Starting in June 2013 and running somewhere into January 2017, millions of shares of unregistered pennystocks were allegedly sold without the necessary due diligence. Additionally, Suspicious Activity Reports likely should have been but were not filed. Although the shares may have sold for mere pennies, the proceeds amounted to just shy of $25 million. Not exactly chump change. All of which prompts a Securities and Exchange Commission investigation and the scheduling of a full-fledged regulatory hearing. In keeping with the august tradition of the BrokeAndBroker.com Blog, we focus on the silliness that is often attendant to such regulatory enterprises of great pith and moment.Case In PointAs stated in the "Summary of Claims" portion of a Securities and Exchange Commission ("SEC") Order Instituting Administrative and Cease-And-Desist Proceedings (the "OIP") In the Matter of Windsor Street Capital, L.P. (F/K/A Meyers Associates, L.P.) and John David Telfer, Respondents, (OIP; '33 Act Rel.No. 10293; '34 Act Rel. No.79877; Invest. Co. Act. Rel. No. 32451; Admin. Proc. File No. 3-17813 / January 25, 2017):
3. On numerous occasions, from at least June 2013 to the present, Meyers Associates violated Securities Act Section 5 by facilitating the unregistered sale of hundreds of millions of penny stock shares, without performing adequate due diligence regarding the sales' Section 5 compliance. 4. In addition, regarding the same penny-stock transactions as well as others, Meyers Associates repeatedly violated Exchange Act Section 17(a), and Rule 17a-8 thereunder, by failing to file suspicious activity reports ("SARs") with the United States Treasury Department's Financial Crimes Enforcement Network ("FinCEN"), as required by the Bank Secrecy Act of 1970 ("BSA") and its implementing regulations. Meyers Associates failed to file required SARs for suspicious penny stock sale transactions that resulted in proceeds of at least $24.8 million. 5. From June 2013 to the present, Meyers Associates earned a total of at least $493,000 in commissions and fees from the above illegal penny-stock sales and unreported suspicious transactions. 6. Respondent Telfer was Meyers Associates' AML officer and, pursuant to the firm's written AML program (the "AML Program"), was personally responsible for monitoring customer transactions for suspicious activity and ensuring the firm's compliance with SAR reporting requirements. By failing to monitor customer transactions and failing to cause the firm to file the required SAR reports, Telfer aided and abetted, and caused, Meyers Associates' violations of Exchange Act Section 17(a) and Rule 17a-8 thereunder.February 27, 2017 HearingSimply going by the seriousness of the allegations, we can all understand the SEC's concerns. On the other hand, it's sort of tough to justify the filing of the OIP on January 25, 2017, and the scheduling of a hearing for February 27, 2017, as was the case. Yeah, I know, it's all part of the give-and-take and back-and-forth of SEC regulatory proceedings. Still . . . unless you're an insider looking out, it all appears a bit of a rush to justice when the time between the filing of a complaint and the first hearing is only about one month. As noted by Chief Administrative Law Judge Brenda P. Murray in In the Matter of Windsor Street Capital, L.P. (F/K/A Meyers Associates, L.P.) and John David Telfer, Respondents, (Order Postponing Hearing; Admin. Proc. Rul. Rel. No. 4578; Admin. Proc. File No. 3-17813 / February 1, 2017), about a week after the OIP was filed (and less than a month before the first, scheduled hearing) there wasn't even a record that :
Windsor Street Capital, L.P. (f/k/a Meyers Associates, L.P.), or John David Telfer have been served with the OIP. However, on January 31, the Division of Enforcement relayed a request from the parties to my office by telephone that I postpone the hearing and schedule a telephonic prehearing conference at any time on February 27, 2017. I GRANT the request, POSTPONE the hearing, and schedule a telephonic prehearing conference on February 27, 2017, at 9:30 a.m. ETMarch 1, 2017 OrderFollowing the prehearing conference of February 27, 2017, Chief ALJ Murray rescheduled the initial hearing to June 19, 2017. In the Matter of Windsor Street Capital, L.P. (F/K/A Meyers Associates, L.P.) and John David Telfer, Respondents, (Order Following Prehearing Conference; Admin. Proc. Rul. Rel. No. 4643; Admin. Proc. File No. 3-17813 / March 