Tag Archives: Brady material

Why the SEC’s Proposed Changes to Its Rules of Practice Are Woefully Inadequate — Part IV

This is the fourth and final post discussing the SEC’s proposals for revising the Rules of Practice in its administrative court.  These proposals purport to modernize antiquated procedures in that forum.  Our first three posts addressed three unacceptable aspects of the SEC’s proposals: (1) requiring that respondents plead in their answers certain defense theories that are not “affirmative defenses” required to be pled in response to complaints filed by the SEC in the federal courts; (2) providing for a discovery process limited to a maximum of 5 depositions, requiring that those be shared among multiple respondents, allowing the Division of Enforcement an equal number of depositions (in addition many investigative depositions taken before the case was filed), and limiting the scope of witnesses that respondents could depose within the tiny allotment provided; and (3) the proposals continue to handcuff the respondents with respect to third party discovery and discovery from the SEC itself by maintaining highly restrictive rules limiting the issuance of subpoenas, while the SEC staff has essentially unlimited access to these sources of evidence.  You can review these comments here (Part I), here (Part II), and here (Part III), respectively.

The last part of the SEC proposed rule changes we will discuss involves the administrative trial itself.  Many commentators have noted the unfairness of the current SEC administrative proceedings with respect to the court’s acceptance of unreliable information into evidence.  The Federal Rules of Evidence do not apply in this forum, and administrative law judges, who effectively control the record, accept into evidence testimony and exhibits that would not be admitted into evidence in federal court.  As with almost all of the exercises of discretion by the SEC ALJs, this freedom to introduce into evidence material that would not be permitted in a court proceeding usually advantages the SEC staff.  The SEC ALJs treat the SEC staff with deference, lessening the usual standards under the theory that the staff is presumptuously acting in good faith.  That is one of the fundamental, hidden differences between SEC administrative proceedings and SEC court proceedings: the ALJs are accorded more discretion than judges with respect to evidentiary matters, and their use of that discretion tends to favor the litigant they presume is acting in the public interest – the Division of Enforcement and its lawyers.

The SEC’s proposed changes to Rules of Practice 235 and 320 would make what is already an unfair aspect of these proceedings even worse.  Rule 235 addresses when “a prior, sworn statement of a witness, not a party, otherwise admissible in the proceeding” may accepted into evidence.  It allows such evidence to be admitted when witnesses are dead, out of the country, incompetent to testify, cannot be subpoenaed, or “it would be desirable, in the interests of justice, to allow the prior sworn statement to be used.”  The SEC proposes that Rule 235 be expanded to cover “sworn deposition [testimony in the case], investigative testimony, or other sworn statement or a declaration pursuant to 28 U.S.C. 1746, of a witness, not a party, otherwise admissible in the proceeding.”  It further proposes that an “adverse party” may use any such prior statements of “a party or anyone who, when giving the sworn statement or declaration, was the party’s officer, director, or managing agent” may be used “for any purpose,” apparently without any showing of unavailability.  The latter change is presumably intended to benefit only the SEC staff, not respondents, because it seems unlikely that the adverse party to respondents in these proceedings – the Division of Enforcement – would have made any “sworn statements” relevant to the proceeding.

Rule 320 currently provides that the ALJ “may receive relevant evidence and shall exclude all evidence that is irrelevant, immaterial or unduly repetitious.”  The SEC’s proposed changes would require the exclusion of “unreliable” evidence, but would add specifically that “evidence that constitutes hearsay may be admitted if it is relevant, material, and bears satisfactory indicia of reliability so that its use is fair.”  Now, apparently, the Division can obtain mere declarations from some important witnesses like current or former officers, directors, or agents of the respondent — crafted by the SEC lawyers themselves — and submit them as evidence proposed under new Rule.  No court in the land would permit that.

As a result of the current lax standards governing admissibility of evidence, the ALJs already allow many forms of hearsay into the record.  That allows the SEC staff to make much of its case in administrative proceedings with evidence that would not be permitted in federal court. Among the most consistent and worst use of hearsay evidence in these cases is the general acceptance into evidence of transcripts of investigative testimony taken by the SEC staff. Because these examinations are conducted by the Enforcement Division’s lawyers, and are statements made under oath, the ALJs typically accept them into evidence without serious inquiry into their reliability.  However, they often are not reliable. There are several reasons for this:

  • First, these examinations take place in a context in which witnesses are often blindsided with inquiries about things that occurred years before with limited, if any, access to materials that could allow them to refresh their recollection of those dated events.  Sometimes, basic aspects of the subject matter the staff intends to inquire into are not known in advance.
  • Second, these questions and answers take place at a time when the primary goal of the witness is to try to convince the same staff not to take an adverse action against the witness.  This causes the witness to try as hard as possible to please the examiners.  That includes being reticent to tell them when the questions do not make sense, or are based on assumptions that are not valid, or reflect a lack of understanding (sometimes a very basic understanding) of the business matters or transactions involved.  Even defense counsel often resist criticizing questions or tactics for fear that the staff lawyers will become more antagonistic as a result.
  • Third, these examinations often are conducted in a manner that is more in the nature of an inquisition than an examination. It is not unusual for two, three, or four lawyers and sometimes accountants to act like a tag team, taking turns at the examination.  And often the staff is trying to create a record that implicates the witness or others and pressures the witness into providing its desired response, lest the witness otherwise be perceived as uncooperative or recalcitrant.
  • Fourth, the staff lawyers often formulate confusing and ambiguous questions, including regularly misusing technical terms.  That is sometimes because of lack of skill, sometimes lack of experience, and sometimes in an effort to cajole the witness into making statements that can later be portrayed as admissions when they are nothing of the kind.  No judge, magistrate, or even senior SEC official is there to prevent this, and objections by counsel are feckless, because the staff need do nothing to respond to those objections.  The end result is often a transcript that leaves open multiple interpretations of what the testimony actually says.
  • Fifth, the staff will often use limited materials during the examination that do not allow the witness to put documents or events in context, because the context is not made available. That often occurs with the misleading use of emails to portray one picture of events when other emails are not used that create a very different context.
  • Sixth, there is no real right to cross-examine the witness, nor an incentive for the defense counsel to do so.  Defense counsel is given the opportunity to ask questions, but typically lacks the materials that would allow useful questions to be formulated.  And without knowing where the investigation is headed, the defense counsel typically is loathe to get back into matters that may be ambiguous on the record, knowing there should be opportunities at later times to discuss the subject matters addressed with the staff, when a greater knowledge of entire record is possible and the direction the staff may be headed is more clear.

I believe that in contested cases in federal court, one significant reason for the SEC’s greater percentage of losses at trial is the unreliability of the investigative testimony the staff (and Commission) rely upon when a case is brought.  At trial, often the picture that is revealed by court testimony varies in significant ways from the record the staff created during the investigative testimony.  That in turn results in the staff having difficulty proving the Commission’s allegations.  When investigative transcripts are used to try to impeach witnesses by showing a supposed difference between the earlier statements and trial testimony, the infirmities of the investigative testimony undercut staff efforts to challenge the witness’s credibility, and in some cases serve only to impeach the credibility of the SEC and its lawyers.

The SEC’s new proposed Rules 235 and 320 are designed to codify the ALJ practice of treating investigative transcripts as a reliable form of “sworn statement,” as well as to codify the acceptability of hearsay evidence more generally, apparently without regard to a realistic examination of reliability.  Proposed new Rule 235 explicitly calls out investigative transcripts as proper forms of evidence, and allows their use against respondent parties “for any purpose.” And proposed Rule 320, specifically approves the use of hearsay evidence as long as it “bears satisfactory indicia of reliability.”  Having previously defined investigative transcripts as having “satisfactory indicia of reliability” in proposed Rule 235, the proposed new rules assure that ALJs will continue the unseemly and harmful process of using staff-controlled investigative transcripts as valid evidence.

