Tag Archives: Cameron Eliot

SEC Hit with Double Whammy Rulings Barring It from Commencing Challenged Administrative Proceedings

On the afternoon of September 17, 2015, the SEC was rebuffed by two federal courts in separate cases challenging the constitutionality of the SEC’s administrative law enforcement proceedings.  As reported here, the Court of Appeals for the Second Circuit granted Lynn Tilton an order barring the SEC from proceeding with an administrative trial on charges against her, pending that court’s resolution of a dispute over whether the federal courts have jurisdiction to consider her complaint that the administrative proceeding would violate Article II of the Constitution.  At roughly the same time, New York federal district court Judge Richard Berman rejected a motion by the SEC to allow it to proceed with an administrative action against Barbara Duka while it appealed (to the Second Circuit) Judge Berman’s preliminary injunction barring that proceeding from moving forward, on the very same constitutional grounds.  Judge Berman’s preliminary injunction order can be read here: Order Issuing Preliminary Injunction in Duka v. SEC; and his order denying the SEC’s stay motion can be read here: Decision and Order in Duka v. SEC.

The result is that two more administrative proceedings are now barred by court orders, joining two others that were barred by orders of Judge Leigh May in the federal district court in Atlanta.  See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding, and Order Enjoining SEC in Gray Financial Group v. SEC.

The Second Circuit order was brief and straightforward.  But Judge Berman’s denial of the SEC’s application for a stay is filled with meaty discussions of key issues, including reiterating that several of the SEC’s positions on jurisdiction and the merits are wrong, suggesting that the SEC plays a little fast and loose with the positions it argues, and emphasizing that the SEC might want to be more proactive in addressing allegations of potential bias in its administrative court.

Judge Richard Berman - NYLJ/Rick Kopstein 100614

Judge Richard Berman – NYLJ/Rick Kopstein

On the jurisdictional issue, Judge Berman restated his belief that his court does have jurisdiction over the Duka constitutional challenge (“The Court is, respectfully, convinced that it made the correct finding of subject matter jurisdiction,” slip op. at 3), and took the time to address the contrary position recently reached by the Seventh Circuit in Bebo v. SEC, 2015 WL 4998489 (7th Cir. Aug. 24, 2015) (see 7th Circuit Rules for SEC, Affirming Dismissal of Bebo Case on Jurisdictional Grounds).  He openly disagreed with the Seventh Circuit’s view that the Supreme Court decision in Elgin v. Dep’t. of the Treasury, 132 S. Ct. 2126 (2012), was on point because the factual circumstances differed significantly.  See slip op. at 8-9.

Judge Berman also made pointed statements elsewhere in his opinion arguing that immediate consideration of the consitutional issue was consistent with Second Circuit law and the public interest.  For example: “The SEC argues unconvincingly that a party in Ms. Duka’s shoes ‘must patiently await the denouement of proceedings within the [administrative agency],” . . . .  But Second Circuit precedent appears to refute such a notion.  See Touche Ross & Co. v. S.E.C., 609 F.2d 570, 577 (2d Cir. 1979) (‘[T]o require appellants to exhaust their administrative remedies would be to require them to submit to the very procedures which they are attacking.’).”  Slip op. at 15-16 (some cites omitted).  And: “With respect to the public interest, the Court submits that it is of the utmost importance to the public that complex constitutional questions be resolved at the outset, with finality, and by application of the expertise of the federal courts.  See, e.g., Massaro v. United States, 538 U.S. 500,504 (2003); see also Pappas v. Giuliani, 118 F. Supp. 2d 433, 442 (S.D.N.Y. 2000) affd, 290 F.3d 143 (2d Cir. 2002) (‘Although often highly competent in their designated area of law, administrative decision-makers generally have neither the training nor the experience to adjudicate complex federal constitutional issues.’); Austin v. Ford, 181 F.R.D. 283, 286 (S.D.N.Y. 1998) (‘Public interest in finality of judgment encompasses the development of decisional law, the importance of the opinion to nonparties, and the deterrence of frivolous litigation.’).”  Slip op. at 16 (some cites and footnote omitted).

All of these points could be impactful as the Second Circuit considers the same jurisdictional issue in the Tilton v. SEC appeal.

