v. SEC because it does not properly fit the definition of a “related case.”  The Timbervest complaint was filed after another case in that district making the same constitutional argument, Gray Financial Group v. SEC, was reassigned to Judge May as a related case.  See Timbervest Files Complaint and TRO Motion To Halt SEC Proceeding.  Timbervest identified it as a case related to Hill and Gray Financial in the cover sheet for its complaint, and the Timbervest action was assigned to Judge May, but the SEC’s papers do not address the actual process and rationale leading to the assignment of the case to Judge May.  Instead, the SEC accused Timbervest of “judge shopping” by checking the “related case” box.  By all appearances, however, it is the SEC that is “judge shopping” with this motion — shopping for any N.D. Ga. judge other than Judge Leigh Martin May.

The SEC’s motion can be read here: SEC motion opposing related case designation in Timbervest case.  Plaintiff’s response can be read here: Plaintiff’s response to SEC reassignment motion in Timbervest.

The SEC’s argument is that cases are “related” for purposes of judicial assignment in the Northern District of Georgia only if they arise out of common facts (“Plaintiffs noted the supposed relationship between their case, on the one hand, and Hill and Gray on the other, by checking a box on their civil cover sheet allowing for the designation of cases as related if they ‘involve the same issue of fact or arise[] out of the same event or transaction included in an earlier numbered pending suit.’”)  But, the SEC argues, the court’s Internal Operating Procedures establish that “a case is NOT related if it has the same LEGAL issue. . . .”  (quoting Rule 905-2(a)).  The SEC contends that Hill, Gray Financial, and Timbervest all present a common legal issue about the validity of the appointment of ALJs, but they arise out of very different facts (i.e., the SEC’s factual contentions of law violations are different in each case): “the cases do not arise out of the same event or transaction. To the contrary, the cases arise out of different administrative proceedings involving different respondents.”

This argument conflates the facts relevant to the SEC’s charges in the administrative cases with those relevant to the plaintiffs’ complaints pending before the district court.  Each of these cases — that is, each of the federal court complaints — turn on essentially identical facts about the appointments of, powers granted to, and removal limitations for, the ALJs presiding over the proceedings.  The critical facts at issue are not the underlying violations of law charged by the SEC, but the nearly identical facts surrounding the appointment of the ALJs assigned to hear the three administrative cases, the President’s control (or lack thereof) over those ALJs, and the powers they exercise as ALJs.

In fact, the SEC itself previously argued to Judge May that the only relevant facts in the Hill case are the circumstances of the appointment of ALJ James Grimes (see SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery).  Since the Timbervest complaint alleges that the same circumstances apply to the appointment of ALJ Cameron Elliot, who presided over the Timbervest administrative trial, the SEC should be in agreement that the material issues in each of those cases “involve the same issue of fact.” 

But putting aside the merits of the SEC’s argument, it is difficult to understand why the SEC cares about whether the Timbervest case is assigned to the same or a different judge than the Hill and Gray Financial cases.  The SEC already informed Judge May that it will be appealing her preliminary injunction order to the 11th Circuit.  See SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery.  Given the fact that this issue is going up on appeal no matter what, why make a desperate motion to reassign a case turning on what is acknowledged to be an identical legal issue to another judge in the same district?  The legal issue is going to be heard de novo by the court of appeals; there is little or no value in trying to force another judge to labor on another opinion.  And even if the case were reassigned, the strong likelihood is that a different judge in the same district would defer to Judge May’s opinion — which, whether ultimately right or wrong, is thoughtful and certainly not off the wall — rather than labor through the complex analysis again, knowing that the 11th Circuit will be ruling soon in any event.

So, even putting aside the questionable legal arguments made by the Commission, the problem with this motion to reassign the Timbervest case is that it just doesn’t make a lot of tactical, strategic, or common sense.  The filing of the motion, together with a bevy of other questionable recent decisions made by the Commission on the issues raised over the last year about the SEC’s administrative enforcement practices, leaves the impression that very little thought is being given to an overall plan for dealing with what is plainly an important problem.  (Three examples come immediately to mind: the publication without hearings or comment of slapdash and plainly meaningless guidelines for bringing cases administratively, which have been roundly ridiculed by commentators; the recent debacle where the Commission asked ALJ Elliot for an affidavit on bias issues and Mr. Elliot declined to do so; and the Commission’s apparent paralysis in responding to remarks by former ALJ Lillian McEwen about possible systemic biases in the administrative court.)  See Upon Further Review, SEC Memo on Use of Administrative Courts Was Indeed a Fumble; SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission; and Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.

