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Trout Wasserman & Co., Inc., et. al., Exchange Act Rel. 55989 (June 29, 2007)

Interlocutory Appeal, Motion to Dismiss

Time Between appeal and decision - unknown

Time between last brief and decision - unknown

Pages - 11


This decision concerns an interlocutory appeal in a pending administrative proceeding. Respondents were charged with violations in connection with frequent trading and late trading of mutual funds.  An individual respondent filed a motion to dismiss alleging misconduct by the Division of Enforcement which was ordered to make its investigative files available to him. The Commission denied the motion, applying the standard for review it uses for interlocutory appeals of ALJ orders.  Respondent's motion was based on: 1) purported "improper" questioning of respondents and others by the division during it's pre-filing investigation; 2) claims that the Division promised to seek to withdraw cease and desist proceedings against respondent; and 3) an investigation of his former counsel by the Commission's Office of General counsel and trial subpoena in these proceedings to that counsel by the division.

The Commission found that the investigative testimony did not show any prejudice to respondent.  There were no statements adverse to respondent and he does not claim any witness changed his testimony because of the Division conduct.  Nor does respondent cite to any authority that supports dismissing an entire proceeding even if he had suffered prejudice.

As to the claim that the Division had promised to dismiss the cease and desist proceedings, those proceedings were in fact dismissed and Respondent has demonstrated no prejudice resulting from any delay in doing so.  The Division did not "cause" the OGC's investigation of counsel, it was prompted by testimony during the investigation.  The Commission rejected the argument that Respondent was thereby deprived of counsel of his choice.  It noted that there is no absolute to counsel of one's choosing when the integrity of Commission processes may be threatened.  Further, Respondent's current counsel has represented that he has interviewed former counsel and claims that his testimony will not be useful to the Division at trial, an argument inconsistent with claiming prejudice.  

Respondent also argued that the Division knew about the testimony concerning counsel,but failed to disclose it to Respondent, arguing this made his counsel appear untrustworthy, depriving him of effective assistance.  the commission noted that counsel in adversarial proceedings may view positions by opposing counsel with skepticism anyway.  Finally, the Division did not deprive respondent of a meaningful right to make a Wells submission by not disclosing the tampering allegations to Respondent.  Here there was no prejudice to Respondent because he has hired new untainted counsel.

Concerning the claims relating to his former counsel,  the Commission noted that persons had testified that counsel had attempted to tamper with their prospective investigative testimony. 
The Commission summarized by finding that Respondent had not alleged any prejudice or harm from the purported misconduct.

It is somewhat unhelpful that the Commission does not discuss whether or not the investigative testimony was in fact abusive or not.  Nor does the Commission explain why it does not.  At least one case has sanctioned extremely aggressive investigative testimony by the Division.  See, SEC v. Isbrandtsen, 245 F.Supp 518 (S.D.N.Y., 1965) ( SEC entitled to make persistent and thororough inquiry).

Key Points
  • Here, despite the fact that there is no ALJ ruling under consideration, that standard of review will be applied to the interlocutory motion to dismiss.
  •  Respondents do not have an absolute right to counsel of their choosing, especially when as here, allegations of witness tampering by former counsel are being investigated by the Commission staff.
  • Interlocutory motions are  disfavored.  Review of interim orders by the ALJ will be reviewed only under "extraordinary circumstances."
Additional discussion

Isbrandtsen is worth a further look.  A witness refused to continue answering questions pursuant to a SEC investigative subpoena.  He had testified for several days.  The court ordered the testimony to continue.  

"... the protective power of the court may not be invoked by a witness who is uncomfortable or embarrassed by a persistent and thorough examiner who is following out leads and checking possible inconsistencies.  The line of demarcation between persistent questioning and oppressive inquisition cannot be defined in advance.  The individualizing facts and circumstances must be considered ad hoc.  . . . An SEC inquiry is not governed by judicial standards of proof.  Leading questions may be asked.  Hearsay may be elicited.  Investigators are, by the very nature of their task, (especially in non-public hearings) interested in obtaining clues and leads.  Even rumors may furnish helpful material, on the basis of which witnesses may be located  and competent evidence unearthed.  These are but a few of the practical considerations that, realistically considered, require the courts to adopt a liberal attitude in judging the propriety of the investigative techniques of the SEC . . . .  The SEC is charged by Congress with the administration of a number of statutes designed to regulate a complex and technical industry.  Deliberately concealed violations of the securities laws are most difficult to detect.  The SEC is often required to conduct extensive investigations and to inquire into intricate transactions."