That is the opposite of what should have been done.  There are strong reasons why hearsay evidence is permitted only under specific exceptions in the Federal Rules of Evidence.  A long history of evidentiary theory, thought, and practice, produced explicit understandings of when it is fair to allow out of court statements to be used to prove a case at trial.  Instead of endorsing a broad swath of hearsay evidence as acceptable, the SEC should have taken note of that history and careful thought.  It should have started with the assumption that the federal evidentiary rules are cogent and well-conceived, and departed from those rules only as necessary to achieve specific goals unique to its administrative proceedings that the federal rules impede.  If this standard were applied, I have little doubt that most of the Federal Rules of Evidence would be incorporated into the SEC administrative process.  There is no indication that any such analysis was done by the Commission, which in my view makes its evidentiary choices in the proposed rules arbitrary and capricious.

In fact, this same fundamental flaw in the way the Commission formulated its new proposed Rules of Practice infects the entire proposal.  There is an existing system of procedures, discovery, and evidence, that is in place in the federal courts which has been examined and refined over the years with enormous experience and attention.  In contrast, the SEC’s administrative process is broken and desperately needs repair.  But instead of using the federal court experience as a valuable benchmark for SEC administrative rules, the Commission decided to make only marginal changes — at best — to its broken system.  Why it chose this approach is not clear, because that analysis, if it occurred, is never discussed in the proposal.  My guess is that the bureaucrats took control of the process and desperately sought to avoid any major changes.  But for whatever reason, the SEC failed to use the many years of federal court practice and experience to generate a new, better set of rules for its administrative forum.

The Commission should have started from what we know to be fair and due process in the federal courts and replicated that process to the extent possible and appropriate in the context of an administrative proceeding.  It should have used the many years of federal court practice and experience to generate a new, better set of rules for the administrative forum.  If it perceived specific flaws in the federal court discovery or evidentiary process that could cause undue delay or expense, it should explain those, and make only those changes that would improve the process for all of the parties, not just the SEC.

Instead, it is painfully apparent that little effort was made to make the SEC administrative court a fairer forum for those prosecuted.  Minor changes were made in the timing of cases and the availability of discovery – changes transparently insufficient to accomplish any fairness goal. And these were accompanied by granting to the SEC staff several “goodies” from the Division of Enforcement wish list – e.g., requiring additional pleading of defenses and expressly permitting the use of hearsay evidence and investigative transcripts – that, in the end, probably make the administrative forum even more biased in favor of the SEC prosecutors, and against the respondents, than it is now.

The SEC Needs To Be More Transparent and Forthcoming To Recover Any Credibility

One final note.  The degree of disingenuousness by the SEC during this whole process has been shameful.  All along, both the Division of Enforcement and the SEC Chair have been touting the high degree of fairness in the SEC administrative courts in ways that do not pass the “ha ha” test.  See, for example, Ceresney Presents Unconvincing Defense of Increased SEC Administrative Prosecutions.  SEC Chair Mary Jo White was a capable – indeed, admired – private practitioner, and she must fully understand the huge advantage the SEC staff has in SEC administrative proceedings.  But she nevertheless maintains the bureaucratic fiction that everything is just fine there.  And she does so with statements that are obviously, embarrassingly, wrong.

The latest statement along these lines was Ms. White’s cynical performance in a recent Wall Street Journal interview.  See Mary Jo White explains the new SEC rules.  Here is what she said about SEC administrative proceedings:

One of the things that I think was a good thing for us to do was put out public guidelines as to what factors are considered in choosing the forum [in which to bring a case].  The commission, by the way, has to approve the choice of venue in every single case.  It isn’t up to the enforcement division.

There have been questions raised.  For example, I think in one year, if you look at the win rates in administrative proceedings versus district court, you’ll see a higher win rate.  But again, it’s cyclical to some degree.  If you look at this past year, we have a nearly 100% win in district court, and a lesser success rate in administrative proceedings, which have unique due-process rights.  For example, you have to turn over what’s called Jencks and Brady material in administrative proceedings, which is essentially exculpatory information, to the respondent, the defendant.  You don’t have that requirement in district court.  Recently we’ve put out for comment [proposed rules] to modernize our administrative proceedings. Should there be more discovery?  Should there be more time provided before there’s a hearing? . . .

I think they’re very fair proceedings. But you always want to critically examine what you’re doing so that you’re conveying not only in reality the fairness of a particular forum, but the appearance of it, too.

What nonsense.  And Ms. White is a good enough lawyer and securities litigator to know it.  With this statement, she reduced herself to rote adoption of the bureaucratic party line.

First, the statement that the SEC “put out public guidelines as to what factors are considered in choosing the forum,” as if there is some binding and useful guidance on that issue, is wrong, and she knows it.  She must know it because virtually every person and law firm to comment on that release recognized that it provided no useful information about the forum selection process, and essentially said no more than that the Commission has total discretion to choose whatever forum it prefers.  See SEC Attempts To Stick a Thumb in the Dike with New Guidelines for Use of Administrative Court; SEC’s New Guidance on the Use of Administrative Proceedings: “It’s Up to Us.”.

Second, the argument that the administrative forum provides greater rights to the persons sued because the Division of Enforcement is required “to turn over what’s called Jencks and Brady material in administrative proceedings, which is essentially exculpatory information, to the respondent, the defendant, and “[y]ou don’t have that requirement in district court” is both misleading and false.  To begin, the SEC staff’s determination of what is Brady and Jencks material is notoriously narrow.  In the staff’s view, if a document does not itself say that the respondent is innocent, it is not exculpatory – which leaves out many documents that are building blocks in proving the respondent’s innocence (for example, materials that show that a key SEC witness is lying would not be delivered).  Likewise, unless a document is a verbatim recording of what a witness said previously, it is not delivered as Jencks material.  That leaves out important summaries of interviews that report on many important things that were said in unrecorded interviews.  In addition, in both Brady and Jencks disclosures, the staff withholds anything it considers to be work product or subject to the so-called deliberative process privilege, which excludes large amounts of important information.  And there is no effective review of these decisions.  The ALJs almost uniformly accept the staff’s determinations on these disclosures because they assume the SEC staff acts in good faith (which is itself a breach of their duty to serve as neutral judges).  As a result, they are nearly useless in helping a respondent get true Brady and Jencks production.

In contrast, in federal court, a defendant can issue a document request for all Brady and Jencks material, and much more, and force the staff to produce all useful materials for the defense of the case.  When (not if) the SEC lawyers fail to deliver all of the relevant material, they can bring the issue to an independent judge who will treat both parties equally and not defer to the SEC staff’s determinations (at least in most cases).  So how exactly are an accused’s Jencks and Brady rights better in the administrative forum better than a federal court?  They are not.  Ms. White certainly understands that, but chooses to say otherwise.

If the SEC is ever going to reform its administrative forum, and make it into a fair alternative to the federal courts, it must recognize the problems in the current system, speak honestly about them, and make a genuine effort to produce new rules that flatten the playing field.  At the behest of SEC bureaucrats, Ms. White and her fellow Commissioners have plainly decided to avoid that route and make proposals that do not move perceptibly in the direction of fairness, but instead defer to the preferences of the SEC staff.  As a result, the proposals are grossly inadequate, and the SEC’s credibility on the issue is in shreds.

The proposed changes to the SEC Rules of Practice should be rejected.  Because the Commission has shown it is effectively captive to its staff, the best way to proceed is to appoint a committee of well-regarded SEC litigators to put together proposals for new Rules of Practice.  The Commission often seeks the assistance of professionals to address key regulatory issues, and the fairness of its administrative forum is no less important than those.  Of course, the SEC staff would fight tooth and nail to avoid this, so don’t hold your breath.

Straight Arrow

December 3, 2015

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Supreme Court Should Take Action To Rehabilitate Brady Rule in Georgiou v. United States

Justice requires that the Supreme Court shore up the foundations of one of its landmark due process cases, Brady v. Maryland, 373 U.S. 83 (1963).  Otherwise, Brady, one of the seminal due process cases of the 20th Century, will be “more honor’d in the breach than the observance.”

In Brady, the Court ruled that prosecutors could not hide material exculpatory evidence from defendants. It is founded on the simple concept that a fair trial requires that a jury be presented with unbiased evidence, and the Government cannot, consistent with due process, prevent important exculpatory evidence from reaching the jury.

