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The SEC Is Asked to Go Back To The Future to Rewrite History
September 2, 2021
After an individual or entity is named as a defendant or respondent in a legal proceeding, they may subsequently be exonerated, or, the prior charges may be withdrawn for a number of reasons. Such vindication or dismissals may occur years after the filing indictments/complaints and the follow-on press coverage. Unfortunately, it's often difficult (if not impossible) to erase the references to a lawsuit that were posted on the Internet. Moreover, what was "true" when first posted months or years ago is not rendered as false or defamatory merely because subsequent developments prompted a finding of not guilty or the withdrawal of charges. In a recent SEC matter, we see how some of these various considerations come into play.
2020 SECOIP
On June 29, 2020, the SEC instituted administrative proceedings against John Christopher Polit and alleged the following under "ENTRY OF RESPONDENT'S CRIMINAL CONVICTION":
2. In 2017, Respondent was charged in Ecuador with being an accomplice to the crime of extortion pursuant to Article 264, subsection 2, of the Ecuadorian Penal Code in the matter of Dr. Carlos Ramon Polit Faggioni, case no 00204-2017, Tribunal de Garantías Penales de la Sala Especializada de lo Penal Militar, Penal Policial y Tránsito de la Corte Nacional de Justicia (August 8, 2017).3. On June 6, 2018, Respondent was found guilty of being an accomplice to the crime of extortion in the matter of Dr. Carlos Ramon Polit Faggioni, case no 00204-2017, Tribunal de Garantías Penales de la Sala Especializada de lo Penal Militar, Penal Policial y Tránsito de la Corte Nacional de Justicia (June 6, 2018).4. In connection with that conviction, a court of competent jurisdiction found that from at least 2009 through 2015, Respondent assisted another defendant, at the time Ecuador's Comptroller General, in concealing bribes received from a Brazilian construction company in exchange for granting that construction firm Ecuadorian government contracts and favors. As a result of his conviction, on July 23, 2018, Polit was sentenced to three years in prison in Ecuador.5. The misconduct underlying the criminal charges occurred during the period in which Respondent was associated with a broker-dealer and investment adviser registered with the Commission.
at Page 2 of In the Matter of John Christopher Polit, Respondent (Order Instituting Administrative Proceedings ("OIP"), '34 Release No. 89171; Invest. Adv. Act Rel. No. 5528; Admin. Proc. File No. 3-19838 / June 29, 2020)
https://www.sec.gov/litigation/admin/2020/34-89171.pdf
https://www.sec.gov/litigation/admin/2020/34-89171.pdf
The above-cited June 2020 OIP began the SEC's formal hearing process to determine whether the public interest required the imposition of remedial action against Respondent Polit as a result of his 2017 charge in Ecuador for his alleged role as an accomplice to extortion and his subsequent 2017 conviction of same.
2021 SEC Dismissal
On December 18, 2020, the SEC's Division of Enforcement filed a Motion to Dismiss the Proceedings against Polit based upon this development:
[T]he National Court of Ecuador had "reversed the conviction of the Respondent and no further proceedings are contemplated" and that "[b]ecause the basis for this proceeding was Respondent being convicted of a crime in Ecuador and the conviction has now been reversed by the highest court of appeal, the Division believes it prudent for the Commission to dismiss this matter. . . .
at Page 1 of In the Matter of John Christopher Polit, Respondent (Order Dismissing Proceedings, '34 Release No. 92829; Invest. Adv. Act Rel. No. 5843; Admin. Proc. File No. 3-19838 / August 31, 2021)
https://www.sec.gov/litigation/opinions/2021/34-92829.pdf
Okay, so far so good and it appears that the SEC was motivated by considerations of fairness and justice. Nice to see that ethics still come into play. That being said, on February 12, 2021, Polit requested that in addition to Enforcement's request for a dismissal that:
[T]he proceeding be expressly dismissed "with prejudice," and that the Commission "also amend its webpage showing the institution of this proceeding with an appropriate legend indicating that the proceeding has been dismissed because the verdict of guilty was annulled or reversed, and containing a link to the order of dismissal." . . .
