Tag Archives: discovery in administrative proceeding

SEC ALJ James Grimes Issues Important Discovery Order Against SEC

In In the Matter of Charles L. Hill, Jr., File No. 3-16383, SEC Administrative Law Judge James E. Grimes issued a subpoena requested by Mr. Hill requiring that the SEC produce materials relevant to Mr. Hill’s objections to using the SEC administrative law forum to pursue the enforcement action against him.  The Division of Enforcement and SEC Office of General Counsel (OGC) objected to the motion seeking the subpoena on what were plainly frivolous grounds.  ALJ Grimes properly rejected those objections and compelled the SEC to provide potentially important materials bearing on the fairness or constitutionality of the SEC’s administrative enforcement process.  See the order here: In re Hill Order Partially Granting Subpoena Request.

Recall that ALJ Grimes previously concluded that he lacked jurisdiction to consider some aspects of Mr. Hill’s constitutional challenge to the proceeding (see SEC ALJ Says He Lacks Authority To Decide Key Constitutional Challenges).  Following the issuance of that order, Mr. Hill commenced an action in federal court in the Northern District of Georgia to seek consideration of the constitutional issues the ALJ said he could not consider.  See Complaint in Hill v. SEC (N.D. Ga.).

The subpoena requested by Mr. Hill and opposed by the SEC covered a number of areas, but only two were addressed in yesterday’s order: (1) seeking documents identifying all SEC enforcement actions brought administratively against persons not subject to SEC regulatory oversight solely for alleged violations of section 14(e) of the Securities Exchange Act of 1934; and (2) seeking documents “that support, or reflect or are related to the allegations made by Lillian McEwen, a former SEC administrative law judge, as reported by the Wall Street Journal on May 6, 2015, that chief administrative law judge Brenda Murray ‘questioned [her] loyalty to the SEC’ as a result of finding too often in favor of defendants and that SEC administrative law judges are expected to work on the assumption that ‘the burden was on the people who were accused to show that they didn’t do what the agency said they did.'”  This second request relates to last week’s blockbuster Wall Street Journal article about the SEC’s possible unfair use of its administrative process to prosecute enforcement actions.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.

The objections raised to those aspects of the subpoena request were patently insufficient.  On the first request, the OGC argued the documents sought were “covered by attorney-client privilege and the work-product doctrine.”  Since the request on its face asked only for documents reflecting or reporting on public information (the actual filing of a proceeding), this objection was nonsensical (sanctionable, if the SEC can be sanctioned by its own ALJ).  ALJ Grimes appropriately gave the objection short shrift: “The identity of administrative proceedings is a matter of public record.  As such, documents that identify administrative cases . . . are not protected by the privileges asserted.”

On the second request, the OGC argued “‘[i]t is difficult to perceive how’ the requested documents could be relevant.”  Perhaps so if you are still in elementary school; but if you are a practicing lawyer, the relevance is obvious, since the information requested goes directly to a potential systemic bias imbued in SEC ALJs that would flout due process.  In response to the SEC’s perception problems, ALJ Grimes said no more than “I disagree,” and ordered production of any responsive materials.

The SEC OGC and Enforcement Division do themselves and the Commission no favors by making knee-jerk oppositions to discovery requests by respondents in administrative proceedings.  The very fact that the subpoenas must be approved by the ALJ before being served is a significant disadvantage for respondents as compared to federal court defendants (who can issue subpoenas to third parties, or make document requests of parties, without court approval).  It makes it worse that the SEC will routinely object to any attempt of a respondent to gather evidence through issuance of a subpoena.  It is obviously beyond the pale to do so on purely frivolous grounds.

Kudos to ALJ Grimes for his quick rejection of the SEC staff’s obstructive efforts.  The materials sought could have an important bearing on consideration of constitutional issues raised by Mr. Hill.  And, after the statements made by a former SEC ALJ, development of the record of possible misconduct relating to attempts to influence SEC ALJs to favor the SEC staff in administrative proceedings is essential.  Frankly, it is sad (but, unfortunately, not surprising) that in light of the charge made, the Commission itself has not already commenced an inquiry to assure that its own administrative proceedings have not been tainted by such bias.