On the merits, Judge Berman restated his belief that Supreme Court case law leaves little doubt that the SEC’s administrative law judges are “inferior officers” within the meaning of that term in Article II, and, as a result, their appointments are subject to limitations in Article II’s Appointments Clause.  His finding that the High Court reasoning and holding in Freytag v. Commissioner, 501 U.S. 868 (1991), yields the conclusion that SEC ALJs are inferior officers because they exercised “significant authority pursuant to the laws of the United States” was not new – as he noted, he previously reached the same conclusion when he issued the preliminary injunction.  Slip op. at 9.  But it came within two weeks of the SEC reaching the opposite conclusion in its recent decision on the petition for review in In the Matter of Raymond J. Lucia Cos., Inc., File No. 15006 (see SEC Declares All Is Okay Because Its ALJs Are Just Employees and Not “Inferior Officers”), without even mentioning that decision or its analysis, suggesting Judge Berman found the SEC reasoning unpersuasive and sees no reason to defer to SEC views on the issue.  No doubt with knowledge of the specific analysis of the SEC in Lucia, he still wrote: “the SEC will not, in the Court’s view, be able to persuade the appellate courts that ALJs are not “inferior officers.”  Slip op. at 11.  Judge Berman’s bottom line: “Duka’s constitutional (Appointments Clause) challenge is (very) likely to succeed.”  Id. at 10.

On the SEC’s nimble willingness to revise its arguments to fit the circumstances, Judge Berman noted the “irony” of the SEC’s new-found emphasis on the compelling importance of judicial efficiency after it scoffed at Ms. Duka’s similar arguments in the original preliminary injunction hearing.  He wrote: “The Court’s reference to ‘irony’ [in an earlier ruling] refers to the fact that conservation of Duka’s resources was a core argument that she raised in objecting to participating in the SEC’s administrative proceedings prior to resolution of her constitutional challenge in federal court.  The SEC flatly opposed that argument, which it now appears firmly to embrace.”  He quoted his own statement during the oral argument that “I don’t understand why you reject that argument when Ms. Duka makes it but then at the same time in this Court you make the very same argument.”  Slip op. at 3 n.2.

And Judge Berman was surely making a point when he dwelled, without any apparent need, on the SEC’s opaque handling of publicly-disclosed evidence that its own administrative court could have a latent, or even intentional, bias in favor of the prosecution.  His opinion includes the following striking paragraph:

The Court is aware of recent allegations of undue pressure said to have been applied to an SEC ALJ to cause her to make SEC-favorable rulings.  “Lillian McEwen, who was an SEC judge from 1995 to 2007, said she came under fire from [Chief Administrative Law Judge Brenda] Murray for finding too often in favor of defendants.”  See Jean Eaglesham, SEC Wins with In-House Judges, The Wall Street Journal, May 6, 2015. . . .  And, in In the Matter of Timbervest, respondents allegedly sought to depose presiding ALJ Cameron Elliot, who was then allegedly invited by the SEC “to file by July I, 2015 an affidavit addressing whether he has had any communications or experienced any pressure similar to that alleged in the May 6, 2015 The Wall Street Journal article.”. . .  On June 9, 2015, ALJ Elliot emailed the following response: “I respectfully decline to submit the affidavit requested.”  See Jean Eagelsham, SEC Judge Declines to Submit Affidavit of No Bias, The Wall Street Journal, June 11, 2015. . . .  On July 24,2015, Chief Administrative Law Judge Murray issued an Order Redesignating Presiding Judge, designating Administrative Law Judge James E. Grimes “in place and stead of the Administrative Law Judge [ALJ Cameron Elliot] heretofore designated, to preside at the hearing in these proceedings and to perform other and related duties in accordance with the Commissioner’s Rules of Practice.”  See In the Matter of Barbara Duka, File No. 3-16349 (SEC).

During the September 16, 2015 hearing, the Court noted that it was “aware that there is some sort of flap at the SEC with respect to some of the ALJs,” that it “want[ed] to get further clarification about that matter,” and that “in this very case, [ALJ] Cameron Elliot . . . has been reassigned because he was not able or would not submit an affidavit.”. . .  While acknowledging that ALJ Elliot was removed from the Duka matter, Ms. Lin contended that “Judge Elliot has a very busy docket . . . and there is no suggestion, no connection whatsoever about [The Wall Street Journal article], about that particular former ALJ’s accusations to Judge Elliot’s reassignment in this case. . . .  And it’s not true that there would be any kind of connection.”. . .  The Court assumes that the SEC will want fully to investigate these matters.

Slip op. at 14-15 (citations omitted and emphasis added).