at Page 1 of the SEC Order Dismissing
Now we have a time-space paradox! When the SEC filed its 2020 OIP the allegations were correct. An Ecuadorian Court had convicted the referenced parties. Polit was found guilty for his role as an accomplice to extortion. As time progressed, however, the Court reversed Polit's conviction. In the absence of an extant conviction, there was no basis in 2021 for the SEC's OIP, which had been filed in 2020. What is the right thing to do given the changed facts and circumstances? If, in fact, the SEC goes back and redacts and revises portions of the 2020 OIP, how would the federal regulator be required to act with cases in which some (but not all) facts materially change -- or when other considerations come into play that may not go to the issue of a prior allegation now being false or inaccurate but for the sake of fairness, a prior allegation should be redacted or removed? Truly, the SEC is confronted with a proverbial slippery slope.
Accordingly, it should come as no surprise that Enforcement opposed the extended relief sought by Polit beyond the mere dismissal of the OIP.
As set forth in the SEC Order Dismissing, the Commission clearly found that as a result of the reversal of Polit's conviction that:
[T]here is no basis for continuing the proceeding against Polit pursuant to Exchange Act Section 15(b) or Advisers Act Section 203(f) on the record before us. Therefore, it is appropriate to dismiss the proceeding.3 As to the question of whether the proceeding should be dismissed expressly "with prejudice," we have stated that "[o]ur Rules of Practice . . . do not distinguish between dismissing proceedings with or without prejudice." 4 As a result of this dismissal, we may not reinstitute this proceeding.= = = = =Footnote 3: See, e.g., Evelyn Litwok, Investment Advisers Act Release No. 3438, 2012 WL 3027914 (July 25, 2012) (dismissing a follow-on administrative proceeding after the court of appeals reversed or vacated and remanded convictions that were the basis of the proceeding); John M. Lucarelli, Exchange Act Release No. 56075, 2007 WL 2031556, at *2 (July 13, 2007) (dismissing a proceeding based on a jury verdict after the district court judge entered judgmentof acquittal notwithstanding the verdict).Footnote 4: Richard L. Goble, Exchange Act Release No. 68651, 2013 WL 150557, at *2 & n.13(Jan. 14, 2013) (citing Lucarelli, 2007 WL 2031556, at *2).
at Page 2 of the SEC Order Dismissing
Frankly, that's a somewhat stunning pronouncement from the SEC and one that many practitioners are likely unaware of and unfamiliar with. As such, it bears repeating: The SEC's Rules of Practice do not distinguish between dismissals "with" or "without" prejudice.
What then is the SEC to make of Polit's request for the legending of various text on the SEC' website? That's an interesting request but one which, as previously noted, presents the SEC with a very slippery slope. In addressing Polit's request, the SEC states in part that:
[O]ur Rules of Practice do not provide for such a request, and Polit does not identify any instance where the Commission's website has been appended in the way he requests. Indeed, none of the examples cited above where we dismissed an administrative proceeding because of the reversal of the conviction or injunction that provided the basis for the administrative proceeding have such a legend on the Commission's website with a link to the OIP in the relevant case. Further, the OIP, as noted above, merely instituted proceedings to determine if the allegations contained therein were true and made no findings that they were true. Therefore, Polit's claims that the "lingering webpage [containing the OIP] . . . has lost its validity" and that the OIP "establishes a presumption that Mr. Polit was 'convicted' of a serious crime in Ecuador" lack merit. This order, which expressly finds that there is no longer a basis for the proceeding and therefore dismisses it, will be published on the Commission website. We therefore deny Polit's request that we "amend the webpage showing the institution of this proceeding with an appropriate legend indicating that the proceeding has been dismissed because the verdict of guilty was annulled or reversed, and containing a link to the order of dismissal."5= = = = =Footnote 5 :We deny Polit's request for oral argument because the "decisional process" would not be "significantly aided by oral argument." Rule of Practice 451(a), 17 C.F.R. § 201.451(a)
at Pages 2 - 3 of the SEC Order Dismissing