Straight Arrow

May 22, 2015

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Bebo Case Continues To Show Why SEC Administrative Proceeding Home Advantage Is Unfair

SEC Administrative Law Judge Cameron Elliot just issued another procedural ruling in In the Matter of Laurie Bebo and John Buono, File No. 3-16293, that shows how SEC prosecutors are accorded great advantages in their home administrative courts.  The order is available here: Order Denying Motion To Compel and Granting in Part Motion n Limine.  We previously discussed the unfairness of Ms. Bebo’s administrative proceeding here: SEC ALJ Cameron Elliot Shows Why In re Bebo Should Be in Federal Court, and here: In re Bebo Shows Why SEC Administrative Proceedings Have Fairness Issues.

Bebo moved to compel the notes of interviews conducted by SEC lawyers of potential witnesses in the case.  ALJ Elliot denied that motion, and ordered that SEC lawyers could not be called to testify about those interviews as well.  He ruled that “Each set of notes is plainly an ‘internal memorandum, note or writing prepared by a Commission employee.’  17 C.F.R. § 201.230(b)(1)(ii).  Such documents are, with certain exceptions inapplicable here, not subject to production.  Id.  To the extent Bebo seeks material exculpatory evidence contained within the notes, such evidence need not be disclosed by production of the notes themselves….  Although Bebo correctly observes that the Federal Rules of Civil Procedure provide a mechanism for discovery of attorney work product, those Rules are inapplicable here.”  Bullseye!

On the issue of calling SEC lawyers as witnesses he said: “demanding the deposition or examination of opposing trial counsel is almost always pure gamesmanship.  I am deeply disappointed that Bebo has chosen this course instead of simply following my guidance.  I intend to give both sides a fair hearing, and I expect all parties and all counsel to behave like professionals; if not, it will be a very long hearing indeed.”  He may be “deeply disappointed,” but it is he, not the lawyers, who is acting unprofessionally by making such a comment.  They are doing the best job they can to defend their client in an uphill battle in an unfair forum.  He has no business calling that “unprofessional.”  In fact, SEC lawyers on a prosecution team have been ordered to testify in discovery depositions in federal court enforcement proceedings if they may have relevant testimony that could have a bearing on the case.  By attacking defense counsel for trying to get a similar order here, ALJ Elliot is showing questionable fitness for the job of adjudicating a case in which Ms. Bebo’s future freedom to serve as an executive or director in a public company is at issue.  Filing a motion in court is not “unprofessional,” Mr. Elliot.  It is called “making a record” so that ultimately real judges in real courts have before them the necessary facts to rule on the legality of your proceeding.

So ALJ Elliot provided a short, neat lesson to SEC Enforcement Director Andrew Ceresney on why the SEC is so much more successful in administrative enforcement proceedings than in those litigated in federal court.  See Ceresney Presents Unconvincing Defense of Increased SEC Administrative Prosecutions.  Not only is Bebo’s attempt to even the playing field by learning about what potential witnesses said to the SEC barred by the SEC Rules of Practice, but Ms. Bebo has no way to gather that information for her defense because there is no possibility for discovery depositions of these third parties.  And the judge gets belligerent with defense counsel just for doing their jobs.  The end result: the SEC knows what these potential witnesses have to say, how strong their testimony might be, and how favorable or unfavorable they are towards Ms. Bebo, and Ms. Bebo’s counsel is forced to litigate in the dark.  And the judge serves notice that aggressively pursuing Ms. Bebo’s case will be met with rancor.  You call that fair, Mr. Ceresney?

Hopefully, Ms. Bebo’s strong record of how she is being disadvantaged in the administrative forum will bear fruit when she finally gets the chance to have a court of appeals review the constitutionality of transferring important law enforcement actions against non-regulated persons into the SEC’s administrative courts.

Straight Arrow

April 6, 2015

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