Most everything the SEC is doing now with these cases, and on the critical issues raised by the Commission’s increased use of administrative enforcement actions, seems without rhyme or reason.  The Commission and its staff need to sit back, take a deep breath, and figure out how to get to a resolution of these serious concerns with minimal chaos and upheaval, both in the courts and in its own administrative court.  Right now, that is just not happening, and the resulting turmoil is saddening and a bit frightening.

Straight Arrow

June 17, 2015

Contact Straight Arrow privately here, or leave a public comment below:

SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery

An SEC June 15, 2015 filing in Hill v. SEC, No. 15-cv-1801 (N.D. Ga.), informed Judge Leigh Martin May that the Commission will appeal her June 8 ruling that the administrative proceeding In the Matter of Charles L. Hill, Jr. violates the constitution because the appointment of the presiding administrative law judge, James Grimes, was unconstitutional.  See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding.  The SEC also said it would seek a stay of the entire proceeding before Judge May, including any discovery the plaintiff intends to pursue as the Hill action moves beyond the preliminary injunction stage.  The SEC’s submission can be read here: SEC June 15 Filing in Hill v. SECThe submission on behalf of plaintiff Charles Hill can be read here: Hill June 15 Filing in Hill v. SEC.

These submissions were made in response to the portion of the June 8 ruling stating that the parties should “confer on a timetable for conducting discovery and briefing the remaining issues.”

Although Judge May’s preliminary injunction was narrowly drawn to halt only the single administrative action against Mr. Hill — and ALJ Grimes has since been appointed to preside over a new proceeding — the SEC still argues that the requirements for staying the Hill Order and litigation are satisfied.  The SEC wrote: “Defendant intends to appeal the preliminary injunction issued by this Court.  Defendant also intends to move to stay all proceedings in this Court pending appeal because the Eleventh Circuit’s ruling will have a significant impact on this case, and any further proceedings in this Court could prove largely superfluous and a waste of the parties’ and the Court’s resources.”  SEC Submission at 1-2.  Typically, however, the mere possibility of some wasted resources in the event of a reversal on appeal is insufficient to support a stay of proceedings.  Such a motion normally requires a showing that in the absence of a stay the status quo could be sufficiently altered that the moving party could suffer irreparable harm.  Because Judge May’s order does not go beyond the one proceeding, and the only harm to the SEC of the litigation going forward during the appeal would relate to discovery in the case itself, obtaining a stay should be an uphill battle.

Perhaps recognizing this, the SEC’s backup plan apparently is to slow play the Hill litigation.  It argued that if a stay is not issued, there is no urgency to resolve the matter.  Instead, the normal schedule for a civil action in the Northern District of Georgia should prevail: “There is no good cause for Plaintiff’s request that the parties begin discovery immediately.  First, this Court has already issued a preliminary injunction, and thus, there is no urgency for Plaintiff to proceed faster than the normal pace set by the Federal Rules and the Local Rules [under which] the government is entitled to have until July 20, 2015, to file its answer or other response to Plaintiff’s Amended Complaint.  There is no reason that the government should be deprived of the usual time that the Federal Rules provide for responding to the Amended Complaint nor that issues regarding whether discovery is warranted need to be resolved before the government has had that opportunity.  Moreover, under Local Rule 26.2(A), the discovery period does not commence until ‘thirty (30) days after the appearance of the first defendant by answer.'”  Id. at 2.

The SEC also said that plaintiff had not indicated the nature of discovery he intended to pursue, and argued that “no discovery is necessary because all of Plaintiff’s claims involve pure issues of law,” the “case can be resolved on dispositive motions without any factual development,” and “to the extent any facts are necessary, Plaintiff already has them in his possession.”  Id. at 2-3.  Accordingly, the SEC asks “that the Court should decide the case without permitting discovery.”  Id. at 3.

