Commission Denies Motion for Summary Affirmance of ALJ Sanctions Against Enjoined Adviser and Remands For Full Hearing

Don Warner Reinhard, Exchange Act Rel. 61506, February 4, 2010

A Commission ALJ barred Reinhard from associating with any investment adviser based on a federal court order enjoining him from anti-fraud and other securities law violations. The injunction was entered by default and upheld by the court of appeals.

The Division of Enforcement filed a motion for summary affirmance. Reinhard claimed that others were at fault and claimed that his clients who suffered losses were sophisticated. The ALJ relied solely on the injunctive complaint, the injunctive order, and the court's final judgment.

The Commission denied the Division's motion and remanded the case to the ALJ for a full hearing. In doing so it relied on it's boilerplate recitation that summary affirmance should be rarely granted. It faulted the ALJ for not holding a hearing on public interest factors relating to sanctions.

Based on long standing Commission precedent Reinhard is estopped from challenging the factual allegations in the district court complaint and the fact that he was enjoined from serious securities law violations. The effect of the Commission's reasoning is to require hearings in all cases of disciplinary actions based on injunctions and criminal convictions where those are entered by default. The Commission justified its conclusion by noting that the district court judge did not make extensive fact findings in his final order. Because the Commission's district court complaint and all of its factual allegations may not be rebutted by Reinhard this is a distinction without significance. Hence the reasoning of the opinion would arguably apply equally to all follow-on proceedings based on injunctions or convictions, thus ending the ability of ALJs to enter orders by summary disposition in any case.

Further, the Commission took more than 10 months to rule on the division's motion. There is no excuse for this delay.

If the Commission wants its opinions and adjudicatory processes to be treated with respect by the courts it needs to do much better than this.