February 13, 2017
At its core, a recent Securities and Exchange Commission case alleges that the Respondent didn't do right by his clients but, in essence, picked through various trades and dumped the less successful trades on his unsuspecting clients. As the case makes its way to a contested hearing, the Respondent argues that he is being overwhelmed by the regulatory machinery and being forced to choose between defending himself or providing for his family. Frankly, it's not that rare a complaint. Although I am not suggesting any moral equivalency, the photo of that lone Tiananmen Square protester standing in the way of a tank captures the dimension of the challenge raised by many SEC Respondents. Depending upon the facts of a given SEC enforcement case, sometimes you root for the tank; sometimes you root for the guy in the white shirt.
Case In Point
NOTE: An OIP merely contains allegations and a respondent is presumed innocent unless and until proven guilty beyond a preponderance of the evidence.
take a quick trip from the top to bottom of the investment complex involved in
- Oracle Investment Research,
an SEC registered investment adviser from June 2, 2010, until the company
withdrew its registration on August 26, 2013. Oracle had $47 million in assets
under management. Balter was the founder, sole owner, principal, and Chief
Compliance Officer of Oracle Investment Research.
- Oracle Family of
Funds, a trust registered with the SEC as
an investment company from June 8, 2010 until March 6, 2014. Balter served as
the Oracle Family of Funds' President, a Trustee, and sole employee.
- Oracle Mutual Fund, a
series of the Oracle Family of Funds. Balter served as the portfolio manager, Chief
Compliance Officer, Administrator/Adviser to the Oracle Mutual Fund, which ceased
operation on August 31, 2013 and withdrew its registration on November 21,
The OIP asserts that a large
number of Balter's advisory clients were over-60-years-old retirees (or nearing
retirement), who are further characterized as "unsophisticated investors
with little investment experience." As preliminarily set forth in the
"Summary" section of the OIP:
1. This proceeding involves multiple breaches of
fiduciary duty and violations of the antifraud provisions of the federal
securities laws from January 2011 to April 2014 (the "Relevant Period") by
Laurence I. Balter ("Respondent"), a formerly registered investment adviser to
the Oracle Mutual Fund (the "Fund") and between 100 and 120 separate accounts
("Separately Managed Accounts" or "SMAs"). Balter engaged in three distinct
schemes. First, he fraudulently allocated profitable trades to his own accounts
to the detriment of several client accounts. Second, Balter falsely told his
SMA clients who invested in the Fund that they would not pay both advisory fees
and Fund management fees for the portions of their accounts invested in the
Fund. Third, Balter made trades for the Fund that deviated from two of its
fundamental investment limitations. Together, the violations caused significant
harm to Balter's clients.
2. By virtue of this conduct,
Respondent willfully violated Securities Act Section 17(a), Exchange Act
Section 10(b) and Rule 10b-5 thereunder, Advisers Act Sections 206(1), 206(2),
206(4) and 207, and Rule 206(4)-8 thereunder, and Investment Company Act
Section 34(b), and willfully aided and abetted and caused violations of
Investment Company Act Sections 13(a) and 34(b).
As the SEC's cherry-picking case
against Balter makes its way towards a contested hearing, on January 18, 2017,
Respondent Balter filed a motion seeking, among other things, leave to depose
two additional persons; and a denial/quash/modification of the SEC Division of
Enforcement's ("Enforcement's") notice to depose him.
SIDE BAR: § 201.233 Depositions upon oral examination.
(a)Depositions upon written notice. In any proceeding under the 120-day timeframe designated pursuant to § 201.360(a)(2) depositions upon written notice may be taken as set forth in this paragraph. No other depositions shall be permitted except as provided in paragraph (b) this section
(1) If the proceeding involves a single respondent, the respondent may file written notices to depose no more than three persons, and the Division of Enforcement may file written notices to depose no more than three persons.
(2) If the proceeding involves multiple respondents, the respondents collectively may file joint written notices to depose no more than five persons, and the Division of Enforcement may file written notices to depose no more than five persons. The depositions taken under this paragraph (a)(2) shall not exceed a total of five depositions for the Division of Enforcement, and five depositions for all respondents collectively
(3) Additional depositions upon motion. Any side may file a motion with the hearing officer seeking leave to notice up to two additional depositions beyond those permitted pursuant to paragraphs (a)(1) and (2) of this section . . .
(f) By remote means.The parties may stipulate - or the hearing officer or Commission may on motion order - that a deposition be taken by telephone or other remote means. For the purpose of this section, the deposition takes place where the deponent answers the questions.
(j) Duration; cross-examination; motion to terminate or limit -
(1)Duration. Unless otherwise stipulated or ordered by the hearing officer or the Commission, a deposition is limited to one day of seven hours, including cross-examination as provided in this subsection. In a deposition conducted by or for a respondent, the Division of Enforcement shall be allowed a reasonable amount of time for cross-examination of the deponent. In a deposition conducted by the Division, the respondents collectively shall be allowed a reasonable amount of time for cross-examination of the deponent. The hearing officer or the Commission may allow additional time if needed to fairly examine the deponent or if the deponent, another person, or any other circumstance impedes or delays the examination. . .