Plaintiff Charles Hill presented a different proposal.  After noting that counsel for the parties conferred “on multiple occasions” without reaching agreement on a proposed schedule, he proposed, without argument, simply that discovery begin “immediately,” end “90 days after Defendant files an answer, or, if Defendant files a Motion to Dismiss, 90 days after the Court denies the Motion to Dismiss,” and the deadline for motions for summary judgment be “30 days after the close of discovery.”  He presented no argument why the schedule should depart from local rules.

The best result probably lies somewhere between the two proposals.  The SEC’s notion that this should be treated as just another ordinary case seems a little tone-deaf, and strangely out of sync with the expectation that whatever the result, the Commission should want to avoid extending the period during which there is a cloud over its administrative proceedings.  It certainly seems in the public interest to expedite a case of this nature, and try to move quickly to a final result, while allowing the parties ample time to address complex issues.  On the other hand, it is the rare case that moves “immediately” to discovery when there is no pending deadline that causes the parties and the court to need to reach a quick result.  And the SEC has a point that the nature of discovery needed is unclear with respect to the appointments clause issue because the facts of ALJ Grimes’s appointment appear not to be in dispute.  (Although there could be a need for discovery or development of expert testimony on the equitable factors bearing on whether an injunction should issue, and, if so, what its scope should be.)  The same may not be true for the other Article II issue raised in the complaint — the alleged invalidity of the double layer of “for cause” protection for SEC ALJs against removal by the President — as to which Judge May’s opinion did not address the merits.  It is also not clear whether plaintiff will try to seek discovery on the two other theories in the complaint — the alleged improper delegation of legislative authority to SEC ALJs, and the denial of a 7th Amendment jury right — which Judge May found were not likely to succeed on the merits.

In any event, whether any discovery is appropriate, and if so what it would encompass, is not really a scheduling issue.  If the plaintiff wants to pursue discovery and the SEC objects, that dispute can be raised with the court.

The inability of the parties to reach a reasonable compromise on scheduling leaves it up to Judge May to decide what she believes is reasonable under these circumstances.  That probably should be something that allows the case to move forward expeditiously, but not quite at the breakneck pace Mr. Hill is suggesting.

In the meantime, as reported in Law 360 (SEC To Appeal District Judge’s Admin Court Injunction) the SEC informed Judge Richard Berman in a letter to the court in Duka v. SEC “that the agency has no plans to change the way it appoints its judges while it waits for the solicitor general to approve the appeal to the Eleventh Circuit it was not considering an effort to cure the appointments clause violation found by Judge May.”  The letter supports this position because “the SEC has over 100 litigated proceedings at various stages of the administrative process and the ALJ scheme has been in use for seven decades and is grounded in a highly-regulated competitive service system that Congress created for the selection, hiring and appointment of ALJs in the executive branch.”  That suggests that it may not be as straightforward as Judge May speculated that the appointments clause violation might be easily cured.

Straight Arrow

June 16, 2015

Contact Straight Arrow privately here, or leave a public comment below:

Timbervest Files Complaint and TRO Motion To Halt SEC Proceeding

Today (June 12, 2015), Timbervest, LLC filed a complaint in federal court in the Northern District of Georgia seeking a halt to its ongoing SEC administrative proceeding, In the Matter of Timbervest, LLC at al.  We have previously discussed the Timbervest SEC proceeding, including recent developments involving Timbervest’s challenge to the constitutionality of the SEC administrative process and requests for discovery into possible systemic bias within the administrative court.  See Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt, SEC Broadens Constitutional Inquiry into Its Own Administrative Judges in Timbervest Case, SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ, and SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission.

With its efforts to pursue the constitutional challenge before the SEC meeting obstacles before the Commission, Timbervest opted to seek federal court intervention, commencing an action for injunctive relief, and moving for a temporary restraining order.  Those documents can be found here: Complaint in Timbervest v. SECMemorandum in Support of Motion for TRO in Timbervest v. SEC.