Over the years, prosecutors have largely resisted the concept that they share evidence in their possession that could assist the defense.  This reflects a fundamentally flawed approach to the criminal justice process – too many prosecutors view winning a prosecution as the ultimate goal, when in fact achieving justice – win or lose – is the sine qua non of the criminal justice system of which they are part and parcel.

It is well-known that obtaining exculpatory evidence from prosecutors can be like pulling their teeth, and it has been documented that the failure to follow the simple Brady mandate is a common occurrence.  The courts, which are entrusted to assure the Brady rule is followed, have been unduly neglectful of this key oversight role, showing an unseemly willingness to accept Brady violations under a range of rationalizations.

One of the key rationalizations for permitting Brady violations has been the so-called “due diligence” rule adopted by some courts, under which even the intentional failure of the prosecution to share important exculpatory evidence is ignored if the court develops a hindsight theory of how defense counsel could have uncovered similar information through its own investigations.  The “due diligence” concept finds no support in Brady or other Supreme Court decisions, and, as is readily apparent, flies in the face of the very concept of Brady, which is about the State’s duty to assure a fair trial, not the relative diligence or acumen of the defense lawyers.

This issue has now been placed squarely before the Court in a petition for certiorari in Georgiou v. United States, No. 14-1535.  Some time ago we wrote about some ill-conceived decisions by the Third Circuit in United States v. Georgiou, 777 F.3d 125 (3d Cir. 2014).  The 3rd Circuit first misapplied the Supreme Court decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), by ruling that transactions that touched the United States in only the most ephemeral way were subject to extraterritorial jurisdiction.  See Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou.  Then, the court sunk a spear into the heart of Brady by ruling that the prosecutors’ intentional withholding from the defense of key exculpatory evidence was not a Brady violation because the defense lawyers could have figured out how to gain access to that information themselves.  See U.S. v. Georgiou: 3rd Circuit Panel Decision Makes a “Mockery” of Brady Disclosures and Jencks Act Compliance.  The Third Circuit opinion is available here: US v Georgiou.

It is well-documented that prosecutorial violations of the Brady rule – which is critically important to both actual and apparent fairness in criminal prosecutions – are common.  This is one of the shameful aspects of our current criminal justice system that most courts blithely ignore.  It is bad enough that non-compliance with Brady is rife; it is even worse that our courts not only conjure up reasons to allow prosecutors to get away with this, but also, like the Third Circuit in Georgiou, create new rules to provide non-compliant prosecutors with a safe harbor to avoid the appropriate consequences – reversal and retrial – for deciding not to comply with the core fairness principles Brady endorsed and imposed.

The cert. petition in Georgiou and three supporting amicus briefs show (i) the Brady rule is often circumvented by prosecutors, mostly with no consequences; (ii) that is what happened in the Georgiou prosecution; and (iii) the post-hoc absolution of prosecutorial misconduct by focusing on hypothetical defense failures to cure that violation is contrary to Supreme Court precedent, antithetical to Brady, and fosters a prosecutorial mindset that the risk of such due process violations is worth taking in order “win” a conviction.

The Georgiou cert. petition is available here: Cert. Petition in Georgiou v. US.  The three amicus briefs in support of that petition are available here: Georgiou v. US Amicus Brief of Former Prosecutors; Georgiou v. US Center on Administration of Criminal Law Amicus Brief; and Georgiou v. US Amicus Brief of California Attorneys for Criminal Justice.

The Georgiou cert. petition presents these key facts relating to the Brady issue:

The charges arose out of an alleged scheme to artificially inflate the prices of several stocks on the over-the-counter securities market. . . .  According to the indictment, Georgiou and his co-conspirators caused the stocks’ prices to rise by engaging in manipulative trading. . . .

. . . . The Government’s star witness was Kevin Waltzer, an alleged coconspirator.  Waltzer was the only witness who could provide what the Government described as “an insider[’]s view into this stock ring by one of its participants.” . . .  And during the trial, Waltzer testified directly to Georgiou’s mens rea, telling the jury that Georgiou “basically” admitted to him that Georgiou “kn[ew] that the public is going to get fleeced.” . . .

Following trial, Georgiou obtained critical material from Waltzer’s own criminal proceedings. Waltzer himself had been charged with wire fraud and other federal crimes. . . .  [M]ore than a year before the start of Georgiou’s trial . . . a [bail report] regarding whether Waltzer should be released on bail . . . stated that Waltzer had “been diagnosed in the past with Anxiety Disorder, Panic Disorder and Substance Abuse Disorder.” . . .  And it noted that he had been taking Paxil for the last ten years for his anxiety. . . .  Georgiou obtained a copy of this bail report for the first time after the end of his trial.

Georgiou also obtained, for the first time following his trial, a copy of the transcript of Waltzer’s arraignment and guilty plea hearing.  During that hearing, in the presence of an assistant U.S. attorney, Waltzer acknowledged “see[ing] a psychiatrist, psychologist or mental health provider * * * in connection with depression and anxiety.”

The Government had failed to disclose either the bail report or the plea transcript prior to Georgiou’s trial, even though Georgiou had requested “any and all evidence” that “a government witness or prospective government witness * * * is or was suffering from any mental disability or emotional disturbance.” . . .  Georgiou had also requested any “[i]nformation concerning Mr. Waltzer’s * * * current or past psychiatric treatment or counseling.”

Cert. petition at 4-8.

The petition also describes how the availability of that evidence would have permitted the defendant to learn that this key witness was an admitted drug addict, and that his medication had known side-effects of memory impairment.  Id. at 6-7 & notes 2-3.  The Third Circuit ruled that the prosecutors’ intentional withholding of this evidence about the state of mind of the Government’s star witness was not a Brady violation because with greater diligence, the defense could have obtained those materials themselves.  It also found they were not “material” evidence under Brady.

The Georgiou case struck a nerve among both defense lawyers and prosecutors.  This is reflected in the three amicus briefs filed in support of granting the writ of certiorari and reversing Georgiou. One was filed by the California Attorneys for Criminal Justice, one by the Center on the Administration of Criminal Law, and one by an unusual, large group of former federal prosecutors, Department of Justice, and other Government officials.  Those officials include: a former Attorney General and federal district judge, two former Acting Attorneys General, a former White House Counsel, four former Deputy Attorneys General, five former U.S. Attorneys, and an assortment of other former high-level federal criminal justice officials.

These three amicus briefs agree that the exception to the Brady rule adopted by the Third Circuit is wrong as a matter of law under Supreme Court precedent, and dangerous as a matter of policy because of its harmful effects on due process.  They also agree that the documented trend of prosecutors ignoring Brady will continue and worsen if the Supreme Court fails to step in to make it clear that the rule is not just a heuristic concept with no serious consequences if (actually, when) it is ignored, but is mandated by principles of fundamental fairness, due process, and the administration of justice, and must be enforced vigorously and without exception.

The impressive group of former DOJ leaders, prosecutors, and government officials wrote:

As the Supreme Court recognized in Brady v. Maryland, the failure to disclose favorable evidence “violates due process … irrespective of the good faith or bad faith of the prosecution.” 373 U.S. 83, 87 (1963); see also United States v. Nixon, 418 U.S. 683, 709 (1974) (“The very integrity of the judicial system and public confidence in the system depend on full disclosure of all the facts, within the framework of the rules of evidence.”).  While this affirmative duty is above and beyond the demands of the “pure adversary model,” United States v. Bagley, 473 U.S. 667, 675 n.6 (1985), it is grounded in an understanding of the prosecutor’s “‘special role … in the search for truth in criminal trial,’” Banks v. Dretke, 540 U.S. 668, 696 (2004).  From their years of combined experience, amici appreciate the challenging judgment calls prosecutors face on a daily basis, but they also deeply believe that fundamental fairness and public confidence in our justice system relies on prosecutors taking their disclosure obligations seriously and fulfilling this duty capaciously.