1, 2017). Respondent's First Request for PostponementIn May 2017, Respondent Windsor Street Capital made its first request for a postponement of the initial hearing, which had been rescheduled by the ALJ to June 19, 2017. Respondent Telfer had previously made an offer of settlement, which the Division accepted and would be presenting to the Commission for approval. In the Matter of Windsor Street Capital, L.P. (F/K/A Meyers Associates, L.P.) and John David Telfer, Respondents, (Order on Motion; Admin. Proc. Rul. Rel. No. 4805' Admin. Proc. File No. 3-17813 / May 17, 2017). In support of its request for a postponement, Respondent Windsor Street Capital informed the SEC that it had ceased the business practices that are alleged in the OIP (apparently to demonstrate the lack of likelihood of ongoing harm to the public). In further support of Respondent's postponement request, the May 17th Order states that:
Windsor represents that counsel has been focused on settlement negotiations and needs time to prepare for the hearing and one of two new co-counsel, David E. Robbins and Sam Silverstein, who submitted a notice of appearance on May 8, 2017, is unavailable because of a scheduling conflict."NO" but with "Flexibility"In response to Respondent's postponement request, the May 17th Order asserts that:
[W]hile the Division does not consent to a postponement, it has indicated it would be flexible on the hearing date.We don't consent but we're flexible on the date? Seriously?As a former regulator with two regulatory organizations, I fully understand why regulatory staff would push back against certain postponement requests. Frequently, respondents often make those requests in bad faith and only to disrupt the staff's trial preparation. On the other hand, given the specific facts in this case, a few weeks of additional time isn't that big of a deal. Frankly, given all the circumstances behind the postponement request, any veteran regulatory lawyer would expect that a reasonable trier-of-fact (be that an ALJ or judge) would likely grant some extension. Alas, litigation tends to devolve in silliness and this case is no exception. In support of its "NO" but with "flexibility," the Division purportedly argued that:
"Windsor has not articulated a reasonable basis for the postponement and because the requested delay is potentially unfair to the Division." Opp. at 1. If a postponement is granted, however, the Division stated it is available the week of June 26 and from July 19 to September 1. Id. It noted that July 19-25 is problematic for its litigation team and witnesses due to previously scheduled obligations. Id. at 1-2.
On May 16, 2017, Windsor submitted a letter objecting to the Division's characterization of its reasons for a postponement as "dubious," stating that counsel initially requested that the hearing not be scheduled until at least the third week of June, and arguing that not postponing the hearing would be extremely damaging and prejudicial to Windsor. Regarding its availability for the week of June 26, counsel only noted the possibility of a personal scheduling conflict on one day that week, but cannot predict the specific date at this time.
I am persuaded by the following. The OIP was issued three and a half months ago. The parties have known the hearing date since March 1. The Division, which has the burden of proof, has witnesses ready for the week of June 19, but is available the following week. At the prehearing conference, counsel for Windsor notified me that he expected the birth of a grandchild to occur on June 8 and would prefer not to schedule the hearing for that week or the following week, thus I scheduled the hearing to begin on June 19, 2017. Tr. 15.2 Now, in addition to the birth of a grandchild, we have new counsel's son's wedding, a fortieth wedding anniversary, and an Alaskan cruise. Mot. Ex. B at 2. Finally, the allegations are serious and should be resolved and there are no substantive issues to be resolved before the hearing can begin.
I understand that a draft of the Initial Decision is all but completed, however, the review and cite checking by the law clerks/attorney-advisers has not yet begun. July and August will be a particularly busy time in the Office with the departure of the senior attorney adviser on June 26, several multi-week scheduled vacations by two of the remaining six attorney-advisers, the necessary review of hundreds of resumes and interviews of a lucky few to