Tag Archives: Lillian McEwen

SEC Inspector General Reveals Investigation into Possible Bias of SEC ALJs

The Inspector General of the SEC issued an Interim Report on August 7, 2015 which indicated that he is in the midst of an inquiry into allegations that SEC administrative law judges may have been subjected to pressure from other in the performance of their duties.  According to the Interim Report, the “investigation was initiated on June 30, 2015, based on information provided by Erica Williams, Deputy Chief of Staff, Office of the Chair, concerning alleged potential issues of fairness and bias in the SEC’s administrative proceedings, including those introduced in the Timbervest, LLC (Timbervest) matter.”  On receipt of this information, the “OIG determined it would investigate allegations of bias on the part of Administrative Law Judges (ALJ) in the Commission’s administrative proceedings.”

The information that stirred the inquiry included the May 6, 2015 Wall Street Journal article by Jean Eaglesham, which reported that the SEC’s Division of Enforcement prevailed in about 90% of the cases sent to the SEC administrative law judges (see SEC Wins With In-House Judges: Agency prevails against around 90% of defendants when it sends cases to its administrative law judges), and a Securities Diary June 30, 2015 blog post entitled “SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed.”  The Interim Report also referenced another, May 7, 2015 Securities Diary post “Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal,” which reported on the content of the May 6 Wall Street Journal article.

Ms. Williams told the OIG that “Chair Mary Jo White requested an OIG investigation of the alleged bias issue because the identified concerns could impact all ALJs and the SEC administrative proceedings.  The Interim Report can be read here: Interim Report of Investigation by SEC Office of Inspector General into Possible SEC ALJ Bias.

The Interim Report says:

The OIG reviewed the Securities Diary and WSJ news articles that Williams identified, which included the following statements attributed to former ALJ McEwen: she thought the system was slanted against defendants at times; she came under fire from Chief ALJ Murray for finding too often in favor of defendants; Chief ALJ Murray questioned McEwen’s loyalty to the SEC; McEwen retired as a result of the criticism; and SEC judges were 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.”

The Interim Report discussed an OIG interview with ALJ Cameron Elliot, who presided over the Timbervest administrative trial, and described that interview as follows:

The OIG interviewed ALJ Elliot concerning allegations of potential issues of fairness and bias in the SEC’s administrative proceedings.  Elliot denied bias during his reviews and rulings and stated that he independently made his decisions.  Concerning his decision not to provide an affidavit after being invited to do so by a Commission order, Elliot said he received the invitation to provide an affidavit from the Office of the Secretary.  He said that he informed Chief ALJ Murray of the existence of the invitation.  However, he said he adhered to the instructions in the order which requested him to “not consult with anyone at the Commission in the preparation of his affidavit concerning the substance thereof.”  Elliot said that he strictly followed those instructions and that he informed Chief ALJ Murray of the existence of the instructions.  At an office meeting, he informed everyone in the Office of ALJ that he had responded to the order.  When asked, Elliot said he did not receive any direction or guidance from anyone, including Chief ALJ Murray, on how he should respond to the invitation.  Elliot said he had declined to provide an affidavit, stating he had “multiple reasons why [he] decided not to provide a response” but declined to provide any of those reasons to the OIG.  Furthermore, Elliot denied being influenced by anyone on “how to decide [his] cases or suggest or make [him] biased in any fashion.”

The OIG also interviewed ALJ Brenda Murray, who “denied influencing matters before the ALJs and explained that she is responsible only for assigning the ALJs’ workload.”  She also “stated that there was no merit to the allegations of bias as alleged in the WSJ article.”

Regarding the status of the investigation, the OIG reports that it “remains ongoing,” and it “is still gathering additional facts and completing investigative steps, and new information will be reported accordingly.”  At this point, however, “the OIG has not developed any evidence to support the allegations of bias in ALJs’ decisions in the Commission’s administrative proceedings.”

It is troubling, however, that there is no reference to any effort to interview former ALJ Lillian McEwen, who made the troubling statements to the Wall Street Journal.  Ms. McEwen later reportedly said that she would be willing to be interviewed on this matter by the Commissioners.  It is important for the OIG to lay out precisely what efforts have been made to flesh out her views on this issue before issuing any clean bill of health for the SEC’s administrative process.

