Humpty Dumpty and Alice. From Through the Looking-Glass. Illustration by John Tenniel. (Photo credit: Wikipedia)
If you read the papers, watch television, or spend time online, you know that the Securities and Exchange Commission ("SEC") has its hands full these days. There are rumors and reports of lots of SEC investigations: Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America,Wells Fargo, UBS - hey, fill in the blanks as you will. At some point, the SEC's Staff pretty much figures it's done and decides that it's time to issue charges or to close the file and move on.
What happens at that crossroads? It's not as simple or clear-cut as you might imagine.
Howsabout we start with some plain language from the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank")?
Hey, don't hold your breath - there ain't so such thing. That was a trick question.
Within 180 Days After The Wells
In any event, take a gander at this example of Dodd-Frank‘s literary legacy now on the shelves of the Securities and Exchange Commission ("SEC"):
15 USC § 78d-5 - Deadline for completing enforcement investigations and compliance examinations and inspections
(a) Enforcement investigations
(1) In general
Not later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action. . .
A relatively well-educated individual would understand that the SEC's Staff has 180 days after providing the Wells notice to either:
What the eyes read and the brain interprets, however, isn't necessarily the be-all-and-end-all of understanding the securities laws, rules, and regulations. As you will learn (if you don't already), there's no such thing as Plain English with most of our laws. You'll also understand the rank hypocrisy of many federal regulators who demand that the industry utilize Plain English even though Wall Street's cops oft times twist words and stretch meanings to suit their needs.
SIDE BAR: What's a Wells Notice? As explained in the SEC's Enforcement Manual (March 9, 2012)
2.4 The Wells Process
The Wells Notice:
Rule 5(c) of the SEC's Rules on Informal and Other Procedures states that ―[u]pon request, the staff, in its discretion, may advise such persons [involved in preliminary or formal investigations] of the general nature of the investigation, including the indicated violations as they pertain to them, and the amount of time that may be available for preparing and submitting a statement prior to the presentation of a staff recommendation to the Commission for the commencement of an administrative or injunction proceeding.‖ 17 C.F.R. Section 202.5(c).
This "Wells notice" evolved from recommendations made by an advisory committee chaired by John Wells. Staff should refer back to the intent of the original "Wells Release," in making determinations regarding Wells notices. See Securities Act of 1933 ("Securities Act") Release No. 5310, "Procedures Relating to the Commencement of Enforcement Proceedings and Termination of Staff Investigations." As the Commission stated in the Wells Release, "[t]he Commission, however, is also conscious of its responsibility to protect the public interest. It cannot place itself in a position where, as a result of the establishment of formal procedural requirements, it would lose its ability to respond to violative activities in a timely fashion .". . .
Bill Singer's Comment: Among industry practitioners, the Wells Notice is sort of the Now-Or-Never moment when your client is put on notice that the Staff is likely to recommend charges and if you're going to propose settlement, this is the time to start. Of course, inherent in the Wells Notice is a process that permits you to argue why the Staff got it all wrong and how certain facts were misinterpreted - hey, if you believe in the integrity of that opportunity, knock yourself out. Me? I've rarely used the notice as a chance to re-argue the case. Too often my efforts during the Wells will result in revealing defenses and helping the Staff better draft their case. Nonetheless, as underscored in the Dodd-Frank language above, once the Wells Notice is issued, a lot of clocks begin ticking, most of which are in countdown mode.
Now going back to that 15 USC S78d-5(a)(1) language above about the Staff having only 180 days after issuing the Wells Notice to file or to not file, consider this second paragraph:
2) Exceptions for certain complex actions
Notwithstanding paragraph (1), if the Director of the Division of Enforcement of the Commission or the Director's designee determines that a particular enforcement investigation is sufficiently complex such that a determination regarding the filing of an action against a person cannot be completed within the deadline specified in paragraph (1), the Director of the Division of Enforcement of the Commission or the Director's designee may, after providing notice to the Chairman of the Commission, extend such deadline as needed for one additional 180-day period. If after the additional 180-day period the Director of the Division of Enforcement of the Commission or the Director's designee determines that a particular enforcement investigation is sufficiently complex such that a determination regarding the filing of an action against a person cannot be completed within the additional 180-day period, the Director of the Division of Enforcement of the Commission or the Director's designee may, after providing notice to and receiving approval of the Commission, extend such deadline as needed for one or more additional successive 180-day periods.
Please, step over dear, demented, babbling Alice as you pass through this Dodd-Frank looking glass and enter into the unintelligible world of SEC policies and protocol.
Paragraph 1 says that the SEC's Staff has 180 days to file or not file after issuing a Wells Notice.
Can we all agree on that crystal clear point?
Great - now let's consider Paragraph 2, which states that in certain actions, the DOE Director or designee is permitted to determine that a particular enforcement investigation is sufficiently complex, such, that a determination regarding the filing of an action against a person cannot be completed within the 180-day deadline specified in paragraph (1).
Let's stop here and digest that.
So there's an apparently ironclad obligation for the Staff to file or refrain from filing, and that's supposed to be determined within 180 days after filing the Wells. Except, you know, not exactly. If the DOE Director or designee notifies the SEC's Chair that a given matter is "sufficiently complex," then the whole 180-day thing goes out the window.
Put another way: There's a 180-day time limit except for SEC matters that an SEC employee gets to decide, apparently pretty much according to his or her prerogative, is "sufficiently complex." Not just tough or difficult. Not just "complex." No, the prerequisite here is "sufficiently complex."