Apparently Judge Berman is as perplexed as yours truly when the Commission seems more insouciant than concerned in its reaction to serious public questioning of the fairness of its own administrative judicial process.  See SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed; and SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ.  Indeed — although Judge Berman made no mention of this — it is downright embarrassing that 15 months ago the SEC’s General Counsel acknowledged that the Rules of Practice governing SEC administrative proceeding are archaic and need revamping and nothing has yet been done to address that issue.  See SEC Administrative Case Rules Likely Out Of Date, GC Says.  (Ms. Small said it was fair for attorneys to question whether the SEC’s rules for administrative proceedings were still appropriate, with the rules last revised “quite some time ago” when the SEC’s administrative proceedings dealt with different kinds of cases than the more complex administrative matters it now takes on or expects to take on — given the commission’s expanded authority under the Dodd-Frank Act — such as insider-trading actions.  It was “entirely reasonable to wonder” if those rules should be updated to reflect the changed situation, for instance by allowing more flexibility on current limits to trial preparation time or allowing for depositions to be taken.  “We want to make sure the process is fair and reasonable, so [changing] procedures to reflect the changes makes a lot of sense.”)

Anne Small -- SEC General Counsel

Anne Small — SEC General Counsel

When all of the dust settles on the Appointments Clause and other Article II constitutional challenges to these administrative courts, we will still be left with what every practicing securities litigator knows are vastly diminished due process rights in the SEC’s administrative courts as compared to the federal courts.  Judge Berman certainly seemed concerned about this in his opinion.  He said: “during the September 16, 2015 hearing, the SEC argued that administrative proceedings would serve the public interest because ‘it is a much faster process and it expedites the consideration and the determination of whether the underlying security violations had actually occurred and, more importantly, to impose the kind of remedy that would then help to prevent future harm.’. . .  The Court responded that ‘faster is [not] necessarily better because faster means no juries, no discovery, no declaratory relief.  In federal court you can get that . . . there’s a whole lot of protections, Ms. Duka argues, that are available in federal courts that are not available before the Commission.'”  Slip op. at 16.

If the SEC continues to be empowered to exercise effectively uncontrolled discretion over which cases are directed to the administrative courts (as a result of the expanded jurisdiction of those courts under the Dodd-Frank Act), and it continues to ignore obvious needs to modernize and balance the procedures for those proceedings to eliminate their “Star Chamber” similarities, the controversy over these actions will be unabated.

Straight Arrow

September 18, 2015

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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

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SEC ALJ Cameron Elliot Shows Why In re Bebo Should Be in Federal Court

The administrative enforcement action brought by the SEC against Laurie Bebo, the former CEO of Assisted Living Concepts, Inc. (“ALC”) is serving as a case study showing why it is highly improper to use the administrative forum to prosecute serious fraud claims against individuals or entities not subject to SEC regulatory authority.  We previously discussed elements of unfairness in this proceeding in our post In re Bebo Shows Why SEC Administrative Proceedings Have Fairness Issues.  A new ruling by the administrative law judge in that case shows once again how the administrative forum tilts the field significantly (and unfairly) in favor of the SEC in comparison to federal courts, to the point that due process of law is threatened.

The SEC filed a motion in limine to allow it to introduce a broad range of hearsay evidence: 16 sworn declarations and three deposition transcripts.  By all appearances, none of these documents would be admissible as evidence in federal court because there is no apparent exception to the hearsay rule that would allow the SEC to avoid live testimony, subject to live cross-examination.  Ms. Bebo opposed the motion.  Administrative Law Judge Cameron Elliot ruled that the evidence would be admitted under a provision of the SEC Rules of Practice allowing an ALJ to admit into evidence the prior sworn statement of a witness, other than a party, if “it would be desirable, in the interests of justice, to allow the prior sworn statement to be used.” SEC Rule 235(a)(5), 17 C.F.R. § 201.235(a).  This notwithstanding the fact that the Rules of Practice state: a “presumption that witnesses will testify orally in an open hearing.”  ALJ Elliot’s order can be read here: In re Bebo Ruling on Introduction of Hearsay Evidence.

ALJ Elliot apparently thought it was important that Ms. Bebo did not “dispute the truth of the Declarants’ statements or of the Deponents’ testimony.”  Yet, he accepted that counsel for Ms. Bebo “did not participate in any interviews of the Declarants, and so far has been able to speak to only one Declarant.”  In other words, in the ALJ’s view, Ms. Bebo was saddled with the extreme burden of disputing the truth of statements without ever having access to the declarants, which seems bizarre.  Since the “truth” of statements is heavily dependent on context and possible equivocation, it is a near-impossible burden to challenge “truth” without access to context.