In addition, the statistics showing an unusually high success rate for the Enforcement Division should be confirmed or rejected through a thorough analysis, and if a statistically significant higher success rate is found for administrative proceedings over the Division’s federal court prosecutions, it is essential that the OIG make every effort to determine that the source of that differential is not, even in part, attributable to inherent biases in either the ALJs themselves or the process they use to reach their results.  Anything short of this will not put the serious due process and fairness issues to rest.  The courts — including the Supreme Court in a key employment discrimination case this past term — often accept that a statistically provable disparate impact can provide evidence of underlying concerns.  That is certainly not a precise analogy for what may be happening here, but if there is a compelling statistical case (and a 90% win rate, or even 100% for some judges, suggests there may be), it should not be ignored.

This being said, it is encouraging that Chair Mary Jo White has seen fit to cause this inquiry to occur.  The apparent determination not to make the existence of the inquiry public is a little perplexing, given the publicity surrounding the accusations.  Nevertheless, she should get credit where it is due.  Those facing prosecution in a possibly biased forum argue, however, that it is not enough to turn to an in-house IG to investigate possible in-house bias.  Lynn Tilton, who is challenging the constitutionality of her administrative enforcement action, tweeted in response: “This defendant feels no comfort that the SEC’s Internal IG investigates bias by its own Judges in its own Courts.”  This skepticism that the SEC’s IG can perform a truly independent investigation must be met by an investigative process so thorough and informed that it is beyond reproach.

Straight Arrow

August 10, 2015

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

The SEC’s handling of the controversy over whether its administrative law judges were properly appointed under the Appointments Clause of Article II of the Constitution continues to amuse, or horrify, depending on your point of view.  Putting aside the actual substance of the Appointments Clause issue itself, which will work its way through the courts, when it comes to the mere disclosure of the underlying facts at issue about the appointment of the SEC’s ALJs, the SEC staff has acted with questionable competence, and apparent insubordination.  That’s a strong statement, so you can decide for yourself, based on recent events in the In the Matter of Timbervest, LLC administrative proceeding.

You may recall that the Timbervest administrative enforcement action was tried to SEC ALJ Cameron Elliot, who issued an Initial Decision finding for the Division of Enforcement in all respects except that he concluded two of the individual respondents lacked the scienter required for aiding and abetting the firm’s violations, and that the five-year statute of limitations in 28 U.S.C. § 2462 precluded the associational bars sought against the individuals and the revocation of Timbervest’s adviser’s license.  Both sides petitioned for review by the Commission, which was granted.  Before the Commission itself, the respondents pressed their constitutional challenges to the administrative proceeding, and the Commission asked for further briefing on those issues.  See Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt.

Then the Wall Street Journal published a blockbuster article discussing potential issues of fairness in the SEC’s administrative court, including statements by former SEC ALJ Lillian McEwen that she had been pressured to issue rulings more favorable to the SEC staff.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.  On the basis of that article, the Timbervest respondents sought to pursue additional discovery to obtain evidence relevant to its constitutional challenges.  The precise request made is not clear from the record because the SEC failed to post this motion on its docket.  But it is apparent that the information sought included data about SEC ALJs Cameron Elliot and Brenda Murray (who was the original ALJ designated to hear the case before it was transferred to Mr. Elliot), as well as information about the allegations made by Ms. McEwen.  The Commission responded with an Order Requesting Additional Submissions and Additional Briefing, stating that “The Commission’s consideration of the Appointments Clause challenge would be assisted by the submission of additional material for inclusion in the record and by the submission of additional briefing.”  It then “ORDERED that the Division of Enforcement shall . . . file . . . an affidavit from an appropriate Commission staff member, with supporting exhibits if appropriate, setting forth the manner in which ALJ Cameron Elliot and Chief ALJ Brenda Murray were hired, including the method of selection and appointment.”

A week later, the Commission issued another Order Concerning Additional Submission and Protective Order, in which it “invited” ALJ Elliot to provide an affidavit addressing whether he was ever aware of ALJs being subjected to such pressures.  See SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ.

The responses to these Orders were remarkable.  In response to the second Order, Mr. Elliot declined to provide the affidavit “invited” by the Commission.  That certainly raised the possibility that the content of such an affidavit would be problematic.  See SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission.  But that at least was consistent with the SEC’s Order, which made it clear it was not mandating that ALJ Elliot provide the affidavit.