5 - 2 = Moot
Balter's moved to depose a total of five individuals, which he believed comprised three individual provided under (a)(1) above, and two additional provided under (a)(3) above. In reviewing the proposed five witnesses, the ALJ characterized two of them as Enforcement's expert witnesses, which would not be included in the Respondent's threshold of "no more than three persons." As such, Respondent Balter was still within his three-witness limit and did not need leave to depose additional persons. Accordingly, the ALJ denied Balter's motion as moot. In the
Matter of Laurence I. Balter d/b/a Oracle Investment Research
(Order, Admin. Pro. Rul. Rel. No. 4560; Admin.
Pro. File No. 3-17614 / January 27, 2017).
A Matter of Time
As to Respondent Balter's motion
to quash/modify the deposition and subpoena against him from Enforcement, Balter
asserted that he was unavailable for the scheduled February 7, 2017, date and
will not be available until February 28th; and, further, that Enforcement has
already deposed him on two dates for in excess of 11 hours after having
previously informally interviewed him eight times. In addition to deeming the
Enforcement's request for a deposition to be in violation of 233(j)(1), Balter
further characterizes it as unreasonable, oppressive, and unduly burdensome. He
requested that the deposition be quashed or modified by rescheduling it to
February 28th and ordering that the deposition be limited to no more than two
In response to Balter's motion, the ALJ ruled that [Ed: footnote
[T]he parties may reschedule the deposition to a
mutually convenient date consistent with the amended prehearing schedule.
Respondent's request that the deposition be limited to two hours will be
denied. While it may seem unnecessary for the Division, having interviewed and
taken testimony from a respondent prior to the institution of proceedings, to
depose him during the proceeding, the Commission's rules do not prohibit this
or restrict the duration of such a deposition.
An Inexpensive Determination
Finally, the ALJ tackled Respondent Balter's various complaints about the financial pressures exerted upon him by Enforcement. In responding to such
complaints, the ALJ considered the SEC's Rules of Practice that address such
In ruling on Balter's motions, the ALJ offered this commentary:
§ 201.103 Construction of
(a) The Rules of Practice shall be construed and administered to secure the just, speedy, and inexpensive determination of every proceeding. . .
Justice and Expense
The Commission requires that its
rules "shall be construed and administered to secure the just, speedy, and
inexpensive determination of every proceeding." 17 C.F.R. § 201.103(a).
Respondent urges that his deposition, if any, and Barbata's be scheduled on
adjoining days, to conserve resources involved in counsel traveling to Hawaii.
Motion at 4. In the motion and elsewhere, Respondent states that he supports
his family by giving flight lessons and driving Uber and that he is financially
pressed. Motion at 9; Balter Decl. at 2-3. The parties are urged to cooperate
on the logistics of depositions so as to conserve public and private resources.
See 17 C.F.R. § 201.233(f) (providing that depositions may be taken remotely).
Further, the parties are urged to consider video hearing sessions as well, so
as to reduce expenses to Respondent and the Commission to the extent possible.
If you re-read the above blog, you should note that I have NOT expressed any position as to the merits of either the SEC's or Respondent's case. The OIP is well crafted and its allegations are compelling; however, we do not have any sense of Respondent's defenses or counter-statement of facts. Consequently, today's blog is simply about jockeying for pre-hearing position and procedural gamesmanship. I am not getting into the merits of the case.
For those unfamiliar with SEC practice, you now have a taste as to just how granular the process can get: the numbers of witnesses you can call, when and where a deposition should be scheduled, opportunities to the use video, etc.. This case the SEC's ALJ system and its in-house administrative hearings; and, if nothing else, prompts us to wonder how differently the motions might have been treated in a neutral forum, federal court by a magistrate or judge who does not work at the SEC.
One aspect of the ALJ's ruling that bothers me is what I view as her "punt" on Balter's complaints about the logistics of the depositions. In response to Respondent's motions seeking a decision on the mechanics of the proposed depositions, the ALJ urged the parties to cooperate. I don't think that the ALJ's Kumbaya refrain is consistent with promoting a "speedy, and inexpensive determination . . ." I would refer the ALJ to Clotho, Lachesis, and Atropos for a far better approach to such motions: Spin, measure, and cut.
- SEC ALJ Says Bandimere Notwithstanding. And So It Goes. And So It Goes (BrokeAndBroker.com Blog, January 16, 2017)
- UPDATE: In Face Of Split Circuits, SEC ALJ Rules Because We Say So (BrokeAndBroker.com Blog, January 10, 2017)
- SEC Opts For Intercircuit Nonacquiescence (BrokeAndBrBoker.com Blog, January 9, 2017)
- In Face Of Split Circuits, SEC ALJ Rules Because We Say So (BrokeAndBroker.com Blog, January 6, 2017)
- BREAKING NEWS: Federal Appeals Court Says Securities and Exchange Commission ALJs Unconstitutional (BrokeAndBroker.com Blog, December 28, 2016)