Amici do not believe that Supreme Court precedent recognizes an exception to the Brady rule for lack of diligence by the defense and are concerned that the decisions of several federal circuits, including the Third Circuit, have undermined Brady by shifting focus away from the prosecutor’s affirmative obligation to disclose. We submit this brief to emphasize that the introduction of an antecedent “due diligence” inquiry focused on the defendant is inconsistent not only with Supreme Court precedent but also principles codified in the codes of ethical conduct for prosecutors.

Petitioner George Georgiou’s case presents a straightforward question about the appropriateness of conditioning Brady disclosures on a defendant’s exercise of due diligence.  According to the government, Georgiou and his co-conspirators engaged in a scheme that inflated the prices of four securities through various trading strategies and then fraudulently used those manipulated securities as collateral to obtain large loans. . . .  The prosecution relied on the testimony of Kevin Waltzer, Georgiou’s former business partner and alleged co-conspirator. . . .  Waltzer’s testimony corroborated certain physical evidence collected by the government . . . and undergirded the government’s contention that Georgiou acted “wilfully” and had the “intent to defraud.”. . .

Recognizing the importance of Waltzer’s testimony, Georgiou made a pre-trial request that the government turn over any Brady information that would “reflect upon the credibility, ompetency, bias or motive of government witnesses,” including with respect to any mental health problems or substance abuse issues Waltzer might have had. . . .  The government provided limited information regarding Waltzer’s drug use responsive to this request. . . .

Yet the government had been aware from Waltzer’s own criminal proceedings that he had an extensive history of substance abuse and mental health problems, and possessed two pieces of evidence at issue on appeal that it failed to disclose: A Bail Report provided to the government a year before Georgiou’s trial by pretrial services . . . and the transcript of Waltzer’s arraignment and guilty plea hearing . . . .  Both documents contained specific information about the timeline of Waltzer’s mental health and substance abuse issues, as well as the medication and treatment he was receiving in the period leading up to his testimony.  This information might have informed Georgiou’s defense strategy and advanced his efforts to undermine Waltzer’s credibility. . . .

The Third Circuit affirmed the conviction. The court held that the evidence had not been suppressed because Georgiou failed to exercise “reasonable diligence” in seeking evidence of Waltzer’s mental health history. . . .  In particular, the court reasoned that the Bail Report and the Minutes, as public records, were equally available to Georgiou and the prosecution.  . . .

By adopting this circumscribed view of a prosecutor’s obligations under Brady, the Third Circuit has joined a growing list of courts departing in this way from Supreme Court precedent and the fundamental principles that undergird the Brady doctrine.  Where prosecutors are aware of this sort of information, they should disclose it to the defense, and their obligations to the truth-seeking process and principles of fairness are not discharged on the theory that the defendant could seek it out for himself.  Such an approach contributes to a harmful notion that the criminal justice system is a game, and that victory rather than justice is a prosecutor’s goal.

. . . . The Third Circuit has diminished this constitutional and ethical requirement by introducing a rule that excuses a prosecutor from fulfilling her obligation if the defendant could have but did not find the favorable evidence himself.  Rather than ask whether the prosecution has withheld from the defendant evidence that, “if made available, would tend to exculpate him or reduce the penalty,” Brady, 373 U.S. at 87-88, the Third Circuit asks whether the defendant could have obtained the evidence “from other sources by exercising reasonable diligence,” United States v. Perdomo, 929 F.2d 967, 973 (1991).  Such a rule is tantamount to saying that a “‘prosecutor may hide, defendant must seek,’” which this Court in Banks v. Dretke made clear “is not tenable in a system constitutionally bound to accord defendants due process.”  540 U.S. 668, 696 (2004) . . . .  It is also at odds with standards of prosecutorial conduct.

Brief of Former Prosecutors and Officials at 2-7.

The Center for the Administration of Criminal Law (CACL) provided similar views, and focused on the harmful impact of fashioning rules that allow departures from Brady obligations:

Prosecutors’ duty under Brady to disclose exculpatory evidence to defendants is a core component of prosecutors’ ethical duty to seek justice rather than victory.  Nonetheless, many prosecutors fail to live up to the obligations that Brady imposes on them.  Because of the public perception that prosecutorial misconduct is widespread, public confidence in prosecutors’ integrity and the overall fairness of the criminal justice system is in decline.

The Third Circuit’s recognition of a “due diligence” exception to Brady not only undermines defendants’ constitutional right to due process, but also fosters conditions likely to further erode public confidence in the system.  While a legal doctrine excusing Brady violations might appear to be an attractive option for prosecutors, in fact it harms both prosecutors and defendants.  It muddies an otherwise clear ethical obligation to disclose exculpatory information, which is central to prosecutors’ duty to seek justice.  It burdens prosecutors by requiring speculation about information available to their adversaries through due diligence – a determination that prosecutors are ill-equipped to make for myriad reasons.  By undermining defendants’ confidence in the information they receive from prosecutors, it discourages plea bargaining, which is essential to the efficient functioning of today’s criminal justice system.  By undercutting public confidence in prosecutors generally, it hampers their ability to obtain the cooperation of witnesses and the trust of jurors.  And ultimately, it undermines the public’s interest in ensuring that the guilty are convicted and the innocent exonerated, because those outcomes depend on a robust adversarial system in which both sides have actual knowledge of the material facts.

CACL Brief at 3-4.

The CACL brief also focused on the growing problem of non-compliance with Brady:

Unfortunately, Brady’s promise of full disclosure often has not been realized in practice.  In a recent frank opinion, Chief Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit observed that “Brady violations have reached epidemic proportions in recent years, and the federal and state reporters bear testament to this unsettling trend.”  United States v. Olsen, 737 F.3d 625, 631 (9th Cir. 2013) (Kozinski, J., dissenting from denial of reh’g en banc) (collecting cases).  Some commentators are even more critical.

Empirical studies confirm that Chief Judge Kozinski’s statement was no exaggeration.  According to a study by the Veritas Initiative, prosecutors withheld or delayed disclosing favorable evidence in roughly one-third of the cases sampled.  [Citation omitted.]  Yet in 2001, “[a] nationwide study of all reported cases involving discipline for prosecutorial misconduct found only twenty-seven instances in which prosecutors were disciplined for unethical behavior that compromised the fairness of a trial.”  [Citations omitted.]  Recognizing a due diligence exception, and thereby increasing uncertainty about Brady’s scope, threatens to exacerbate these problems by suggesting judicial sanction for prosecutors’ noncompliance.

. . . .

Disclosing exculpatory evidence helps to “justify trust in the prosecutor,” and supplies legitimacy enabling the prosecutor to fulfill his or her mandate. . . .  By excusing failures to disclose Brady material that might be discovered through “reasonable diligence” . . ., the exception both weakens prosecutors’ disclosure obligations and reduces transparency.  In short, it undermines trust in prosecutors by minimizing their duty to disclose exculpatory evidence.

Id. at 6-7, 10.

The CACL brief goes on to discuss at length why presenting prosecutors with the option to game the Brady rule by speculating about what defense “due diligence” might reveal – thus negating their own obligation to reveal exculpatory evidence they know exists – undermines the rule, and places even good faith prosecutors in an untenable position to make decisions based on guesses or suppositions that they are ill-fitted to make.  Id. at 13-18.

The California Attorneys for Criminal Justice likewise argue that removing the uncertainty of the products of “due diligence” from the Brady disclosure equation is necessary to achieve Brady’s key fairness goals:

The “due diligence” exception adopted by the Third Circuit in this case, and by other circuits and state courts around the country, should be rejected because it undermines the animating principle of Brady and imposes on prosecutors and courts the unavoidably speculative analysis of whether a particular piece of evidence would be meaningfully “available” to a diligent defendant.  The exception also invites prosecutorial mischief, as complex rules that rest on speculative inquiries are far more vulnerable to mistakes, or abuse, than clear and simple commands.  The exception also imposes onerous and inefficient limitations on counsel to indigent defendants, who often do not have resources to conduct fulsome investigations.

. . . .