The Division of Enforcement’s response to the first Order was even more extraordinary.  It refused to provide the ordered “affidavit . . . setting forth the manner in which ALJ Cameron Elliot and Chief ALJ Brenda Murray were hired, including the method of selection and appointment,” instead providing an affidavit only containing “the factual information the Division believes legally relevant to resolving Respondents’ Article II-based constitutional claims,” which said only that “ALJ Elliot was not hired through a process involving the approval of the individual members of the Commission.”  In further explanation, the Division justified failing to comply with the Commission’s Order because “the Division believes that the facts set forth in the affidavit — i.e., facts relating to ALJ Elliot’s hiring — are sufficient for the Commission’s consideration of Respondents’ Appointments Clause challenge.”  The precise language of the affidavit was: “Based on my knowledge of the Commission’s ALJ hiring process, ALJ Elliot was not hired through a process involving the approval of the individual members of the Commission.”  See Division’s Notice of Filing, with Attached Affidavit of Jayne L. Seidman.

The Division described “the hiring process for Commission ALJs,” as administered by OPM, and told the Commission: “It is the Division’s understanding that the above process was employed as to ALJ Elliot, who began work at the agency in 2011.  As for earlier hires, it is likely the Commission employed a similar, if not identical, hiring process.  But the Division acknowledges that it is possible that internal processes have shifted over time with changing laws and circumstances, and thus the hiring process may have been somewhat different with respect to previously hired ALJs. For instance, Chief ALJ Murray began work at the agency in 1988 and information regarding hiring practices at that time is not readily accessible.”

This submission was a stunning act of insubordination, bordering on contempt.  It plainly declined to address the specific issues ordered by the Commission, and did so on the presumptuous basis that “the Division believes” the information ordered by the Commission was not necessary for the Commission to decide the issues raised by the respondents.  If the Division wanted relief from the Order, it should have moved for it to be revised.  It was impermissible to ignore the command based on what the Division — at this point simply a party in the proceeding — believed should have been requested.  But even beyond this, the affidavit the Division provided was misleading.  It did not even attempt to state the facts of Mr. Elliot’s hiring.  Instead, it was only “based on” “knowledge of the Commission’s ALJ hiring process,” and the Division’s Notice was founded on an unsupported “understanding” that the normal process was used.  So, even in the single respect the Division responded to the Order, it did so based on presumption, not investigation.  The combination of brazenly ignoring the Order, and then providing an affidavit not founded on facts, is conduct that should be reprimanded, if not sanctioned.  If a respondent had acted this way in response to a Commission Order, there would be more than silence from the Commission.

That isn’t the end of the story, because it turns out the assumption used to support the affidavit, and the Division’s purported “understanding” of what occurred, was unfounded, which could have been learned with only a modicum of effort.  ALJ Elliot is now presiding over another case being challenged on constitutional grounds, In the Matter of Laurie Bebo and John Buono.  In that case, at a hearing on June 18, 2015, ALJ Elliot raised the issue of the circumstances of his hiring, and the Division’s filing in Timbervest,  and noted the “the Division’s description of how I was hired was erroneous.”  He went on, “The crucial language is in the first full paragraph on page 2. . . .  I have informed the chief ALJ.  I brought it to her attention that it was wrong.  Of course she knew because she hired me, so she already knew that it was wrong.  I also informed Jayne Seidman, who is the woman who gave the affidavit.”  He went on, “I certainly don’t want the Division to be, you know, embarrassing themselves by saying things that are wrong. . . .”

The next day, the parties asked that ALJ Elliot state “what you believe the inaccuracies to be.”  He explained that the SEC’s affidavit assumed he was newly hired as an ALJ by the SEC, but that was not correct because he had been an ALJ in the Social Security Administration.  That meant that he was hired “through the process that essentially everyone else goes through,” responding to a posting on the federal government’s job-posting website.  “I saw a posting on USA Jobs when I was at Social Security.  I sent in my resume, I had an interview, I got an offer; it’s as simple as that.  What’s described in the Division’s notice of filing in Timbervest is if you’ve never been an ALJ before.  And as I said, I did in fact go through that process, just not when I was hired by the SEC.”  He went on, “I think when I was hired by the SEC, the Office of Personnel Management did have to approve my transfer from Social Security to SEC. . . .  So OPM does actually get involved in every ALJ’s hiring, to my knowledge.”  When asked with whom he interviewed, he responded: “I interviewed with Judge Murray, with Jayne Seidman, . . . and an attorney with the general counsel’s office, whose name escapes me at the moment.”  He also said “I pulled out one of my forms that I got from HR, and it appears that someone in HR did sign off on my hiring. . . .  I’m not saying that the person who signed the paper itself was my appointment. . . .  Whether that constitutes my appointment or not, I don’t know.”  When asked if he knew who appointed him, or the actual act that constituted his appointment, he responded: “I would have to say no, I don’t know.  I have an educated guess, but it’s really just an educate guess.  No, I don’t know the answer.”

