In the great 1967 film "Cool Hand Luke," we get that iconic line about "What we've got here is failure to communicate." The scene involves the beat-down of a prisoner, played by Paul Newman, by a prison Captain, played by Strother Martin. In 2015, in a Securities and Exchange Commission case, we have a more droll example of the communication admonition. In these more modern days, it appears that a convicted felon's mail just can't seem to find him. All of which brings to mind the other bit of dialog by Strother Martin in that same iconic scene, "Some men, you just can't reach."
Case In Point
On March 2, 2012, Michael Lee Mendenhall was convicted in Colorado State Court of 17 counts of securities fraud and 8 counts of theft -- all Class Three Felonies. On April 20, 2012, Mendenhall was sentenced to 30 years in prison, and ordered to pay $1,408,667.77 in restitution. People v. Mendenhall, (Colo.Dist. Ct; No. 2011CR10094; Apr. 20, 2012). As set forth in the Denver, CO District Attorney's April 20, 2012, press release "Insurance Broker Sentenced to Prison":
A man accused of stealing more than a million dollars from elderly victims has been sentenced to prison today in Denver District Court. The case is the result of an investigation by the Colorado Division of Securities.
Michael Mendenhall (dob: 06-18-63) was found guilty at trial of 25 felony counts of securities fraud and theft and was sentenced to 30 years in prison today, and was ordered to pay more than $1 million in restitution ($1,408,667.77)
Mendenhall was an insurance broker who targeted elderly victims, convincing them to withdraw large sums of money to invest with him in exchange for promissory notes. Instead of investing the money, Mendenhall used investor funds to make payments to other investors and to pay for his personal expenses and lifestyle. There were 16 identified victims in the original indictment with losses that totaled approximately $1.2 million dollars.
The case was prosecuted by Denver Deputy DA Kandace Gerdes, who urged the Court to reject probation and give a lengthy prison sentence. Mendenhall also spoke to the Court, saying he was heartbroken at "how things had turned out," and that he wanted to work to repay the losses. Denver District Court Judge Brian Whitney noted that this case was different than others because these victims had all invested their life savings because of their trust, not because of greed. He went on to note that what Mendenhall had done was a crime wave, and that the 25-year prison sentence would result in Mendenhall being in a similar position to his victims when he is eventually released - he will be about their age and will have no assets.
September 2014 SEC OIP
During the relevant times of his criminal conduct, Mendenhall was associated with a broker-dealer and investment adviser and/or a broker-dealer registered with the Securities and Exchange Commission ("SEC"). On September 12, 2014, the SEC instituted administrative proceeding against Respondent Mendenhall in September 2014 based on his securities fraud and theft convictions. In the Matter of Michael Lee Mendenhall (SEC Order Instituting Administrative Proceedings and Notice of Hearing; ‘34 Act Release No. 73087; IA '40 Act Release No. 3917; Admin. Proc. File No. 3-16104 / September 12, 2014).
SEC December 2014 Motion for Summary Disposition
Following Order Instituting Proceedings ("OIP"), on December 12, 2014, the SEC's Division of Enforcement filed a motion for summary disposition; and Mendenhall was given an extension of time pursuant to an SEC Order dated January 22, 2015, to respond until February 13, 2015. In the absence of having received a timely response, on February 18, 2015, Mendenhall was barred pursuant to an Initial Decision.
Case closed - ahhh, but not quite.
Addressing the Problem
Turns out that neither the the January 22 Order extending Mendenhall's time to file a response nor the February 18, 2015, Initial Decision were sent to Mendenhall at his current address: DOC # 157626, Colorado Territorial Correctional Facility, P.O. Box 1010, Carson City, CO 81215.
What We've Got Here Is Failure To Communicate
Via letter dated February 17, 2015, and received by the SEC on February 23, 2015, Mendenhall asserted that he not received a response to his extension request and inquiring as to its status. Some men, you just can't reach.
Pursuant to an Order dated February 23, 2015, an SEC Administrative Law Judge stated, in part, that Mendenhall's February 17th letter:
[W]ill be treated as a motion to correct a manifest error of fact in the ID, pursuant to 17 C.F.R. § 201.111(h). Mendenhall may have an additional four weeks, until March 20, 2015, to file a supplemental pleading concerning the ID and the Division's motion for summary disposition. The Division may reply by March 27, 2015. . .