As Brady itself recognized, “[s]ociety wins not only when the guilty are convicted but when criminal trials are fair; our system of the administration of justice suffers when any accused is treated unfairly.”  373 U.S. at 87. . . .  The “due diligence” rule applied by the Third Circuit in this case undermines these goals. . . .  The due diligence exception has no place in the Brady analysis, and in fact operates only to undermine the promise of fair trials.  As applied by the Third Circuit and other courts, the exception affects the outcome of the Brady analysis only when the defendant has established the failure to disclose evidence that has a reasonable probability of affecting the outcome of a case.  That is, it preserves a conviction precisely, and only, when there is substantial doubt that the defendant was “convicted on the basis of all the evidence which exposes the truth.”

. . . .

The Third Circuit’s opinion in this case relied on the assumption that the undisclosed evidence “could have been accessed through his exercise of reasonable diligence.” . . .  Even if that assumption were warranted here, in many cases a prosecutor’s determination whether evidence is reasonably accessible to defendants will require speculation regarding both the availability of evidence and the resources available to the defendant and his counsel.  And more importantly, even when a defendant might have access to information via rumors or innuendo, a prosecutor might well have access to reliable, admissible documents with far more persuasive value.  Due Process cannot condone withholding admissible, exculpatory evidence on the grounds that a defendant, through the exercise of due diligence, could have had access to inadmissible hearsay.

. . . .

If speculation as to the fruitfulness of “pre-trial depositions and other discovery” is sufficient to establish the “availability” of evidence in an undisclosed police report, and is therefore sufficient to excuse a Brady violation, the result will be that Brady violations, including intentional suppression of exculpatory evidence, will be excused.  And on a practical level, such a rule invites a prosecutor to engage in the same speculation in seeking to determine whether to disclose plainly exculpatory evidence under Brady.  The question of “availability” of evidence therefore becomes yet another opportunity for subjective analysis by prosecutors creating a corresponding risk of error—or temptation into gamesmanship.

California Attorneys for Criminal Justice Brief at 3-5, 8, 10.

Ironically, the lack of equivalence the California Attorneys point to between actual exculpatory evidence known to prosecutors, and the hypothetical prospect that defense counsel might obtain access to some form of similar information in the exercise of so-called “due diligence,” is one that is often addressed under the securities laws — the same laws under which Mr. Georgiou was convicted.  Under the securities laws, however, the availability of material information through exercise of due diligence by investors does not relieve companies or company officials of duties they may have to disclose that same information.  That rule applies for good reason, because obtaining hard information from a reliable company source with a duty to disclose it is different from ferreting out what may be the same information by means that may lack the same provenance.  It is a bizarre world where the duties of corporate officers to disclose business information could be more onerous and inflexible than the duties of public prosecutors to maintain a fair criminal process.

The Georgiou case gives the Supreme Court an opportunity to stem the growing trend of Brady non-compliance, and the creation of exceptions to the Brady rule that ignore its core message and effectively impede its goals.  The fairness of criminal proceedings is not a discretionary concept to be toyed with by aggressive prosecutors or judges unwilling to put teeth behind core due process requirements.  The Georgiou cert. petition should be granted, and the Supreme Court should send a clear message to the lower courts that some concepts are sacred.

Among those concepts is the admonition in Berger v. United States, 295 U.S. 78, 88 (1935), that the federal prosecutor “is the representative not of an ordinary party to a controversy, but of a sovereignty … whose interest, therefore, in a criminal prosecution is not that it shall win a case, but that justice shall be done.”  The prosecutor’s duty is not to win, but to “ensure that a miscarriage of justice does not occur,” and that includes complying with Brady by disclosing “evidence favorable to the accused that, if suppressed, would deprive the defendant of a fair trial.”  United States v. Bagley, 473 U.S. 667, 675 (1985).  In Brady, the Court made it clear that it is in society’s broader interest “when criminal trials are fair,” and that “our system of the administration of justice suffers when any accused is treated unfairly.”  373 U.S. at 87.  A vague, unverifiable, and poorly-conceived “due diligence” exception to the Brady rule – which excuses even intentional prosecutorial efforts to prevent a fair trial — eviscerates that paramount need and requirement.

Straight Arrow

August 20, 2015

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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

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Upon Further Review, SEC Memo on Use of Administrative Courts Was Indeed a Fumble

Penalty Flag“Upon further review,” as they say in the NFL, was the SEC’s recent “Division of Enforcement Approach to Forum Selection in Contested Actions,” entitled to a better call than we gave it in our Friday post: SEC Attempts To Stick a Thumb in the Dike with New Guidelines for Use of Administrative Court?  The definitive answer is: “No.”  The SEC clearly fumbled the ball with this publication, and made itself look pretty silly doing it.  I’m going to add a penalty flag.

SEC Chair Mary Jo White (Courtesy Salon) Her approval is inexplicable and depressing

SEC Chair Mary Jo White (Courtesy Salon)
Her approval is inexplicable and depressing

Our Friday post did not discuss any of the SEC’s vague descriptions, all-encompassing caveats, prevarications, and self-congratulatory pats on the back (to itself) in this document, so we will address some of them here.  This SEC memo is the equivalent of one of those “what were they thinking?” moments we now see on the internet all of the time, like a selfie someone might take (and actually post for all to see) of the author grinning before some solemn background, like the Vietnam War Memorial.  It’s an embarrassment for what it says and what it fails to say about the serious issue of assuring due process and fair treatment in SEC enforcement actions, particularly as to non-regulated persons.

“When recommending a contested enforcement action to the Commission, the Division recommends the forum that will best Utilize the Commission’s limited resources to carry out its mission.”

A false and misleading statement in at least two respects.  The Director of the Division of Enforcement already admitted that the Division chooses its administrative forum to pressure targets into settlement (“I will tell you that there have been a number of cases in recent months where we have threatened administrative proceedings, it was something we told the other side we were going to do and they settled”), and that he believed federal court juries were not properly adhering to the required burden of proof (“Frankly, I think juries, while they’re instructed that we have a preponderance standard, I think apply a higher standard to us than preponderance”).  See SEC Could Bring More Insider Trading Cases In-House.  That has nothing to do with “best utilizing resources”; it has to do with maximizing the chance to win or force a settlement on SEC terms.  One of the key reasons for choosing the administrative forum is because it has a better chance of winning there, not to make careful use of enforcement resources.  And, as the Wall Street Journal recently documented, that is precisely the result.  The Division also makes no real effort to “best utilize” its resources in any other enforcement context.  It badly allocates its ample staff resources on investigative matters that have little overall public policy consequence.  That includes the  so-called “broken windows” approach to enforcement, which focuses staff attention on what the SEC itself describes as minor violations.  But it also includes expensive litigated cases involving trivial violations of law, even if all the allegations could be proved.  (See There They Go Again: SEC Wasting Taxpayer Dollars on Trivial Perquisite Enforcement Litigation in SEC v. Miller.)

“There is no rigid formula dictating the choice of forum.  The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case.  Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case.  Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum.  While the list of potentially relevant considerations set out below is not (and could not be) exhaustive, the Division may in its discretion consider any or all of the factors in assessing whether to recommend that a contested case be brought in the administrative forum or in federal district court.”

A long-winded way of saying: “We are going to list a whole lot of factors below, but there is no way to know which ones we will decide are important, or whether we will decide other unmentioned factors are more important.  That is, the Division will choose a forum on whatever basis it thinks makes sense, and we are not going to give you any way of predicting or understanding that decision”

“The Division may in its discretion consider . . .  [t]he cost ‐ , resource ‐ , and time ‐ effectiveness of litigation in each forum. . . .  In general, hearings are held more quickly in contested administrative actions than in contested federal court actions. . . .   When a matter involves older conduct, this may allow for the presentation of testimony from witnesses who have a fresher recollection of relevant events.”

In other words, since administrative proceedings move more quickly, that can justify our choice of that forum in pretty much any case.  And in an “older case” — which means, by the way, cases that Division of Enforcement lawyers have sat on for years on end — because our dilatory investigation makes it virtually impossible for any witness to remember accurately what really happened, we will lean towards the administrative forum because, in our discretion, we now think it is important to move at a breakneck pace, and not allow the defense the time to develop a complete understanding of the record or what witnesses may say at trial.

