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To Serve Man In Jerusalem or Pennsylvania : Challenges to SEC Service
Written: April 30, 2012

GLENDALE, CA - JULY 22:  A United Parcel Servi...

UPS: Universal Process Server?

On January 26, 2012, the Securities and Exchange Commission (the “SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings(“OIP”), and on February 22, 2012, the proceeding was stayed as to Respondents Douglas G. Frederick, Frank K. McDonald, and Zanshin Enterprises, LLC; and on April 10, 2012, as to Respondents Alchemy Ventures, Inc., Mark H. Rogers, and Steven D. Hotovec pending the SEC’s consideration of their offers of settlement.

On March 5, 2012, the Administrative Law Judge (“ALJ”) held a prehearing conference at which Respondent Yisroel M. Wachs’s counsel was permitted to make a special appearance for the purpose of contesting service, and at which the parties were ordered to brief the issue of service. On April 4, 2012, the ALJ denied Respondent Wachs’s request to dismiss this proceeding as to him, and deferred decision on the propriety of service.

On April 12, 2012, the ALJ found additional Respondents KM Capital Management, LLC, and Joshua A. Klein in default and imposed sanctions.

To Serve Man

Alas, it’s often that last piece of the puzzle that proves the most elusive. What is to be done with Respondent Wachs’s assertion that he has yet to be properly served?

The SEC allegedly documented the following attempts to serve the OIP on Wachs:

  • No later than February 1, 2012, Wachs’s counsel, Richard Levan, received the OIP by mail. Subsequently, Levan notified the SEC that he was not authorized to accept service of the OIP.
  • On February 8, 2012, a process server delivered the OIP to Wachs’s father’s purported residence at 7841 Langdon Street, Philadelphia, PA, which Respondent Wachs had allegedly identified as his US residence when he was served with the SEC’s investigative supbpoena.
  • On April 17, 2012, the OIP was delivered by UPS to Ohr Somayach, a university or yeshiva located at 22 Shimon Hatzadik Street, Jerusalem, Israel, which Wachs had previously identified to the SEC in September 2010 as his address.
  • Also on April 17, 2012, the SEC sent the OIP by email to two addresses, one listed as Wachs’s email address in applications for brokerage accounts (although Wachs alleged that he did not fill out the applications), and one provided by Wachs to SEC staff during the investigation.

In weighing the SEC’s efforts to effect service and Wachs’s assertions that no such service was duly effected, the ALJ found that:

Wachs vigorously disputes the propriety of each of these service attempts. I need not resolve this dispute, for two reasons: Wachs has actual notice of this proceeding as a result of these service attempts, and Wachs’s (admittedly limited) efforts to evade service warrant directed service.

The point of service is to provide actual notice of a proceeding; nonetheless, actual notice is not required to satisfy due process. . . [w]here there has been actual notice, however, due process has been satisfied, at least in Commission administrative proceedings…

Jerusalem Address

As to the Jerusalem address, the ALJ asserts that SEC staff had determined that it was an “office” for the institution rather than a residential building:

It is possible, of course, that the most specific mailing address available to an Ohr Somayach resident student is the address Wachs provided, and that mail gets routed through one central office at the institution to the resident students. If so, and assuming that service by UPS in Israel is lawful, service at the Ohr Somayach office address might be effective.

In noting that Wachs had provided the Ohr Somayach address during the SEC’s  investigation, the ALJ admonishes that

if it is not a proper service address, which is the implication of his argument, then he misled the Division. Indeed, he may even have committed a crime. 18 U.S.C. § 1001(a)(2) (criminalizing any materially false statement or representation within the jurisdiction of the executive branch). . .”

Pennsylvania Address

As to the dispute concerning the propriety of service at Wachs’s father’s Pennsylvania residence, the ALJ observes that Pennsylvania issued Wachs a renewed driver’s license on August 22, 2006, with the 7841 Address as his listed residence; and that the license was subsequently renewed on May 11, 2010. The ALJ took

official notice that Pennsylvania law apparently requires that an original Pennsylvania driver’s license may only be issued to a resident of Pennsylvania, and that a renewal of a Pennsylvania driver’s license requires the applicant to certify under oath any address changes.

Prior Cooperation

The ALJ concedes that Wachs had been cooperative prior to the issuance of the OIP and his alleged:

efforts to evade service have not been strenuous. . . [h]owever, in view of his possibly false and misleading statements regarding his residency, and his disingenuous efforts to distance himself from those statements, his efforts at evasion cross the threshold needed to warrant directed service. I am authorized to direct service upon Respondent’s counsel, even when counsel is not authorized to accept service. . .

In the Matter of Alchemy Ventures, Inc., et al. (Admin. Proc. Rulings #702, Admin. Proc. #3-14720 / April 27, 2012).

Bill Singer’s Comment

A deceptively simple issue on the surface. It would appear that Wachs is attempting to avoid or evade service of the SEC’s OIP. In and of itself a fairly common response by defendants/respondents in many cases.  Frankly, it happens everyday. Someone likely resides somewhere but where that is does not seem particularly clear.  Here, the ALJ is confronted with the ticklish issue of a lawyer who has pointedly informed the SEC that he is notauthorized to accept such service on behalf of the Respondent.

Many similarly situated respondents and their legal counsel will argue that the SEC is not relieved of the obligation to effect service of the OIP.  You can’t simply email the papers or fax them.  You can’t send a courier to a lawyer’s office when that lawyer refuses to accept the service upon a given client (or non-client, or potential client). You can’t pick a father’s, mother’s, son’s, daughter’s, or other relative’s residential address and mail legal documents there in an effort to satisfy (or backdoor) applicable procedural laws/rules.

In the face of such objections, this ALJ says that Respondent Wachs’s conduct has crossed some line — and that bad faith authorizes the services of the OIP upon a lawyer who denies that he is authorized to accept such service.  All of which likely sets this case up for a fascinating clash on any ensuing appeal.

Does the successful evasion of service constitute exactly that: the successfulevasion.  Similarly, if a party lacks an accurate address for service, since when does the law impose an obligation upon a potential defendant/respondent to volunteer such information? Finally, while the ALJ is this case does present a compelling argument for moving ahead despite Respondent Wachs’s protestations to the contrary, how firm a legal footing is it to order service upon a lawyer who has stated that he is not authorized to accept service?

None of which is to suggest that the ALJ got any of this wrong (or right) or that Wachs has not firmly planted his tongue in his cheek when making his points.  It is simply to suggest that the game of chess is fully afoot on this legal chessboard and that we may yet find this issue before the courts.  The gambit has been accepted but the endgame is far off in the future.

This dispute is not as esoteric as it may seem — and is certainly likely of replication in years to come. With the increasing globalization of the banking and securities industry, employees at firms such as Goldman Sachs, JP Morgan, UBS, Citibank, Morgan Stanley Smith Barney, etc., frequentlly find themselves relocating from the US to Europe to Asia — and changing employers and personal lawyers.  All of which places a tremendous burden on prosecutors and regulators to track down their man or woman.

The looming question is whether this globalization trend imposes greater or lesser obligations to effect service as required by a given jurisdiction’s law or rule? Keep in mind that whatever your answer, turnaround might be fair play and what’s good for the goose is good for the gander.  If we stretch the traditional limits of what constitutes good service upon residents of foreign countries (even those who are US citizens living abroad) then we should also expect similar demands made upon US residents.

Topics: SEC  Wachs  Service  OIP  Bill Singer  BrokeAndBroker  

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