Category: Administrative Proceedings


The Robare Ruling Regarding “May” Disclosures and “Willfulness”

Posted on May 7th, by , and in Administrative Proceedings, Enforcement, Form ADV, Investment Advisers. Comments Off on The Robare Ruling Regarding “May” Disclosures and “Willfulness”

Over the last year, the SEC has continued to intensify its focus on disclosures from investment advisers on Forms ADV regarding several issues, including—but not limited to—revenue sharing arrangements. Last week, the D.C. Court of Appeals handed down a decision that will likely have significant ramifications for investment advisers and the SEC’s Division of Enforcement (“Enforcement”). In Robare Group, Ltd., v. SEC, the D.C. Circuit upheld the SEC Commission’s decision that the use of the word “may” in a disclosure regarding an investment adviser’s conflicts of interest pertaining to revenue sharing violated the negligence-based fraud provision of Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”).
On appeal, The Robare Group, Ltd., a Texas-based investment adviser, argued that the evidence presented by Enforcement in an administrative proceeding did not support the Commission’s ruling, upon review, that their disclosures … Read More »


ALJ Deals Blow to SEC’s Fraud Case Against Hedge Fund Manager

Posted on October 24th, by and in Administrative Proceedings, Disclosures, Mispresentations, Scienter. Comments Off on ALJ Deals Blow to SEC’s Fraud Case Against Hedge Fund Manager

An SEC administrative law judge recently rejected some of the SEC’s fraud charges against hedge fund manager RD Legal Capital, LLC and its owner Roni Dersovitz (“Respondents”) by finding that the SEC did not prove that Respondents made certain material misrepresentations and failed to establish that other alleged material misrepresentations were made with scienter. In the Matter of RD Legal Capital, LLC, and Roni Dersovitz, File No. 3-17342, Initial Decision (Oct. 15, 2018). While ALJ Jason S. Patil did conclude that Respondents were liable for negligence-based fraud violations, his rulings with respect to the scienter-based charges and the drastically-reduced penalties he ordered were largely a defeat for the SEC.

Background

In July 2016, the SEC instituted proceedings alleging, among other things, that Respondents defrauded investors by misrepresenting the types of legal receivables in which two funds managed by RD Legal Capital invested. … Read More »


D.C. Circuit Split on Constitutionality of SEC’s Administrative Judges

Posted on June 27th, by and in Administrative Proceedings. Comments Off on D.C. Circuit Split on Constitutionality of SEC’s Administrative Judges

We previously blogged about the D.C. Circuit’s decision in Raymond J. Lucia Cos v. SEC, which rejected the petitioner’s constitutional challenges to the SEC’s use of administrative law judges that are not appointed by the President. Yesterday, the D.C. Circuit issued a two sentence per curiam order denying an en banc review by an equally divided court.

We noted that the panel’s original opinion was the first appellate ruling of its kind. Although the panel’s decision remains in effect because the full court did not rehear the case, the strength of that ruling is now severely undermined. As we previously reported, the Tenth Circuit has already disagreed with the D.C. Circuit’s panel and held that the SEC’s administrative law judges are subject to the Constitution’s Appointments Clause. Yesterday’s order likely sets the stage for a Supreme Court challenge.


SEC Puts Administrative Proceedings within Tenth Circuit on Hold After Court Rules Them Unconstitutional

Posted on May 25th, by and in Administrative Proceedings. Comments Off on SEC Puts Administrative Proceedings within Tenth Circuit on Hold After Court Rules Them Unconstitutional

The SEC announced this week that it would stay all administrative proceedings involving certain provisions of the Securities Act, the Securities Exchange Act, and the Investment Company Act in the wake of the Tenth Circuit’s decision in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016).

In Bandimere, the Tenth Circuit held that the SEC’s administrative law judges (“ALJs”) were “inferior officers” who are subject to the Appointments Clause of the U.S. Constitution. The appeals court granted the petition for review on constitutional grounds because the ALJ was not constitutionally appointed and his duties involved the exercise of significant authority. The court denied the petition for rehearing en banc on May 3, 2017.

The SEC explained that “[i]n light of the U.S. Court of Appeals for the Tenth Circuit’s recent decision denying rehearing en banc in Bandimere v. SEC, we find it … Read More »


10th Circuit Creates Split, Finds SEC’s Use of Administrative Law Judges Unconstitutional

Posted on January 4th, by and in Administrative Proceedings. Comments Off on 10th Circuit Creates Split, Finds SEC’s Use of Administrative Law Judges Unconstitutional

The 10th Circuit recently found that the SEC’s use of Administrative Law Judges (“ALJs”) violates the Appointments Clause of the Constitution, creating a split amongst federal appellate courts and making it likely the Supreme Court will weigh in on the controversy that has been building over the last two years. More specifically, the court, in Bandimere v. SEC, held in a 2-1 decision that an SEC Administrative Law Judge is an inferior officer who must be constitutionally appointed.