And just what happens if this Director notifies the SEC's Chair of the existence of sufficient complexity? Why the first 180-day deadline may be extended for an additional 180 days. Oddly, the only requirement seems to be for the Director to give "notice." You tell me: You read anything about obtaining approval for this first 180-day extension? I don't see that.
So, there's a firm 180-day deadline unless some SEC Director feels that a matter is sufficiently complex, in which case the deadline doubles to up to 360 days. And what's the apparent burden of proof for concluding that a matter is sufficiently complex? Oh, the Director says it's so.
A classic example of bureaucratic and congressional double-talk and logical circularity.
Many logical and fair-minded folks might approve the granting of the second 180 days as a Mulligan - you know, stuff happens and some of these securities fraud cases take on a life of their own as the Staff begins digging around. I'm not denying that there are a lot of bad folks in the biz and a lot of bad things happen to far too many vulnerable victims. All of which sort of makes you wonder just why, in the first place, the Staff can't delay the rush to send out the Wells Notice ; or , in the second place, can't get the case filed within six months of having preliminarily decided to recommend charges.
Unfortunately, it gets worse. Much worse.
If you read further under Part 2, you will see that after notifying the SEC Chair and getting the deadline doubled for up to a total of 360 days, the Director may go back and "extend such deadline as needed for one or more additional successive 180-day periods." Admittedly, these endless numbers of extension require more than mere notice to the SEC's Chair, they require the SEC's approval.
Think about that but not too hard because your brain will explode.
Dodd-Frank provides for an initial fixed 180-day period for SEC Staff to file.
But it's not fixed.
In fact, if the DOE Director somewhat arbitrarily decides that the case needs more time, the Director notifies the SEC's Chair and the deadline is doubled.
Then, if the Director still needs more time, the rule essentially offers the prospect of extensions ad infinitum, provided the SEC approves the additional requests.
All of which might be sort of okay under very limited circumstances but for the fact that we're involved in adversarial proceedings and the respondents seem to be on the hook here indefinitely. One can only compare this to the endless efforts of Sisyphus, who never quite gets that damn boulder to stay atop the hill.
Now you might laugh and say that Bill, you worry too much - where the hell do you come up with this stuff? Bill, you would assure me, it's all academic.
Case In Point
In the Matter of MICHAEL BRESNER, RALPH CALABRO, JASON KONNER, and DIMITRIOS KOUTSOUBOS (Securities And Exchange Commission, Administrative Proceedings Rulings Release #729; Admin. Proceeding File # 3-15015, October 17, 2012), the SEC had previously issued an Order Instituting Administrative and Cease-and-Desist Proceedings ("OIP") on September 10, 2012. In its press release about the case, the SEC stated that:
The Securities and Exchange Commission today charged three former brokers at an Atlanta-based brokerage firm for "churning" the accounts of customers with conservative investment objectives, causing severe investor losses while the brokers collected handsome fees.
The SEC also charged the head supervisor at JP Turner & Company, Michael Bresner, as well as the firm's president William Mello and the firm itself for compliance failures. JP Turner and Mello agreed to settle the SEC's charges, while an administrative proceeding will continue against the three brokers and the supervisors.
Churning is a fraudulent practice in which brokers disregard the customer's investment objectives and engage in excessive trading for the purpose of generating commissions and other revenue for themselves or their firms. The SEC's Enforcement Division alleges that brokers Ralph Calabro, Jason Konner, and Dimitrios Koutsoubos engaged in churning while they worked at JP Turner. They collectively generated commissions, fees, and margin interest totaling approximately $845,000 while the defrauded customers suffered aggregate losses of approximately $2.7 million. . .
On September 28, 2012, Respondent Bresner asserted in a Motion to Dismiss that DOE had failed to institute this action within the Dodd-Frank 180-day time limit. Specifically, Bresner asserted that the 180-day period expired because the written Wells notice was provided to him on May 31, 2011, 468 days before the issuance of the OIP Further, Bresner argued that the matter was not ‘sufficiently complex' to warrant extensions. Accordingly, Bresner sought the dismissal of the OIP.
DOE argued that it was fully compliant with theDodd-Frank obligation to provide notice to the SEC Chair. Pointedly, DOE argued that its Director has discretion to determine whether a proceeding is sufficiently complex to warrant an extension, which was found here. Accordingly, DOE claims that the deadline was duly extended until November 14, 2012.
In deciding Bresner's Motion, SEC Administrative Law Judge Cameron Elliot stated, in part:
[T]here is nothing in the language of Section 929U indicating that any person other than the Division Director or his designee is authorized to make a complexity determination, or that I have the authority to review such a determination. 15 U.S.C. § 78d-5(a)(2). That second or subsequent deadline extensions must be approved by the Commission itself - an approval I obviously cannot second-guess - strongly suggests that I lack such authority. Id. Alternatively, assuming that I have such authority, proceedings in which I must issue an initial decision within 300 days of service of the OIP are, in my experience, the most complex of the various cases referred to the Office of Administrative Law Judges. It is therefore reasonable to apply the following rebuttable presumption: proceedings in which I must issue an initial decision within 300 days of service of the OIP are complex within the meaning of Section 929U. This is such a case, and Bresner has not rebutted the presumption. I do not reach the other issues raised in the Division's Opposition.
Based on the forgoing, I conclude that the Division Director properly authorized the extensions of the deadline to bring this proceeding until November 14, 2012. Therefore, the proceeding was instituted within the period authorized by Dodd-Frank and Bresner's Motion must be denied.
Bill Singer's Comment
‘When I use a word,' Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean - neither more nor less.'
Through The Looking Glass, Lewis Carroll