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Admin Proceedings On Steroids: The Sec's Improper End Run Around Having To Prove "Likelihood" In Federal Court

By Dennis A. Stubblefield, Esq. of Shustak Reynolds & Partners, P.C. posted on Wednesday, October 22, 2014.

Dennis A. Stubblefield

Dennis A. Stubblefield


A week after Commissioner Pinowar publicly questioned it, the SEC's march toward admin enforcement seems inexorable. Tuesday brought two good articles on this troubling development, on page one of the Wall Street Journal, and on Bloomberg. Jean Eaglesham's Wall Street Journal article (Tuesday, October 21, 2014 ("SEC Steers More Trials to Judges It Appoints")) focuses on the push toward administrative enforcement, while Matt Levine's Bloomberg post is about insider trading. Both articles cover the preemptive strike in NY Sup. Ct. by the friend-of-the-roommate-of-the-Herbalife-analyst, and raise very troubling questions of where we are headed in this brave new world of White/Ceresney priorities; as we asked recently, "Got (broken) Process?"

Recall that, to obtain an injunction in federal court, the SEC must not only prove each and every element of the underlying securities law violations, but, also and further and separately, the "likelihood of future violations." The Journal article correctly notes that the SEC often stumbles in federal court when defendants call its bluff, and the notorious Cuban win is only one of quite a handful of defense victories at trial, or, on the eve of it, when the Commission quietly folds. While we are not aware of stats on this, we strongly suspect that these wins have a lot to do with the Commission being vulnerable on the likelihood requirement.

It is important to remember that even the most vile, venal defendant, who is found to have lied, cheated, stolen, and otherwise totally reamed widows and orphans on the baddest scam in history–even this type of dirtbag can win an SEC injunctive case against her if she can demonstrate that, at the time the judge must make his/her ruling (these are bench trials), there is no simply no likelihood that she will engage in misconduct in the future. 

On the other hand, if the SEC sues in its own home admin court, it need only make out the underlying violation and not worry about proving likelihood; in fact, we are unaware of any authority for the Commission to seek to enjoin anyone administratively, and such authority does not make sense for obvious statutory reasons. However, the SEC, on a full court press on its own court, can still request and secure draconian sanctions, including penalties and cease and desist orders.

The question "Who should the SEC sue, and where?" entails a particularly critical judgment call in cases involving individuals who are no longer affiliated or engaged in any way with regulated entities such as BDs, RIAs, public companies, or engaged in capital raising activities qua issuer, promoter, finder or the like.

Our view is that, for example, on the presumed slew of Section 5 cases which will continue to be brought–and, as we have written, there are hundreds of clueless and/or arrogant entrepreneurs out there who violate section 5 every day!–on those cases where there is no real fraud, the Commission should think long and hard on whether it is prudent, even legal, to simply sweep them before its own judges.  Does such admin enforcement deliver effective, meaningful results, much less long-term value? Whether in federal court or its own court, the SEC should re-read Hecht: "It's the Public Interest, Stupid!"

The next public guidance will come this Friday when Ceresney, and Commissioners Stein and Gallagher, participate in the Los Angeles County Bar Association's 47th Annual Securities Regulation Seminar. Let's hope that we will hear some common sense from these Commissioners and their Enforcement Chief, if not a nod toward a "kinder, gentler" approach toward good actors who merely make dumb mistakes.

Dennis Stubblefield, Erwin Shustak and the team at Shustak Reynolds & Partners, P.C. focus on securities enforcement defense, internal investigations, and litigation and arbitration for broker-dealers, investment advisers, funds and others involved in the retail delivery of financial products and services. Learn more about Shustak Reynolds & Partners, P.C.

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