“The additional time and types of pre‐trial discovery available in federal court may entail both costs and benefits, which should be weighed under the facts and circumstances of a case.  Although pre‐trial discovery procedures exist in both administrative proceedings and district court actions, the mechanisms of discovery are different.  For example, in administrative proceedings, the Division must produce to respondents all non‐privileged documents from its case file and the Division has Brady and Jencks obligations, requirements that do not exist in civil district court litigation.  On the other hand, depositions are available in district court but generally not in administrative proceedings.”

This is no more than a transparent effort to create the misleading impression that a sow’s ear could be something other than a sow’s ear.  No aspect of the discovery limits in administrative proceedings are beneficial to a respondent.  The restrictions on discovery may be the single-most unfair aspect of these proceedings, but the SEC portrays them here as cutting both ways.  Hogwash! (In keeping with the sow metaphor.)  The lack of depositions, the inability to pursue reasonable discovery against the SEC, the more restrictive approach to third-party discovery (including that every subpoena must get prior approval from the ALJ, inevitably over opposition from the Division), and the incredibly short time-frame for doing any independent development of evidence, all mire the administrative respondent in a sloppy mud pen.  The SEC, however, had many years to develop its own case (and now uses its own delay as a reason to avoid court!), and no obligation to do so in a way that actually makes a fair record (in investigative testimony, leading and misleading questions, hiding key evidence from witnesses, vague questions that can be later misconstrued, and avoiding any discussion of exculpatory evidence, are the norm).  So the much-touted production of “all non-privileged documents from its case file” is a laugher as a benefit to the respondent.  The same production would be required in court (and typically is made by the SEC at the outset without waiting for a request), and intelligent discovery requests will be able to garner all Brady and Jencks material as well.  Not to mention the fact that the Division’s concept of what is “non-privileged” means they often refuse to produce many materials based on privilege claims (attorney-client, work-product, and the all-encompassing “deliberative process privilege”) that would not (and do not) withstand challenge in court.  But administrative judges are much more reluctant to force discovery on the Division, or the SEC more broadly, than federal court judges.

“Administrative Law Judges, who adjudicate securities law cases, and the Commission develop extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products. . . .  If a contested matter is likely to raise unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, consideration should be given to whether, in light of the Commission’s expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law.”

The hubris!  This could be the most offensive factor of all.  It suggests that administrative law judges and SEC Commissioners are better-suited to decide “unsettled and complex legal issues” to “facilitate development of the law” than federal court judges.  Let me see if I have this right.  An appointee not required to meet anything close to the standards that apply to federal judges is better to decide complex issues and the development of the law?  And Commissioners, who have virtually no adjudicative experience at all when they are appointed, all of a sudden become better at considering “complex and unsettled legal issues” when they are confirmed?  I think not.  Nor does district judge Jed Rakoff, who gave the exact opposite view on this issue (moving cases from the federal courts to the SEC’s captive administrative court “hinders the balanced development of the securities laws”).  See Judge Rakoff Slams SEC for Increased Use of Administrative Proceedings.

The SEC was not content here to talk about technical applications of SEC rules in the securities industry — as to which they could at least have a theoretical basis for making such an argument based on supposed agency expertise.  They argue here that ALJs and Commissioners may be viewed as better able to decide complex legal issues wholly apart from technical SEC regulatory compliance issues — for example, whether a non-regulated corporate official engaged in fraud in some respect or another.  There is no way to support the argument that ALJs or SEC Commissioners are better situated to decide complex and unsettled issues involving fraud allegations than federal judges.  The obvious example is insider trading cases, as to which the law is so nuanced, and so bound up in considerations of fraud and fiduciary obligation, that federal court judges are much more likely to get it right.  (The exact view expressed by Judge Rakoff: see Judge Rakoff PLI Speech.)  That doesn’t even take into consideration the fact the federal judges (and juries) are not conflicted on these cases like the SEC Commissioners are.  Only after having first approved the filing of a prosecution, and likely having rejected a proffered settlement as insufficient, do the Commissioners decide these cases, including whether to adopt views of the facts or the law that may be inconsistent with their own decision to prosecute.

As an attempt to make public policy, this document is an embarrassment.  Its objective is not to determine when an administrative forum is a fairer and more appropriate forum in which to litigate enforcement actions against non-regulated persons.  It is to provide a justification for any decision the SEC may make about where to litigate its cases, and to be able to argue that those decisions deserve deference because they reflect a reasoned agency determination under an adopted set of guidelines

The fact that Chair Mary Jo White signed off on such an atrocity is depressing, and, frankly, inexplicable.

Straight Arrow

May 11, 2015

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U.S. v. Georgiou: 3rd Circuit Panel Decision Makes a “Mockery” of Brady Disclosures and Jencks Act Compliance

We previously discussed the Third Circuit’s flawed analysis in United States v. Georgiou of the extraterritorial application of the federal securities laws to trading activity centered abroad, based solely on the fact that some trades entered into abroad were executed with the involvement of market makers in the United States.  See Third Circuit Adopts “Craven Watchdog” Standard for Extraterriorial Reach of Securities Laws in U.S. v. Georgiou.  We now turn to a different respect in which that panel decision disappoints.  The defendant in Georgiou recently filed a petition for rehearing en banc on different grounds, focusing on the panel’s use of invalid standards in applying Brady v. Maryland, 373 U.S. 83 (1963).  The issues raised in the brief are significant.  A copy of the motion for rehearing is available here: Georgiou Petition for Rehearing En Banc.

Brady is the landmark Supreme Court decision that ended the ability of the Government to hide from defendants exculpatory evidence in its possession.  Mr. Georgiou raises serious concerns that the panel improperly limited the Brady rule, in a manner inconsistent with previous Third Circuit (and other appellate court) holdings, by allowing the Government to avoid the consequences of failing to make required Brady disclosures based on whether the defendant acted diligently to try to obtain those materials himself.  By using this standard, the panel allowed the prosecutors to get away with withholding evidence that could have strongly undercut the credibility of the Government’s key witness.  The withheld information was revealed only in sentencing proceedings for that witness after the Georgiou trial was over.

As the brief in support of the Georgiou petition describes, the approach adopted by the Third Circuit panel allowed a blatant evasion of the obligations imposed on the Government to disclose exculpatory evidence in its possession.  The degree of diligence used by the defense to obtain that same information simply should not be relevant.  To be blunt, it is not too great a burden to demand that Government lawyers satisfy their duties to make required disclosures without permitting them to insulate their failures from consequences by making an issue of defense diligence.  Whether defense counsel is diligent or not, Government lawyers need to recognize their duties and perform them, period.  Anything less undermines the criminal justice process.

Unfortunately, there is a near-constant need to have the courts assure that prosecutors meet their obligations.  Prosecutors seem addicted to trying to win cases through sharp practices rather than a thorough presentation of the facts to the judge or jury.  It never ceases to amaze me that prosecutors consistently try to minimize the effect of Brady by avoiding the disclosure of potential exculpatory material in their possession.  An attempt to deprive the defendant of information that might be useful at trial reflects a prosecutor’s willful effort to prevent a fair and just trial.  It should not be tolerated by the senior lawyers that manage prosecution teams, and it should not be tolerated by the courts.  Indeed, a knowing avoidance of Brady obligations should expose prosecutors to court and bar sanctions, and in some instances be prosecuted as an obstruction of justice.  Prosecutors routinely take the narrowest view possible of Brady obligations, but why they do so is a mystery to me.  What do they think they are achieving by depriving the defendant of potentially relevant evidence?  Do they really think that their views that a defendant is guilty as charged are so reliable that the jury should not be permitted to consider all of the evidence?  The job of a prosecutor is not to engineer a conviction, but to try to assure that a fair adjudication occurs.  Instead of allowing prosecutors to play games to avoid Brady obligations, U.S. Attorneys should demand that their assistants err on the side of producing potentially exculpatory evidence.