Because Timbervest is located in Atlanta, it filed its complaint in the federal district court for the Northern District of Georgia.  That is the same court that days ago halted a different SEC administrative proceeding, In the Matter of Charles L. Hill, Jr., in the action Hill v. SEC.  In that case, Judge Leigh Martin May found the appointment of ALJ James Grimes violated the appointments clause of Article II of the Constitution.  See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding. And another case filed in that same court by yet another SEC respondent, Gray Financial Group v. SEC, was just assigned to Judge May as a related case.  See Ga. Judge Who Blocked SEC Admin Suit Gets Similar Case.  The new Timbervest complaint, which is case number 1:15-cv-02106-LMM, was also assigned to Judge May.

Judge May. an Obama appointee who is only in her first year of service as a judge, was active in the Democratic party before her appointment.  An article discussing her background can be read here: The Atlanta Judge Who Stuck A Thorn In The SEC’s Side.

In the Timbervest SEC proceeding, ALJ Cameron Elliot issued an Initial Decision as to which both the respondents and the SEC staff petitioned for Commission review, which was granted.  After briefing of the issues before the Commission, and supplemental briefing addressing constitutional issues, Timbervest sought discovery after the Wall Street Journal revealed possible pressures on SEC administrative judges to favor the SEC staff.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.  Only days ago, the Commission held oral argument on the petitions for review.  But after Judge May”s decision in the Hill case, and ALJ Elliot’s refusal to provide information about possible pressures requested by the Commissioners, Timbervest felt it had to seek relief in federal court, saying: “Plaintiffs have appealed the ALJ’s Initial Decision to the Commission, but it has become clear that the Commission should not hear these arguments.  First, the Commission itself did not properly appoint the ALJ.  Second, the Commission has argued in other cases that its administrative forum is constitutional.  Thus, Plaintiffs’ appeal to the Commission is nothing more than an exercise in futility.”  Complaint ¶ 8.

The Timbervest complaint reveals an interesting issue about the handling of its case by the SEC’s ALJs.  The case was originally assigned to Chief Administrative Law Judge Brenda Murray, but then handed over to ALJ Elliot.  (ALJ Murray is the person identified by former ALJ Lillian McEwen as having told Ms. McEwen that she “questioned her loyalty to the SEC” because she did not treat the SEC staff sufficiently favorably.)  ALJs Murray and Elliot allegedly made a critical decision preventing Timbervest from using Brady material (material tending to show the respondents were innocent):

Given the age of the case, the primary evidence presented in support of the Division’s alleged violations was the faded and inconsistent memories of two Division witnesses.  As to one of those witnesses, Plaintiffs argued that the SEC had in its possession Brady material that the Commission’s staff disagreed with and argued was inadvertently produced.  The Brady material consisted of notes of two interviews the Commission’s staff conducted with that witness.  The Plaintiffs argued that the notes were exculpatory and, at the very least, were inconsistent statements that were required to be produced.  Pursuant to the SEC’s own administrative proceeding rules, it is required to produce Brady material.  Even though the SEC conducted an investigation that lasted over three years,speaking to numerous individuals over that time, the Commission’s staff did not produce any documents or information that it identified as Brady to the Plaintiffs.  Ultimately, ALJ Elliot, as well as ALJ Murray, ruled in favor of the Commission’s staff that the notes were not Brady, even though the notes were clearly inconsistent and exculpatory.

Complaint ¶ 28.

The Timbervest complaint also revealed that the SEC staff acknowledged that “ALJ Elliot was not hired through a process involving the approval of the individual members of the Commission.”  The staff could not state how ALJ Murray was appointed because “Chief ALJ Murray began work at the agency in 1988 and information regarding hiring practices at that time is not readily available.”  Complaint ¶ 36.  At a minimum, then, if Judge May retains her view that the SEC’s administrative law judges are “inferior officers” of the Executive Branch, a finding that ALJ Elliot was improperly appointed may come soon.  The only thing that might prevent such a ruling is if Judge May concludes that because the Timbervest SEC proceeding has already gone through trial and is before the SEC on review of the Initial Decision — a different set of circumstances than she faced in the Hill case — a federal court should not take jurisdiction over the case.

The SEC’s pot is now boiling over in, of all places, Atlanta, Georgia.

Straight Arrow

June 12, 2105

Contact Straight Arrow privately here, or leave a public comment below: