Tag Archives: In the Matter of Bebo

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 in Bebo Case Refuses To Consider Constitutional Challenge and Denies More Time To Prepare Defense

SEC Administrative Law Judge Cameron Elliot continued his run of decisions against respondent Laurie Bebo with two orders issued April 7, 2015.  The approach reflected in these decisions reinforces the view that his court is not serving as a fair forum for Ms. Bebo.  See Bebo Case Continues To Show Why SEC Administrative Proceeding Home Advantage Is Unfair.

In one ruling, he refused to consider major motion papers filed on behalf of Ms. Bebo challenging the constitutionality of the administrative proceeding because he decided that should be considered a “motion for summary disposition,” and, as such, was filed out of time, and would not be considered.  See Order on Respondent’s Motion for Declaratory and Injunctive Relief for Constitutional Violations and Request for Leave To File Overlength Motion

In the second, he rejected a request for an extension of time before the administrative trial commences (it is scheduled to start in fewer than two weeks), holding that “the  proceeding is neither unusually complex nor is the investigative file particularly large, and granting the requested relief would jeopardize my ability to complete the proceeding under the timeline” set by the SEC in its order initiating the proceeding.  See Order Denying Renewed Motion for Relief from Rule 360(a)(2) Presumptive Hearing Schedule.

These orders ooze parochialism and tunnel vision, again showing the administrative forum is no place for enforcement actions of this magnitude.

The refusal to consider the constitutional issue on a procedural ground seems bizarre.  If Mr. Elliot were on the basketball court, he would be one of those players desperately trying to avoid taking the clutch shot.  Mr. Elliot knows this is a key issue of some notoriety, and knows that the world is watching how he conducts his proceeding, but insisted on focusing on minutiae.  He certainly had the discretion to consider the motion.  Declining to do so using the crutch of a procedural time-limit, and with the lame statement that the “arguments may be renewed post-hearing,” shows the world that he is just not ready for prime time.  He must know that if there is a constitutional violation, he exacerbates it by requiring that the respondent go through the trial before even considering the issue.

Mr. Elliot showed his true colors, however, by trying to have it both ways, when he opted to comment on one of the points in Ms. Bebo’s submission even while declining to consider it.  He wrote a long footnote arguing that one of the (minor) grounds for considering SEC administrative law judges to be “inferior officers” for constitutional purposes — because they “can issue final decisions under certain circumstances” — is wrong, because even if the ALJ’s order does not get reviewed the SEC must issue an order that makes it final.  Whether he’s right or wrong on this point, it is peculiar that he should choose to give an advisory view on this lesser issue while declining to consider the broader constitutional arguments.

A quality judge would approach the constitutionality issue head on, knowing he will have to do so eventually anyway, and by doing so at the outset, substantial resources could be conserved.  Indeed, any judge worth his salt would look forward to doing so.  But, of course, we know (and so does he) that Mr. Elliot will not give serious consideration to the arguments (that is above his pay-grade), and he is conflicted on the issue to boot (his own job could be at stake).  That’s one reason why the Wisconsin federal court presented with these arguments ruled the wrong way when it found no jurisdiction to hear the challenge.  See Court Dismisses “Compelling and Meritorious” Bebo Constitutional Claims Solely on Jurisdictional Grounds.

The ruling declining to delay the commencement of the trial to allow the defense more time to prepare is yet another example why enforcement proceedings of this type simply don’t belong in the administrative forum.  Mr. Elliot was more focused on meeting the SEC-mandated schedule than whether Ms. Bebo can adequately prepare to defend a case that will determine her future ability to be an executive or director in a public company.  This is a major, life-changing, proceeding for Ms. Bebo, but Mr. Elliot gives no hint that he recognizes that.  His reason for denying the motion focused on administrative precedent that showed he had the discretion to reject it (but not how he should exercise that discretion), and his deferral to the SEC (“in setting the time frame for the case, the Commission has already considered the complexity of the case”).  A real judge would balance the prejudice to either side from granting the relief — which Mr. Elliot strangely does need even address — and almost certainly conclude that in light of the stakes for Ms. Bebo, the much longer period the SEC staff has had to learn the record and prepare its case, and the negligible prejudice to the SEC from a delay, a modest extension was warranted.

Make no mistake.  Cameron Elliot is a homer, which does not bode well for Ms. Bebo.

Straight Arrow

April 8, 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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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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In re Bebo Shows Why SEC Administrative Proceedings Have Fairness Issues

We previously discussed the challenge brought by Laurie Bebo, the former CEO of Assisted Living Concepts, Inc. (“ALC”), against an SEC administrative enforcement action brought against her: New Challenge to the Constitutionality of an SEC Administrative Proceeding Filed in Bebo v. SEC.  We now provide an example of why SEC procedures create at least the appearance of bias, and likely more than that, in these proceedings.

You see, the SEC Commissioners have already entered into a settlement with Bebo’s co-respondent, John Buono, who was the CFO of ALC who reported to Ms. Bebo.  As is typical in these administrative cases, the settlement agreement results in a filing in which the SEC literally makes “findings” consented to by the settling respondent, laying out what supposedly happened and why it was unlawful.  Indeed, the document issued by the SEC is an “Order Making Findings and Imposing Remedial Sanctions.”  See the Order just issued in the case captioned In the Matter of Laurie Bebo and John Buono, CPA here: In re Bebo and Buono Administrative Findings.  The Order says that it is “not binding on any other person or entity in this or any other proceeding,” but it also plainly is, and is intended to be, “findings” of the Commission justifying the “remedies” — actually penalties — it imposes.

Laurie Bebo

Laurie Bebo

John Buono

John Buono

Here, the Order presents 54 paragraphs of detailed factual “findings” and another six paragraphs laying out multiple violations of law “found” by the Commission against Mr. Buono.  The Order says that the Commission has already “found” that Mr. Buono “willfully violated” section 10(b) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 10b-5 thereunder, “willfully aided and abetted and caused” violations by ALC of section 13(a) of the 1934 Act and rules thereunder, “willfully violated” SEC Rule 13a-14, “willfully violated” section 13(b)(5) of the 1934 Act, “willfully violated” SEC Rules 13b2-1 and 13b2-2,  and “willfully aided and abetted and caused” ALC’s violations of sections 13(b)(2)(A) and 13(b)(2)(B) of the 1934 Act.

The fact that these are “findings,” and not “allegations,” which is what the SEC files in federal court cases, is no mere accident.  It is a long-standing practice for administrative settlements.  The difference is meaningful in some areas.  For example, the existence of “findings” of violations by the SEC creates potential insurance coverage or licensing issues that “allegations” do not.  As a result, in some cases settling parties would prefer to settle a case based on allegations in federal court than accept an administrative settlement based on SEC “findings.”

The Commission also imposed severe penalties on Mr. Buono, including permanent bars against him ever serving as an officer or director of a public company, or ever practicing accounting before the Commission (i.e., taking an accounting job with any public company), plus a $100,000 penalty.  It thus has already concluded that its “findings” warrant those draconian penalties.  (For a 51-year-old professional, likely supporting a family, who has just been effectively barred from the employment for which he is most suited, there is no doubt these are severe penalties.)

Now, Ms. Bebo is being forced to appear at trial before an administrative law judge who reports to the Commission that made these “findings.”  And once that administrative judge issues a ruling, Ms. Bebo’s only path of appeal goes through the very same Commission that made “findings” of illegality by her colleague and imposed severe penalties on that basis.  (Only after the SEC adjudicates a challenge to the ALJ decision is there an appeal to a federal appellate court, and that appeal requires that court to treat SEC findings with deference.)  The Buono findings are not “binding” on Ms. Bebo or the Commission in  her case, but the notion that the same people who decided the case against Mr. Buono as they did will ultimately hear the case being litigated by Ms. Bebo strikes at the heart of fundamental concepts of fairness.  Does anyone want to take odds that the SEC will not take contrary positions in Ms. Bebo’s case to the ones they already approved in Mr. Buono’s case?  Contact me and we’ll work out a bet.

The potential bias arising out of the adjudicators’ “findings” against co-respondents is just one of numerous fairness issues raised by SEC administrative proceedings that may impose severe penalties against persons unregulated by the SEC.  Some others were discussed in our previous posts: Ceresney Presents Unconvincing Defense of Increased SEC Administrative Prosecutions, and Opposition Growing to SEC’s New “Star Chamber” Administrative Prosecutions.

Straight Arrow

January 30, 2015

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