This response makes it clear that records available at the SEC, could have informed the Division that the affidavit it provided was inaccurate.  Numerous people knew that ALJ Elliot was initially hired to serve at the Social Security Administration, apparently including the affiant, Ms. Seidman, but this fact was ignored.  Presumably the Division did not find it convenient actually to search the SEC’s own HR records before submitting the erroneous affidavit.  The difference here may not be material, which was ALJ Elliot’s stated view, but that is surely not within the Division’s purview to decide.  When asked for the facts, the Division (a) declined to seek them out, and (b) made an inaccurate filing instead.

The Division finally corrected the record in the Timbervest case on June 23, with the filing of an additional Notice: SEC June 23 Notice in Timbervest Administrative Proceeding.  That Notice attached the transcript of comments made by ALJ Elliot in the Bebo hearing, but otherwise said the Division still had not taken steps to confirm whether these recollections were accurate, including, apparently, not even seeking to obtain documents that could clarify the record.  Interestingly, although the Division’s original, inaccurate, Notice is posted on the docket, the mea culpa corrective Notice, with the excerpted portions of the Bebo transcript, is strangely missing, just like Timbervest’s original motion for discovery.

Of course, as ALJ Elliot noted, at a minimum the Division of Enforcement is “embarrassing themselves by saying things that are wrong.”  If this weren’t the government seeking to impose major penalties and other sanctions, we could dismiss them as “The Gang That Couldn’t Shoot Straight” (credit to Jimmy Breslin, RIP).

Jimmy Breslin - The Gang That Couldn't Shoot Straight

Jimmy Breslin – The Gang That Couldn’t Shoot Straight

But what happened here is much worse.  The Commission, sitting in its adjudicatory capacity, ordered that the Division provide certain information.  The Division refused to do so, declined to seek relief from the order, and instead substituted erroneous information, which a modest amount of diligence would have shown was certainly incomplete, if not inaccurate.  If the Division were held to the standards of performance it routinely applies to those it investigates and prosecutes, there would be meaningful repercussions, if not outright accusations of reckless misconduct.

I won’t hold my breath.

Straight Arrow

June 30, 2015

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

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

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

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

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

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

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

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

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

Straight Arrow

June 17, 2015

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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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SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission

On June 4, 2015, we discussed the SEC’s Order in In the Matter of Timbervest LLC “inviting”  administrative Law judge Cameron Elliot to submit 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, ‘SEC Wins With In-House Judges,’ and whether he is aware of any specific instances in which any other Commission ALJ has had such communications or experienced such pressure.”  See SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ.  Well, ALJ Elliot either doesn’t think that fits his job description, or he just doesn’t like the idea of providing a sworn declaration to the SEC.  On June 9, after considering the matter for four days, he tersely declined the invitation, saying only “I respectfully decline to submit the affidavit requested.”  (This does suggest that, at least as to this ALJ, the President or his proxies at the Commission do not have much sway over an ALJ who has multiple layers of protection against being fired.)

That would seem to leave the SEC in a bit of a pickle.  The Commissioners obviously thought there would be some value in gathering information on the issue of pressure on ALJs to act favorably to the Commission, which was raised by former ALJ Lillian McEwen with Wall Street Journal reporter Jean Eaglesham.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.  The invitation to ALJ Elliot to supply data specific to him has now been rejected.  The Commission apparently still has not acted on respondent Timbervest’s request for discovery on the issue.  So what next step can the Commission take that doesn’t smack of arbitrarily ignoring the question, even after acknowledging it could be relevant?  We can only wait and see.  The Wall Street Journal reported that in a recent interview, Ms. McEwen explained that a sitting SEC judge would have difficulty discussing whether he or she felt pressure to favor the SEC, but that she said “she would ‘of course’ be happy to give evidence about her own experience” to the commissioners “if the agency decided to ask her for that.”  See SEC Judge Declines to Submit Affidavit of No Bias.

