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.

CPAs' Summary Affirmance Motion Denied

Kevin Hall, CPA and Rosemary Meyer, CPA, Exchange Act Rel. 57855 (May 23, 2008)

Summary

On January 15, 2008 an ALJ dismissed proceedings against these two CPAs (decision here).  The Division of Enforcement appealed that decision.  Hall and Meyer moved for summary affirmance.  The Commission denied the motions.

The Commission will summarily affirm an ALJ's decision only when "no issue raised in the proceedings warrants further consideration."  Here, the Division of Enforcement claims in its appeal that the ALJ misapplied or ignored important GAAS concepts and long standing Commission precedent.  The Commission rarely grants summary affirmance motions as "generally we have an interest in articulating our views . . . ."  Summary affirmance is appropriate only where "it is clear that 'submission of briefs by the parties will not benefit us in reaching a decision. (footnote omitted)'"

Comment

A case involving complex issues of the application of GAAS and auditor judgment calls is clearly not appropriate for summary disposition.  I have criticized the Commission for not granting summary affirmance in cases where ALJ's have sanctioned persons convicted or enjoined for securities fraud.  Perhaps someday the Commission will see fit to persuasively articulate why summary affirmance is not appropriate in those cases.  Using the standard set out in this case, summary affirmance would seem appropriate under those circumstances.

Salvatore F. Sodano, Exchange Act Rel. 5691, December 13, 2007

Denial of motion for summary affirmance.

Summary

The ALJ dismissed the proceedings and the Division of Enforcement appealed.  The respondent filed a motion for summary affirmance.  In this order the Commission denies that motion.

Sodano was the Chairman and CEO of the AMEX.  The AMEX settled proceedings that charged it with violation of various option trading rules.  The ALJ dismissed the proceedings against Soldano after ruling that Section 19(h)(4) of the Exchange Act, the provision under which the case was brought, only authorizes proceedings against persons who are currently officers or directors of self regulatory organizations.  When the proceedings were brought, Sodano had previously resigned his positions as AMEX chairman and CEO.  

Although Rule 411(e)(2) permits the Commission to summarily affirm an ALJ's initial decision, the Commission has previously stated that it will grant such motions sparingly. Here, the Division of Enforcement argued that there is no Commission precedent that supports the ALJ's interpretation.  Also, it pointed out that the matter raises important policy issues as the ALJ's interpretation would permit someone to resign even after proceedings had been brought in order to avoid sanctions.

Because the appeal raises important policy considerations, the Commission denied the motion.

Comment

The motion was filed at the end of August 2007.  It took the Commission 3 1/2 months to deny this motion in a routine and rather perfunctory 2 1/2 page order.

America's Sports Voice, Inc., Exchange Act Rel. 55511 (March 22, 2007)

Issuer reporting violations

Time between appeal and decision - 7 months, 6 days.
Time between last brief and decision - 4 months, 30 days.
Pages - 10

Comment

This is a routine matter revoking the registration of a company that had repeatedly failed to comply with the periodic reporting requirements since 2001. The Company had not filed any annual or quarterly reports since June 2001. The Commission affirmed the ALJ's initial decision revoking the registration of the company.

Remarkably, the Commission denied the Division of Enforcement motion for summary affirmance without explanation, merely citing Richard Kern, Exchange Act Release 51115 (February 1, 2005)(observing that "summary affirmance is rare, given that generally we have an interest in articulating our views on important matters of public interest.").

The Commission failed to articulate what in this opinion involved any "views on important matters of public interest" that justified denial of the motion. This was not the first case of its kind and would seem particularly appropriate for summary disposition.

Key Points

• No scienter is required to establish a violation of the reporting provisions of Exchange Act Section 13(a).
• In determining sanctions against an issuer the Commission considers: the seriousness of the violations, whether the violations are isolated or recurring; the degree of culpability; the issuers efforts to cure the violations; and the credibility of any assurances, if any, concerning future compliance.
• Compliance with reporting requirements is mandatory and may not be subject to conditions from the registrant.
• Harm to existing investors from a revocation must be weighed against harm to potential future investors and both existing and potential investors are harmed by continuing lack of current and reliable financial information about the company.

Summary

There isn't much to say here. The company had not made any periodic filings since June 2001. The Commission suspended trading in the stock for 10 days in June 2006.

Revocation was appropriate because the company's violations were "numerous and extended over a lengthy period."

Particularly important is the fact that although current management took control of the company before June 2004, the company is 29 months delinquent in filing a Form 10-KSB for that year. The company has also made no filings despite the June 2006 trading suspension and the later institution of this proceeding.