Since that did not occur here, it was up to the courts to elevate justice above the prosecutors’ hubris, or their single-minded desire for a notch in the belt.  Alas, that did not occur.  Instead of casting a jaundiced eye on the prosecution’s questionable disclosure decisions, the Third Circuit panel bent over backwards to justify or exonerate those decisions.  It should have held the prosecutors’ feet to the fire, because adhering to principles that foster a fair and just adjudication is far, far more important than the result in a particular case.  The Third Circuit panel abdicated its role to hold overly-zealous prosecutors in check.

The petition points out another serious error by the Third Circuit panel.  The Government never produced to the defense notes of witness interviews by Government officials of the prosecution’s key witness.  Any such materials known to the prosecutors should have been produced under Brady if aspects of the interviews were exculpatory, and under the Jencks Act because they reflect previous statements of one of the Government’s witnesses.  The panel ruled that even though the SEC was in possession of notes of these interviews, they were not required to be produced by DOJ prosecutors because they were in the possession of the SEC, not the DOJ.  As a result, in the court’s view, these materials “were not within the possession of the prosecutorial arm of the government” and therefore prosecutors were absolved of the duty to produce them, even if they knew they existed and could easily have obtained them.  That is a truly absurd position which has been soundly repudiated by other courts.  Those courts rightfully recognize that accepting this fiction would make a “mockery” of the Brady and Jencks Act disclosure requirements. See, e.g., United States v. Gupta, 848 F. Supp. 2d 491, 493-95 (S.D.N.Y. 2012).

In this case, as in most criminal cases involving allegations of key securities violations, the DOJ worked hand-in-hand with the SEC, often jointly participating in interviews.  To permit avoidance of disclosures by the DOJ based on which government employee took or retained those notes — whether they were SEC officials, FBI agents, U.S. mail inspectors, or some other agency employee — is a gross elevation of form over substance.  All of the law enforcement agencies in these cases cooperate and work together, and all of them should be required to treat these notes as jointly-held materials.  To rule otherwise does, indeed, make a mockery of justice.

Mr. Georgiou faces an uphill battle in his effort to win reconsideration of the decision or en banc review, or, failing so, in getting a grant of certiorari from the Supreme Court.  But if the panel decision stands as written, it represents an embarrassment to criminal justice, regardless of whether Mr. Georgiou is guilty of the crimes charged.

Straight Arrow

February 11, 2015

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SEC To Hear Wide Range of Constitutional Challenges to Administrative Proceeding in Jarkesy Case

Having just escaped district court consideration of constitutional challenges to the SEC’s use of an administrative proceeding in the Chau/Harding Advisory case, the SEC will now review a number of similar challenges to its administrative adjudicatory process in In re Jarkesy, SEC File No. 15255.   The petition for review of respondents John Thomas Capital Management Group and George Jarkesy, which the Commission agreed to hear on December 11, 2014, will be the first opportunity for SEC consideration of a number of constitutional issues since the recent hubbub about the increased use of the administrative court for these kinds of cases.  A copy of the Petition for Review is available here: Jarkesy Petition for Review.

The issues raised in the petition are extensive.  They include:

  1. The administrative proceeding is invalid because the Commissioners issued findings of fact and conclusions of law in advance of the hearing.
  2. The administrative proceeding is invalid because the Commission exercises unguided discretion on the choice of forum for its prosecutions even when they do not involve subject matters outside of the conventional experience of Article III judges, which violates the separation of powers doctrine.  
  3. The decision to require respondents to defend themselves in the administrative court violated the equal protection clause because others similarly situated have not been required to do so and they were deprived them of a Seventh Amendment right to jury trial, which they contend is a fundamental right.
  4. The assignment of their case to the administrative court violates the equal protection clause under the “class of one” doctrine.
  5. The proceeding is invalid because ex parte communications between the Division of Enforcement and the Commission were permitted during the discussions of settlements with co-respondents, which violates due process rights to an impartial forum.
  6. The effective denial of rights under the doctrine of Brady v. Maryland because relevant documents were hidden in a 700gb “document dump” incapable of being reviewed violates due process.
  7. The refusal to allow respondents to create a record for review of violations of rights is itself a due process violation.
  8. The requirement that respondents defend themselves within a “truncated” time-period prevented discovery of relevant facts or the opportunity to prepare a defense, which violated due process rights.

Whether any of this stocks is another question entirely.  Of course, we can be virtually certain that the Commission itself will give these arguments short shrift.  But where the appeals court comes out may be another question.   That would be either the Court of Appeals for the D.C. Circuit, or, it would appear, the Fifth Circuit, since the respondents appear to be located in Texas.

Straight Arrow

December 15, 2014

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Ceresney Presents Unconvincing Defense of Increased SEC Administrative Prosecutions

The SEC has been besieged by criticism of the Division of Enforcement’s new determination to bring more antifraud civil prosecutions in the SEC’s administrative court, and was stung by a speech from Judge Jed Rakoff criticizing that decision in no uncertain terms.  The day after Judge Rakoff’s talk, Andrew Ceresney, the current Director of the Enforcement Division, tried to defend the decision.  He plainly needs more practice; or perhaps he could start with a better understanding of his own administrative proceedings.  The arguments he made were so off-base that they can be explained in only two ways: he either doesn’t know very much about defending SEC enforcement actions (which I hope is not true), or he is just presenting makeweight arguments in the hope that by mere repetition they might be believed.

In a PLI conference panel discussion the day after Judge Rakoff’s speech at the same conference, Ceresney attempted a rejoinder to the Rakoff criticism.  Essentially, he argued that the SEC has no comparative advantage when it litigates in front of its own administrative law judges.  You can see a description of his comments here.  I don’t mean to be dismissive, but that’s a bunch of hooey.

He argued that respondents in these proceedings are not disadvantaged by the fact that they get no discovery, have limited subpoena power controlled by the ALJ, have very little time in which to prepare a case, are unprotected by the rules of evidence, and have no independent (that is, independent of the SEC, the prosecutor in these cases) review of the sufficiency of the “evidence” that gets presented in the administrative court.  His arguments are, to be kind, unconvincing.

Discovery.  Ceresney says the lack of discovery doesn’t matter because the SEC delivers all of its files to the other side.  That’s bunch of malarkey; a fiction; a mere pretense.  The SEC delivers to respondents a part of the official enforcement “case file,” but that may not include vast amounts of important information the SEC has bearing on the claims asserted.  For example, say the SEC were to bring an action alleging a company violated the antifraud provisions of the securities laws because its release of material information used a process that allowed certain investors to get a slightly faster data feed.  The enforcement division is investigating such potential charges in connection with high frequency and algorithmic trading right now.  The documents the SEC would deliver to respondents would be only the SEC’s own formal case file.  It would not include any information about the SEC’s own distribution of information, and how it may be doing the same thing (releasing information in a way that benefits certain traders) that it is charging as a fraud.  Such information would likely be obtainable in discovery in a federal court, but would not be delivered by the SEC in an administrative case and almost certainly would not be ordered to be produced by an administrative law judge (ALJ).  The SEC gains from the choice of an administrative court; the respondent loses.

Another example.  The SEC brings fraud charges against a public company alleging an improper accounting treatment to account for certain expenses.  The accounting approach, however, is in a gray area and is common in the industry.  The SEC’s enforcement file will include only its inquiry into the respondent’s accounting determinations.  What it will not include is information the SEC gathered about other industry participants, which would be relevant to determining the “generally accepted” approach in that industry.  Because that information is plainly relevant to the issue of scienter — whether the respondent knowingly or recklessly chose an incorrect accounting treatment — it would likely be obtainable in discovery in a federal district court, although the SEC would surely contest it.  But the chance of obtaining such information through an order by an ALJ is close to zero.  Once again, the SEC gains from being in the administrative court; the respondent loses.