We’ve called for the Commission to commence an open, independent, and transparent inquiry into what is now at least a potential appearance of bias in its administrative process.  If that kind of review is occurring, it certainly is not open and transparent to interested observers.  The outward appearance is that there is a strange paralysis on the issue.  The longer the silence prevails, the more the appearance of this being a real issue has a chance to develop.  With the courts now for the first time showing a willingness to scrutinize the SEC administrative law process in response to challenges raised by respondents (see Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding), paralysis — or stonewalling, if that’s what it is — would seem to encourage continued chaos.  (Speaking of chaos, doesn’t it seem a little strange that in the wake of Judge May’s decision in Hill v. SEC that the appointment of ALJ James Grimes violated the constitution’s appointments clause, the SEC has taken no steps to address that issue?  Instead, following Judge May’s ruling, ALJ Grimes was appointed to preside over a new proceeding: see Order Scheduling Hearing and Designating Presiding Judge in In the Matter of R. Scott Peden.)

Straight Arrow

June 11, 2015

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SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ

In the administrative proceeding In the Matter of Timbervest, LLC et al., File No. 3-15519, the SEC issued an order “inviting” ALJ Cameron Elliot to provide 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, ‘SEC Wins With In-House Judges,’ and whether he is aware of any specific instances in which any other Commission ALJ has had such communications or experienced such pressure.”  See Order Concerning Additional Submission and Protective Order.  This in response to a motion by Timbervest for discovery into the conversation reported in the Wall Street Journal between former ALJ Lillian McEwen and current Chief Administrative Law Judge Brenda Murray some years ago before Ms. McEwen’s retirement, in which ALJ Murray allegedly said Ms. McEwen’s rulings were not as favorable to the SEC staff as they should be.  See SEC Broadens Constitutional Inquiry into Its Own Administrative Judges in Timbervest Case and Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.

The Commission appears still not to have acted on Timbervest’s motion for discovery into the alleged McEwen conversation, as the most recent order says it does not express the Commission’s views on the disposition on that motion.  But it appears that the Commission is striving to find a way to deny the discovery request by “inviting” ALJ Elliot to deny he ever had such conversations or was aware of similar conversations or “pressures,” after which they will likely deny the request for discovery because it has no bearing on the specific case before them.  Such reasoning would be a wholly inadequate way to address the issue because it relies solely on a voluntary submission by ALJ Elliot without any supporting record, and does address the broader issue of a potential systemic bias that could infect the SEC’s administrative law process.  It would be a grave mistake for the SEC to ignore the “red flag” raised by former ALJ McEwen on the theory that even if the conversation occurred, it is mere history and not relevant unless a presiding ALJ acknowledges to having had a similar discussion.

Instead of taking an open and transparent approach to this issue, the Commission seems to be circling its wagons, looking for any excuse not to examine a serious potential concern about its administrative enforcement process.  This is exacerbated by the unusual step of ordering that any affidavit from ALJ Elliot — which the SEC says he is free not to provide if he prefers not to — must “be maintained under seal in order to provide the affiant confidentiality.”  What need for confidentiality could there be on the issue of whether the presiding ALJ in this case participated in, or is aware of, discussions that suggest ALJs act favorably to the SEC staff in administrative proceedings?

The Commission continues to take the wrong approach here.  It should, like Caesar’s wife, be “above suspicion.”  By failing to pursue this issue thoroughly and openly, and instead trying as hard as possible to cloak it in secrecy, the Commission leaves the sore to fester.

Straight Arrow

June 4, 2015

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SEC Broadens Constitutional Inquiry into Its Own Administrative Judges in Timbervest Case

On May 27, 2015, the SEC agreed to expand its own consideration of constitutionality challenges to its administrative law adjudicative process.  It issued an order asking for further briefing on whether the appointment of its administrative law judges conforms to the Constitution’s Appointments Clause.  The order, which was issued in the administrative proceeding In the Matter of Timbervest LLC et al., File No. 3-15519, is laid out below.  We previously discussed the briefing of constitutional issues before the SEC in the Timbervest case here: Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt.

