February 12, 2016
This is an UPDATE of "SEC
Under Siege! Dramatic Inspector General
Report Shakes ALJ System" (BrokeAndBroker.com Blog, August 10,
On August 7, 2015, the Securities and
Exchange Commission's ("SEC's") Office of the Inspector General
issued an Interim
Report of Investigation (15-ALJ-0482-1). This dramatic Report was purportedly in response to "allegations of bias on the part of Administrative Law Judges in the Commission's Administrative proceedings." As more fully explained in the Report:
This investigation was initiated on June 30, 2015, based on
information provided by Erica Williams, Deputy Chief of Staff, Office of the
Chair, concerning alleged potential issues of fairness and bias in the SEC's
administrative proceedings, including those introduced in the Timbervest, LLC
[W]illiams stated that Lillian
McEwen, former SEC ALJ, alleged bias, which was reported in the May 6, 2015,
WSJ article. According to the WSJ article, McEwen claimed that Chief ALJ Brenda
Murray pressured McEwen to make rulings in certain ways. Williams was not aware
of any other forum in which McEwen had made these allegations. According to
Williams, McEwen left the SEC in 2007.
that in a particular case involving Timbervest, ALJ Cameron Elliot's initial
decision was appealed to the Commission, and the respondent sought to depose
ALJ Elliot. In support of those efforts, the respondent asserted the
aforementioned claims of bias as described in the WSJ article.
Subsequently, the Commission issued an order (dated June
4, 2015), inviting AU Elliot to file an affidavit addressing the allegations of
inappropriate pressure or bias in the administrative proceedings. On June 9,
2015, ALJ Elliot notified Brent Fields, SEC Secretary, that he
"respectfully declined to submit the affidavit" requested in the
order. Williams advised it was unclear why AU Elliot declined the invitation to
provide an affidavit.
According to Williams, Chair Mary
Jo White requested an OIG investigation of the alleged bias
issue because the identified concerns could impact
all ALJs and the SEC administrative proceedings.
reviewed the Securities
Diary and WSJ news
articles that Williams identified, which included the following statements
attributed to former ALJ McEwen: she thought the system was slanted against
defendants at times; she came under fire from Chief ALJ Murray for finding too
often in favor of defendants; Chief ALJ Murray questioned McEwen's loyalty to
the SEC. McEwen retired as a result of the criticism; and SEC judges were
expected to work on the assumption that "the burden was on the people who
were accused to show that they didn't do what the agency said they
the full-text of this dramatic Report
Page 1 -2 of the Report
On .June 30. 2015. the U.S. Securities and Exchange Commission (SEC). Office of Inspector General (OlG). Office of Investigations, initiated an investigation based on information provided by Erica Williams. former Deputy Chief of Staff. Office of the Chair. concerning alleged potential issues of fairness and bias in the SEC administrative proceedings. including those introduced in the Timbervest. LLC (Timbervest) matter.
The OIG determined it would investigate the allegations of bias on the part of the Administrative Law Judges (ALJs or ALJ) in the Commission's administrative proceedings.Specifically. the OIG investigated allegations that were attributed to former SEC ALJ Lillian McEwen and included in a May 6. 2015, The Wall Street Journal (WSJ) article. which suggested that there was improper influence on ALJs to favor the Commission: SEC Chief ALJ Brenda Murray criticized McEwen and questioned her loyalty to the SEC: and ALJ personnel were pressured to shift the burden of proof to respondents. The allegations of bias or improper influence investigated concentrated upon instructions, directives or orders on how to rule on motions, decide questions of facts or law. or make other dispositions or any particular administrative proceeding given by the Chief ALJ to the other ALJs without regard to the evidence or applicable legal authority.
The OIG did not develop any evidence to support the allegations of improper influence. Former and current staff affiliated with the Office of ALJs. including McEwen, stated that ALJ decisions were made independently and free from influence of SEC Chief ALJ Murray.Conversely, several individuals interviewed during this investigation indicated that Murray emphasized fairness and independence of the Office. and some noted only systemic factors that impacted complete adjudicative independence, such as Commission precedent and the rules of practice.
With the exception of McEwen's allegations, the OIG investigation found that the criticisms Murray had of ALJs were not related to the substance of their decisions when presiding over cases, but rather to the timeliness in which they issued their decisions and/or the procedural quality of their work. Furthermore, the OIG investigation identified only possible reference to loyalty by Murray, but the reported emphasis was loyalty to the quality of the ALJ process and not loyalty to the SEC Division of Enforcement (ENF).The OIG investigation did not develop any evidence to support the allegation that ALJ personnel were pressured to shift the burden of proof to respondents.
Bill Singer's Comment
Given the unsatisfactory nature of my own interaction with the SEC's Office of the Inspector General pertaining to my dissatisfaction with the SEC's Office of the Whistleblower, there is virtually no way that I would place much, if any, credence in the findings of OIG, particularly on so sensitive a matter as one that goes to the very integrity of the in-house administrative system for adjudication. Similarly, given the nature of the allegations that prompted this investigation and the implicit threat to the continuation of the ALJ system (and, hence, an implicit threat to the continued employment of ALJs and support staff), it is difficult to understand why an impartial, outside staff was not called upon to replace the OIG or, at the least, to supplement that investigative team.
Consequently, there is virtually no reason for me to comment further on my view of the published Report and I urge all serious investors and market professionals to draw your own conclusions from your own reading of the findings.