SEC ALJ Order Discusses Character Witnesses and Inability to Pay

October 30, 2019

In a recent SEC Order, Administrative Law Judge ("ALJ") Jason S. Patil discussed character witnesses and respondents' alleged inability to pay. In the Matter of Anton & Chia, LLP, Gregory A. Wahl, CPA, Michael Deutchman, CPA, Georgia Chung, CPA, anTommy Shek, CPA (Order Regarding Witnesses, Inability to Pay, and Hearing Transcripts; Admin. Proc. Rul. Rel. No. 6701 / Admin. Proc. File No. 3-18292) Given ALJ Patil's concise explanations and rationale, this is a superb opportunity to briefly consider those two issues that often arise during regulatory proceedings. 

Character Witnesses

In a section discussing the process for requesting witness subpoenas, in part the ALJ notes that parties should make such request "at least two weeks before a witness is expected to testify," and he posts the link to the requisite "Subpoena to Appear and Testify at a Hearing" form at
In addressing various witness-subpoena issues pending in Anton & Chia, the ALJ offers this important observation about the need and role of so-called "character" witnesses:

[I] will hear both from fact witnesses, who can testify to events that are relevant to the allegations in the order instituting proceedings or Respondents' defenses, and character witnesses, who can speak to the character and integrity of a Respondent.1

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Footnote 1: If wrongdoing is found, character witnesses are important because character can inform whether one should be denied the privilege of practicing before the Securities and Exchange Commission, and can bear on whether a cease-and-desist order or a civil penalty is warranted. See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981) (concerning a respondent's sincerity about keeping away from future violations and recognition of wrongdoing); see also 15 U.S.C. § 78u-2(c)(5), (6) (concerning the need for deterrence and other matters that justice requires).

Inability to Pay

Also, ALJ Patil embarks upon a helpful review of the factors involved when respondents may find themselves in financial extremis and unable to pay various costs and fees pertaining to defending themselves at the SEC. Pointedly, the ALJ references SEC Rule 630: Inability to pay disgorgement, interest or penalties and the filing of Form D-A and offers this commentary:

Respondents should be aware that under the Securities and Exchange Commission's Rules of Practice, they are permitted to present evidence of an inability to pay, which I can consider in my discretion as a mitigating factor in deciding whether to grant any Division request to impose monetary sanctions. 17 C.F.R. § 201.630. To be clear, claiming an inability to pay is not an admission of liability. A Respondent who establishes an inability to pay will still receive an impartial ruling on the alleged violations at issue, but, in the event that liability is established, could then benefit from my consideration of their financial circumstances. 

If any Respondent wishes to claim an inability to pay, he or she should submit a Form D-A (model disclosure of assets and financial information form) by November 18, 2019. The form can be found at 

A Respondent should attach the following information to the Form D-A as applicable: 

(1) supporting documentation (such as, for example, bank statements, credit card statements, mortgage statements, corporate financial statements, etc.) for all assets, liabilities, income, and expenses claimed on the form; 

(2) any federal tax returns, including business returns, for 2013 and all subsequent years; 

(3) recent pay stubs or other documentation that demonstrate current income; 

(4) any other financial information they deem relevant to my consideration of their inability to pay.

A Respondent who files a Form D-A may also file a motion for a protective order pursuant to Rules 322 and 630(c), 17 C.F.R. §§ 201.322, .630(c), to seal their confidential financial information from public view. 

If any Respondent files a Form D-A, I will require each such Respondent to affirm, under oath, the filing at the hearing. The Division will have the right to cross-examination on inability to pay, and to raise other relevant arguments.  

Respondents seeking some concession based upon their purported insolvency or dire financial straits aren't always as broke as they would like an ALJ to believe.  Accordingly, if you're going to seek some protection behind your alleged "inability to pay," you should be prepared to put your lack-of-money where your mouth is, and also be prepared for a grilling via cross-examination by SEC Staff.  As noted in the above SEC Order, ALJ Patil retains the discretion to weigh the imposition of requested monetary sanctions against a given respondent's purported "inability to pay." Obviously, the burden of proof of such a condition is high and the nature of supporting documentation should be carefully considered. No ALJ will merely take a respondent's word or assertion of their financial condition -- if you intend to raise such an issue, you must be prepared to back it up with statements from financial institutions, tax returns, etc.