This new development was set in motion by the May 7, 2015 Wall Street Journal article by Jean Eaglesham reporting on questions being raised about the fairness and constitutionality of the SEC’s use of its own administrative courts to prosecute securities enforcement actions for severe penalties, especially against people who were not otherwise subject to SEC regulatory oversight.  See Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.  Among other things, that article quoted a former SEC administrative law judge about pressure that had been placed on her to favor the SEC in her rulings.  That revelation spurred respondents in SEC actions to seek further information from the SEC about possible bias or other taints to the SEC’s administrative law proceedings.  In the proceeding In the Matter of Charles L. Hill, Jr., administrative law judge James Grimes approved a subpoena to the SEC staff for the production of documents relating to the matters discussed in the Wall Street Journal article.  See SEC ALJ James Grimes Issues Important Discovery Order Against SEC.  The respondents in the Timbervest proceeding, which is now under review by the Commission itself after an Initial Decision against the respondents by ALJ Cameron Elliot, also asked for discovery into the matters raised in the WSJ article in a filing that can be read here: Respondents’ Motion To Allow Submission of Additional Evidence and Motion for Leave To Adduce Additional Evidence.  That led to the May 27 SEC order:

On May 20, 2015, Respondents filed a Motion to Allow Submission of Additional Evidence and for Leave to Adduce Additional Evidence.  Based on that motion, the Respondents now appear to be asserting that the manner of appointment of the administrative law judges who presided over this matter violates the Appointments Clause of the Constitution.

The Commission’s consideration of the Appointments Clause challenge would be assisted by the submission of additional material for inclusion in the record and by the submission of additional briefing.

Accordingly, it is ORDERED that the Division of Enforcement shall by June 4, 2015 file and serve on the parties an affidavit from an appropriate Commission staff member, with supporting exhibits if appropriate, setting forth the manner in which ALJ Cameron Elliot and Chief ALJ Brenda Murray were hired, including the method of selection and appointment.

It is further ORDERED that the parties shall file simultaneous supplemental briefs . . . limited to the following two issues: (1) whether, assuming solely for the sake of argument that the Commission’s ALJs are “inferior officers” within the meaning of Article II, Section 2, Clause 2 of the Constitution, their manner of appointment violates the Appointments Clause; and (2) the appropriate remedy if such a violation is found.

In a footnote, the Commission said it was not yet deciding the Timbervest motion, including “the materiality of the discovery sought.”  The order in its entirety can be found here: Order Requesting Additional Submissions and Additional Briefing.

The SEC is treading carefully here.  We know, of course, that there is no chance the Commission will rule that its own administrative proceedings are unconstitutional in any respect, but Mary Jo White is a good enough lawyer to know she has to make a record that will not undercut the appearance of fairness in this entire process, or suggest any SEC bias in its own favor.  Just saying that shows how absurd the process is: the SEC is obviously conflicted in considering whether the prosecutions it sent to its administrative judges are unconstitutional.  That, among other reasons, is why this issue needs to be thrashed out fully before actual Article III judges in Article III courts.  Nevertheless, federal district court judges, with one exception, have ruled they lack the jurisdiction to consider the issue.  See Court Dismisses “Compelling and Meritorious” Bebo Constitutional Claims Solely on Jurisdictional Grounds; SEC Wins First Skirmish on Constitutional Challenge to Chau Administrative Proceeding.  The one exception led to a decision in the SEC’s favor that lacked the substance to serve as a compelling precedent: see In Duka v. SEC, SDNY Judge Berman Finds SEC Administrative Law Enforcement Proceedings Constitutional in a Less than Compelling Opinion.

The revelation of possible pressure on SEC ALJs to favor the SEC would be a game-changer if it is substantiated.  That introduces new elements of due process and fundamental fairness concerns beyond the separation of powers and appointments clause issues that have been the focus of most of the challenges to date.  How the Commission could question the “materiality” of that information is hard to fathom.  As we previously wrote, the only appropriate response to such a “red flag” is to commence a fully independent review of issue.  That is, of course, what the SEC would demand if a similar event were to occur in a public company, in order to avoid a later charge by the SEC and its staff of “reckless disregard” of “red flags.”  But apparently different rules govern the Commission, which seems to be placing itself above the law.

Straight Arrow

May 28, 2015

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