Apart from the narrower scope of documents the SEC must deliver to respondents in an administrative proceeding, Ceresney ignores the SEC’s inevitable, overbroad assertions of work-product and “deliberative-process” privilege.  The SEC does not deliver to opponents documents in the “case file” over which they claim work-product or deliberative-process protections.  Often, these are the most important documents in the file.  In courts, the refusal to provide those materials in discovery can be (and has been) overruled, but the ALJs don’t do this.  For example, the SEC may have gathered 5 million pages of documents in electronic form.  They examine those materials for months, or more likely years, and identify the ones they think best support their case as well as ones that are harmful to their case.  When the “case file” is delivered, all the respondent gets is the 5 million pages (other information being withheld under claim of work product protection), and a short time before trial to try make head or tail out of them.  The SEC identifies as its exhibits the documents it found to be helpful and hopes the documents harmful to its case remain buried in the 5 million pages.  Federal courts can, and have, ordered that the SEC provide documents in the form they are kept in the SEC’s files (that’s what the Federal Rules of Civil Procedure require) — including files identifying what documents may be useful or harmful in certain areas.  ALJs are highly unlikely to do this.  The SEC gains; the respondent loses.

Likewise, the SEC will not deliver key interview material if there is no official transcript, claiming work-product privilege.  SEC lawyers often call potential witnesses during their investigation to learn what they might have to say on relevant issues.  They take notes of those interviews.  Some of those witnesses are subpoenaed for investigative testimony, which is transcribed.  But many of those potential witnesses are not subpoenaed for testimony, often because what they told the SEC lawyers is not helpful to prosecuting a case.  (The SEC investigative lawyers’ bias in creating an investigative record is another huge problem, but not the subject of this discussion.)  The SEC delivers the investigative transcripts as part of the case file, but keeps for itself all non-transcribed witness interviews.  As a result, evidence helpful to a respondent remains hidden.  In a federal court, discovery will likely allow the defendant to get copies of these untranscribed interviews, but an ALJ will never issue such an order.  The SEC gains; the respondent loses.

Ceresney says: “There is no discovery in criminal prosecutions, and I don’t think anyone claims due process violations there.”  That is wrong in many respects.  First, one justification for this is the considerably higher burden of proof the government faces in criminal cases.  Second, there are forms of discovery in criminal cases and judges to determine whether requested discovery should be permitted.  Third, criminal procedure rules mandate that materials obtained by prosecutors be delivered to defendants if they are exculpatory or can be used to impeach witnesses.  That is what is known as so-called “Brady material” (after the Supreme Court case Brady v. Maryland).  But the SEC, in its civil prosecutions, refuses to comply with Brady v. Maryland.  For administrative proceedings, there is a strange provision in the SEC Rules of Practice that lists documents the SEC must disclose, and those it may withhold, and then says the SEC may not “withhold, contrary to the doctrine of Brady v. Maryland, 373 U.S. 83, 87 (1963), documents that contain material exculpatory evidence.”  SEC Rule of Practice 230.  But the staff takes a narrow view of what is “exculpatory,” and does not look for exculpatory material outside of its own investigative file.  That, combined with the fact that the SEC administrative law judges are highly restrictive on what they consider “exculpatory,” means that much evidence that could be used by the defense to disprove SEC claims is never made available.  See, e.g., In the Matter of Thomas C. Bridge et al.,  File No. 3-12626 (Aug. 27, 2007).  When that happens in a federal court, a defendant at least has the chance to gather that same information in the civil discovery process.  But in the administrative court the SEC gets to try to bury evidence that a respondent can use to defend himself or herself.  The result?  You guessed it: the SEC gains; the respondent loses.

So much for Ceresney’s claim that the lack of discovery in administrative proceedings doesn’t harm respondents because the SEC delivers its case file.

ALJs as securities law experts.  Ceresney says the SEC administrative courts are better for these cases because they involve highly technical securities law issues that judges and juries just can’t understand as well as ALJs with securities law expertise.  To begin, there is no requirement that an SEC ALJ have securities law experience when he or she gets appointed.  Many of them learn on the job.  Beyond that, however, there is a kernel of truth in Ceresney’s argument, but not much more.  Over time, SEC ALJs may develop expertise in areas involving technical regulatory rules and industry practices.  But that expertise applies only to enforcement actions against SEC-regulated entities like broker-dealers or investment advisers.  The rules governing those businesses are detailed and non-intuitive, so previous experience with these cases can be helpful.  That is why for many, many years the only cases brought by the SEC in its administrative courts were those involving its own regulated entities.  But the issue raised by Judge Rakoff involves not those cases, but the broader, higher impact fraud cases like, for example, insider trading cases.  As Judge Rakoff noted, trying those cases in administrative courts is a relatively new phenomenon.  And because the SEC has resisted any clear statement of what are and are not fraudulent practices, and fraud cases that get tried (and not settled) often explore the outer edges of the fraud concept, ALJs have no meaningful technical edge on federal courts.  To the contrary, judges and juries are far more capable of applying the concept of fraud than ALJs are likely to be because in such case, technical skills are far less important than more intuitive understanding and application of common sense and community standards.

Timing advantages.  Ceresney says it is no great advantage that the SEC has been able to take months or years to prepare its case and the defense has no such luxury.  He argues that the defense has probably been doing its own investigative work during that period.  But defense counsel have no power to get people to talk to them or deliver documents.  When the SEC lawyers call people subject to SEC regulatory power, say they represent the U.S. government, and ask them to chat off the record, you can bet they get cooperation that defense counsel are unlikely to get.  That is especially true if the people contacted are subject to SEC investigation themselves.  SEC lawyers are not shy about playing on the fear of prosecution to encourage people to talk freely with them.  In fact, the Enforcement Division touts its policy of giving credit to cooperators.  Defense lawyers have no such leverage.  They get their leverage only through the use of subpoena power in a federal civil action, where ample time is allowed for discovery before trial.  Theoretically, defense lawyers can get subpoenas in administrative cases, but the time-frame is much shorter, making use of this process much more difficult.  And ALJs are reluctant to approve the issuance of subpoenas, each of which requires their approval, which almost always must come over SEC objection.  Finally, as noted above, defense lawyers also get hit with large volumes of materials a short time before trial.  The SEC has had months and years to examine and choose the few documents that favor their case.  The defense lawyers are left trying to scour those documents for the ones harmful to the SEC case, which the SEC has intentionally left in the haystack.  Try examining 5 million pages of electronic materials to prepare a case in a month or two.

Due process.  Cereseny says the respondents get great due process with multiple levels of protection. But the only meaningful levels of review of the evidence come from the SEC itself.  The ALJ is an SEC employee and deals every day with the SEC litigators but only rarely with each set of defense lawyers.  The ALJ’s ability to consider even complex cases is limited by the SEC, which sets time limits on the completion of decisions.  Once the ALJ has ruled, the only avenue of appeal is to the SEC itself.  Yes, that’s the same folks who decided to bring the case in the first place.  The Commissioners are supposed to take off their prosecution hats and don judicial hats.  Perhaps in some bizarre utopia this is viewed as due process, but in the real world, prosecutors don’t do so well at deciding they were wrong to bring a case (and incur the major expense in doing so).  And beyond that, the Commissioners will typically defer to the fact-finding of ALJs because they weren’t there to see and evaluate witnesses (like an independent judge or jury is in a federal court case).  After the SEC approves its employee’s decision, the respondent finally gets a chance to have an independent review  — only, of course, if he or she has the financial resources to continue this quest against the government, and many do not.  Even then the court of appeals that reviews the SEC decision is required to defer to SEC judgments unless it can find them unreasonable.  So the value of independent review is diminished by imposing a high bar before the SEC decision can be rejected.

All of those layers of protection touted by Ceresney are more like layers of inquisition.  The expense is enormous.  The review is limited.  The likelihood of reversal is small.  And the only independent review is done under standards that shackle the reviewers.  Compare that to being before an independent judge for the pretrial process and then having an independent judge and jury hear and consider the evidence.  No contest.  Once again, in the administrative process, the SEC wins and the respondent loses.

Despite his statements to the contrary, Ceresney knows the truth here.  He himself admitted it when he announced the new SEC policy of administrative prosecutions.  He said that the rationale for the SEC’s use of its captive courts is that it has a higher success rate in prosecutions brought there.  See here.  The SEC’s improved success rate is not because the administrative courts are fairer, it’s because the playing field is tilted in the SEC’s favor.

Straight Arrow

November 11, 2014

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