In the Matter of Michael Lee Mendenhall (Order; Admin. Proc. Rulings Rel. No. 2344; Admin. Proc. File No. 3-16104 / February 23, 2015
On March 19, 2015, on its own motion, the SEC vacated the Initial Decision and remanded the matter for further proceedings. In the Matter of Michael Lee Mendenhall (Order Vacating Initial Decision and Remanding for Further Proceedings; ‘34 Act Release No. 74532; IA '40 Act Release No. 4051; Admin. Proc. File No. 3-16104 / March 19, 2015). In ordering such action, the SEC noted that the ALJ had charactierzed Mendenhall's February 17th letter as a "motion to correct a manifest error of fact;" and pursuant to such a status, the ALJ permitted Mendenhall to file a supplemental pleading addressing both the Division's Motion for Summary Disposition and the Initial Decision.
Apparently troubled by the procedural issues raised by the ALJ's treatment of Mendenhall's letter and the concomitant posture of the case, the SEC noted that:
Once an initial decision is issued, our Rules of Practice "largely divest the law judge of authority over the proceeding."5 As a result, the law judge did not err (and, indeed, properly acted within the bounds of her authority) when she construed Mendenhall's letter as a motion to correct a manifest error of fact. The Commission is not similarly constrained, however. It retains plenary authority over the course of its administrative proceedings and the rulings of its law judges-both before and after the issuance of the initial decision and irrespective of whether any party has sought relief. 6
Under the unusual circumstances of this case, we believe that Mendenhall should be afforded an opportunity to present facts and legal arguments in response to the Division's motion for summary disposition. We find that the interests of justice would be served, and the disposition of this matter expedited, by vacating the February 18 initial decision and directing that the law judge set a briefing schedule for the Division's motion for summary disposition. In considering that motion, the law judge should employ the standard ordinarily applicable to motions for summary disposition under Rule of Practice 250 and may make such rulings as she deems appropriate.7 We stress that the standard for a motion to correct a manifest error under Rule of Practice 111(h)-which requires the movant to show that there was a "patent misstatement of fact" in the initial decision-has no relevance when, as here, the initial decision has been vacated and the matter remanded for resolution on an open record. . . .
Page 2 of the SEC Order
Bill Singer's Comment
No . . . contrary to what you might have expected, I have no shots to take against anyone involved in this matter. Frankly, I was impressed with how quickly the SEC took ownership of its procedural problem and attempted to provide a fair and workable alternative.
The ALJ was not at fault and, frankly, Mendenhall wasn't at fault (or at least that's what is suggested) -- the problem here was clearly that Mendenhall's address had changed as a consequence of his incarceration. The ALJ, in fact, came up with what seemed a fair solution of allowing Mendenhall to get a shot at addressing both Enforcement's December 12, 2014, Motion for Summary Judgment and the February 18, 2015, Initial Decision.
The problem, however, is that the issuance of the Initial Decision was predicated upon the ALJ's belief that Mendenhall had defaulted, which, he did; however, his default was apparently prompted by the failure to deliver the requisite notices of the motion and proposed decision to his prison residence. Unfortunately, there's something a bit troubling (if only from a procedural perspective) about giving Mendenhall the opportunity to address an Initial Decision that probably should not have been issued under all the attendant circumstances, as hindsight would suggest.
What's truly impressive was the SEC's apparent perception that "good" just wasn't "good enough." In this case, the SEC vacated the Initial Decision and remanded the matter. Even for someone as unsympathetic as Mendenhall -- a fraudster who destroyed innocent victims' life-savings -- it's important that we ensure that due process is guaranteed.
Uncomfortable decisions such as this imbue the adversarial process with a sense of fairness. Compliments to the SEC for doing the right thing. Now . . . let's get this guy out of the industry as quickly as possible.
"What We Have Here Is Failure To Communicate" (BrokeAndBroker.com Blog, September 26, 2013)
It comes off as a bizarre game of hide-and-seek involving the Federal Bureau of Prisons and the Securities and Exchange Commission. You got a convicted felon. You got the SEC looking to bang him out of the biz. Trouble is they either can't find the guy in his cell or they don't want to bother him during orientation week. READ