Bandimere, a respondent in an SEC administrative proceeding, filed a petition for review after the SEC affirmed an initial decision entered by an ALJ that found Bandimere liable for violating a number of securities laws and imposed civil penalties against him. Bandimere raised a constitutional argument before the SEC, contending that the ALJ who presided over his hearing “was an inferior officer who … Read More »


DC Circuit Upholds Constitutionality of SEC’s Use of Administrative Law Judges in First Appellate Ruling

Posted on August 11th, by and in Administrative Proceedings. Comments Off on DC Circuit Upholds Constitutionality of SEC’s Use of Administrative Law Judges in First Appellate Ruling

In the first appellate ruling of its kind, the District of Columbia Circuit upheld the SEC’s use of administrative law judges in administrative proceedings as constitutional. The court in Raymond J. Lucia Cos. v. SEC denied Mr. Lucia’s petition for review in which he claimed that the SEC’s use of administrative law judges was unconstitutional.

Lucia argued that administrative law judges are “Officers of the United States” within the meaning of the Appointments Clause in Article II of the Constitution. Lucia urged the court to rule that the SEC’s use of administrative law judges was unconstitutional because those judges have not been appointed by the President, as the Constitution requires. The three-judge panel disagreed and concluded that the SEC’s administrative law judges are inferior officers/employees who are not governed by the clause. In making this determination, the panel considered the significance … Read More »


Real Estate Developer and Investment Firm Make Another Bid to Challenge the Constitutionality of SEC’s Use of Administrative Courts

Posted on August 5th, by in Administrative Proceedings. Comments Off on Real Estate Developer and Investment Firm Make Another Bid to Challenge the Constitutionality of SEC’s Use of Administrative Courts

A real estate developer and an investment firm have asked the Eleventh Circuit Court of Appeals to reconsider a June 2016 panel ruling that reversed a district court’s decision that permitted both litigants to sue the Securities and Exchange Commission on constitutional grounds. The United States District Court for the Northern District of Georgia permitted Gray Financial Group and Charles L. Hill to proceed with a lawsuit against the SEC that challenged the use of administrative enforcement proceedings, and it enjoined the SEC’s pending enforcement action. Gray Financial and Hill, like several other litigants around the country, urged the federal court to declare that the SEC’s use of administrative courts and administrative law judges violates Article II of the Constitution. The district court concluded that it had jurisdiction to consider that question, even before the underlying enforcement proceeding had concluded. … Read More »


Second Circuit Affirms Dismissal of Constitutional Challenge to SEC Administrative Proceedings

Posted on June 6th, by in Administrative Proceedings. Comments Off on Second Circuit Affirms Dismissal of Constitutional Challenge to SEC Administrative Proceedings

A divided Second Circuit panel ruled this week that a private equity magnate cannot challenge the constitutionality of the SEC’s use of administrative proceedings prior to the conclusion of the underlying proceeding against her.

The SEC charged Lynn Tilton in March 2015 with several violations stemming from her collection of management fees from New York–based Patriach firms. In response to the suit, Tilton filed a complaint in federal district court that claimed that the SEC’s administrative proceeding was unconstitutional. She argued that the Commission’s use of administrative law judges violates the Appointments Clause of Article II of the Constitution because the judges are not appointed by the President. The district court dismissed the suit on jurisdictional grounds and ruled that, based on three Supreme Court decisions, the constitutional challenge fell within the exclusive scope of the SEC’s administrative review scheme. The … Read More »


Dodd-Frank 180-Day “Deadline” For SEC to Take Action Not Really a Deadline After All

Posted on July 15th, by in Administrative Proceedings, SEC Guidance. Comments Off on Dodd-Frank 180-Day “Deadline” For SEC to Take Action Not Really a Deadline After All

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit recently ruled that Section 4E of the Securities Exchange Act of 1934, 15 U.S.C. § 78d-5(a)(1) – which provides that “[n]ot later than 180 days after the date on which [Securities and Exchange Commission (“SEC”)] staff provide a written Wells notification to any person, the [SEC] staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent not to file an action” – did not bar an administrative action against an individual (Ernest V. Montford, Sr.) and his investment advisory firm (Montford Associates) commenced 187 days after such notification.   Montford & Co. v. SEC, No. 14-1126, slip op. at 2 (D.C. Cir. July 10, 2015).

The appeal stemmed from $860,000 in penalties and disgorgement that the … Read More »


SDNY Judge Deals Rejects Constitutional Challenge to SEC’s Use of Administrative Proceedings

Posted on April 20th, by , and in Administrative Proceedings. Comments Off on SDNY Judge Deals Rejects Constitutional Challenge to SEC’s Use of Administrative Proceedings

A former executive of Standard & Poor’s (S&P) Rating Services has lost an early constitutional challenge to the SEC’s use of administrative proceedings.

Barbara Duka filed suit in federal court in January, following the SEC’s decision to bring charges against her for violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraudulent conduct in the offer and sale of securities. Duka, formerly a co-manager of the commercial mortgage backed securities group of S&P’s Rating Services initiated the suit to prevent her from being compelled to submit to allegedly unconstitutional proceedings. Duka sought a preliminary injunction, arguing that administrative law judges (ALJs) who preside over administrative proceedings, are unlawfully insulated from oversight by the President in violation of Article II of the Constitution. Last week, District Judge Richard M. Berman of the … Read More »




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