Keep in mind that this is not just a private party drafting an affidavit and asking another person to sign.  It is the Government telling people who may have law enforcement exposure themselves that it would like them to sign a document, and perhaps making statements or representations about the case to encourage them to do so.  Most folks will do what they can to keep the Government off their backs.

The end result is that statements of many witnesses are now coming into evidence even though the respondent has had no opportunity to develop an understanding of what those witnesses said, and may say, outside of the four corners of declarations carefully drafted by SEC lawyers.  Moreover, because deposition discovery is not generally available in these administrative proceedings, Ms. Bebo’s counsel is placed in the impossible situation of deciding whether to call these witnesses into court to examine them without having any understanding of what they may say, or of ways in which the SEC-drafted declarations could be misleading or deceptive because of important omissions.

This could never happen in federal court. The SEC would have to identify these people as potential witnesses and they could be noticed for depositions.  Those depositions might show that what the witnesses have to say is not as clear-cut as the SEC contends – or may even vary significantly from what the SEC says.  In all likelihood, the SEC would have to decide whether to bring these witnesses into court to testify, and to take the risk that their proffered witnesses would provide unhelpful testimony in response to non-leading questions and the right of cross-examination.  Even if the SEC were permitted to introduce such declarations into evidence – which is highly unlikely – the defense would be in a position, based on pretrial discovery, to decide which should be brought in as live witnesses. In short, the advantage to the SEC created by ALJ Elliot’s ruling allowing SEC-drafted declarations as evidence in this case is palpable.

ALJ Elliot blithely ignores these issues, notwithstanding that even under SEC Rules of Practice that are less demanding than the Federal Rules of Evidence, he is obligated to allow this to occur only if “it would be desirable, in the interests of justice.”  There is precious little discussion in his opinion of how justice is served by putting the respondent behind the 8-ball with respect to 16 witnesses by allowing into evidence hand-crafted statements by SEC lawyers signed by people who need never appear in court.  (Is the ALJ truly ignorant of how these declarations are typically crafted to leave out things that may be helpful to the opposition?)  ALJ Elliot simply takes no cognizance of the burden this imposes on the defense, and the near-impossibility of overcoming that burden without full, fair, and open discovery in advance of trial.  He merely says that “it will not be unreasonable or unduly burdensome to place on Bebo the burden of calling the Deponents as witnesses,” and it is not “a violation of due process to admit undisputed hearsay.”  But why does it serve the interests of justice to impose this burden and to admit this evidence? It is the SEC’s burden to show this, and the ALJ’s duty to make appropriate findings in support of his order, but, incredibly, the ALJ appears to proceed based on the presumption that easing the burden on the SEC at the expense of the respondent is what justice is about.

SEC administrative law judges are used to a regime in which they let the SEC enforcement lawyers cut procedural and evidentiary corners in administrative actions involving respondents associated with SEC-regulated entities.  But after the new expansion of ALJ jurisdiction under Dodd-Frank, they are hearing prosecutions of non-regulated persons that often will involve “nuclear” punishments, like lifetime bars from ever serving as an officer or director of any public company.  In such cases, they have to learn that justice requires a less “loosey-goosey” approach to adjudicating the claims before them.  When a person’s future ability to earn a living and support his or her family is at stake, that person is entitled to considerations of “the interests of justice” that take account of the stakes in the case.  ALJ Elliot doesn’t seem to get that; he’s acting as if he’s hearing just another charge against a delinquent broker.  The common practice of giving the SEC lawyers the home-court advantage in cases against regulated persons is wrong, and should be stopped.  But using those flawed standards in the new higher-profile cases the ALJ’s are now hearing amplifies the problem to the point that due process is threatened.

If ALJ Elliot were focused on fairness and justice, which seems not to be the case, he would have told the SEC: if a witness’s evidence is important to your case but you want to avoid in-court testimony, you should take a deposition that allows full cross-examination by the opponent, and then make your motion to allow portions of the out-of-court deposition into evidence, to which the opponent could respond with fair knowledge about what the witness has to say on the issue.  By shifting the burden to Ms. Bebo of showing injustice from the admission of SEC-drafted declarations, ALJ Elliot tilted the playing field against Ms. Bebo, violated the SEC Rules of Practice, and, in my view, violated due process of law.  None of this, of course, could happen if the SEC brought its case in federal court, where it should be.

Straight Arrow

February 9, 2015

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