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SEC Judge Draws Negative Inference When Respondent Invokes Fifth Amendment

An SEC Administrative Law Judge determined to infer adverse conclusions to questions that a respondent refused to answer by invoking his Fifth Amendment privilege against self-incrimination.  The respondent refused to answer every question in the proceeding including background and foundational questions.  He also did not invoke the Fifth Amendment during the SEC’s investigation.  The ALJ explained that an administrative proceeding as well as a district court could draw such adverse inferences in order to prevent a witness from gaining an unfair litigation advantage.

The Fifth Amendment to the U.S. Constitution states that no person “shall be compelled in any criminal case to be a witness against himself” (emphasis added).  A court or an ALJ cannot make you testify if it would compromise your case in a parallel criminal action, but the judge can draw negative conclusions from invoking the Fifth.  In other words, don’t invoke the Fifth Amendment just to be petulant in front of an ALJ.  Consult your counsel to determine whether invoking the Fifth makes litigation sense given your civil and criminal predicament. 

SEC Commissioner Questions Informal Staff Guidance

SEC Commissioner Hester Peirce recently criticized unpublished staff guidance that operates as de facto legal precedent without going through a process that ensures transparency and accountability.  Referring to the securities regulatory framework as a “compliance minefield” where the wrong move can be a “matter of professional life or death,” Ms. Peirce questioned the propriety of informal staff positions about specific products or types of businesses.  She characterized sub rosa staff guidance as secret law that binds firms without legislative authority, effective oversight, or consistency. 

We agree that unpublished staff guidance can result in industry favoritism and (perceived) unfairness.  The next question is how the SEC addresses Ms. Peirce’s very legitimate concerns. 

SEC Stays All ALJ Cases in Tenth Circuit

The SEC has stayed all administrative proceedings assigned to Administrative Law Judges if a decision could be appealed to the Tenth Circuit Court of Appeals (based in Denver) until time has expired to appeal to the Supreme Court.  The SEC’s decision follows a Tenth Circuit decision (Bandimere v. SEC) that SEC ALJs are not appointed consistent with the U.S. Constitution’s Appointments Clause.  The Tenth Circuit’s decision conflicts with other federal courts, which would provide grounds for the SEC to appeal the decision to the Supreme Court.

OUR TAKE: The SEC will only appeal to the Supreme Court if it thinks it will win because a loss would have significant consequences to previously-decided cases, other federal agencies, and the SEC’s operations.   Instead, the SEC may just change the way it appoints ALJs and avoid a further federal imbroglio.

https://www.sec.gov/litigation/opinions/2017/33-10365.pdf