Wow... The @SECGov under @GaryGensler has had over 25 instances in which the agency staff responsible for bringing & prosecuting enforcement actions had access to documents created by the staff responsible for advising the commission on how to rule on those enforcement actions
This is a huge deal and means that the enforcement staff could access information regarding how the commission might rule which was not available to the respondents to those enforcement actions, meaning that the agency could have had an unfair advantage in those actions.
Let me explain how the SEC works: The SEC creates securities rules, then part of the agency enforces those rules by brining enforcement actions, and another part of the agency actually acts as the tribunal to consider and rule on those enforcement actions.
Put another way: the SEC writes the rules, then enforces the rules through legal proceedings, and acts as judge and jury when it enforces the rules. In order to make this process fair, the SEC is divided into groups and they aren't supposed to share info between each other.
In the case of enforcement actions, the SEC's Division of Enforcement is responsible for investigating and prosecuting enforcement actions, and the SEC's Office of the General Counsel's Adjudication Group is responsible for advising the Commission on how to rule.
In a statement issued by the SEC in June of 2022, the SEC admitted:
"The Commission has determined that, for a period of time, certain databases maintained by the Commission’s Office of the Secretary were not configured to restrict access by Enforcement personnel...
to memoranda drafted by Adjudication staff. As a result, in a number of adjudicatory matters, administrative support personnel from Enforcement, who were responsible for maintaining Enforcement’s case files, accessed Adjudication memoranda...
via the Office of the Secretary’s databases. Those individuals then emailed Adjudication memoranda to other administrative staff who in many cases uploaded the files into Enforcement databases."
The full June 2022 statement is here: sec.gov/news/statement/commission-statement-relating-certain-administrative-adjudications
To paint an analogy to a criminal court, this would be like the district attorney who was prosecuting a criminal case gaining access to the court's internal records, notes, and research (i.e. the judges documents and writings and the law clerks' documents and writings)...
WHILE THE CASE WAS PENDING AND BEFORE THE JUDGE RULED and having an unfair advantage by knowing what the court was thinking about the case before it ruled.
Beyond the fact that it happened in the first place, is the fact that this pattern of abuse carried across multiple cases. As the SEC admitted in a statement from June 2, 2023, this improper access happened in AT LEAST 28 CASES!
sec.gov/news/statement/second-commission-statement-relating-certain-administrative-adjudications
Further, we don't even know if these numbers are accurate, as it was the SEC itself - the agency in which the wrongdoing occurred - that conducted the investigation.
While the SEC hired an outside consultant to assist with its investigation, Berkley Research Group, LLC (BRG), that consultant regularly acts as an expert witness in securities fraud cases and provides services to public companies to help those companies with SEC filings.
In other words, the consultant that the SEC hired regularly works before the SEC!
The SEC's statement from June of 2023 states that the SEC found no evidence that staff responsible for actually prosecuting enforcement actions accessed or relied on the leaked adjudicatory information, but, again, it was the SEC itself that conducted the investigation.
The SEC's statements attempt to paint Gary Gensler in a positive light by stating that he immediately began an investigation we he learned of the issue.
The fact is, this should have never happened in the first place. The appearance of impropriety is just as damaging as impropriety itself.
Further, Gary's corrective action was to have the wolves guard the proverbial hen house by causing the investigation of the SEC's wrongdoing to be conducted by the SEC itself!
The SEC's failures in properly siloing adjuratory information to prevent access by enforcement staff caused the SEC to dismiss 42 pending administrative cases that were involved. reuters.com/world/us/us-sec-dismiss-roughly-40-enforcement-cases-after-internal-data-mishap-2023-06-02/
The SEC was served with a freedom of information request from the New Civil Liberties Alliance (NCLA), a pro bono law firm that specializes in pushing back against administrative overreach. In typical SEC, fashion, the SEC refused to comply with the request.
You can read more about the NCLA's efforts to hold the SEC accountable here: nclalegal.org/2023/06/hopelessly-compromised-sec-dismisses-dozens-of-cases-due-to-widespread-agency-misconduct/
In November of 2022, NCLA filed a lawsuit against the SEC based on the SEC's improper denial of the information request. That lawsuit remains pending and can be found here: link.mediaoutreach.meltwater.com/ls/click?upn=jDs0ztXrdZv1O-2BufaSOC80FW-2F-2Be8hjQcJIaUmkjlFfqufellhNbSL85U8d1tha8drSAtBetxL5JdEDh1mleb1vAPg6NzFpVcIZzNN0NPOmc7lAzPfgUsZr0Ri6w8D5VxTt3r_UliKdVn-2Fym66ieOkKWmTiHW7JW2J3QKthSFHubO5WmQVxYaBz2skzdyAAIdmc3bWMAJ2Sj69R0IX5LpzXSkA-2FsnM0OhAjQ8j5okLc2zlw-2BelisSMjoHf1YEuLqtv-2Bj2mhFZ1SBwC-2BjTRux09Si-2BjQkqso3D8DG9MuHD1aBbvgDIiycXPILtip6EbZF57v71RRH9kxwpUATa-2FgaQjhL8U0KfF4r4s5nFJBdbA9F-2BVCYjX4422dN-2F2-2ByMAQ1N6AUOFfCVF-2FBtzEu6AFpGSGVpqgEAblmd8Lr4snszcHcopgrLEQB2-2FG1MO7bIAjnSOUEZ3k9Ct4ZcCI3ayNkCvVcoQ0nxHPTjCTwcmDUPn7e9W2LmQLBscYv32x7l1XfIhyXz2O87MVUaPFd27O3hWv747sg-3D-3D
If I have not yet made it clear just how serious the SEC's failures in this instance are, here's a quote from Mark Chenoweth, President and General Counsel of NCLA: "SEC’s unprecedented dismissal of dozens of enforcement cases...
is a cynical ploy by the agency to avoid scrutiny of two things. First, SEC seeks to avoid creating precedent in some of these cases that would very likely hold that much of what SEC does in adjudications violates the Constitution. Second, SEC hopes to dodge further...
inquiry into its so-called control deficiency, which was not a fluke but rather the predictable consequence of locating prosecutorial and adjudicative functions in the same body. While dismissing these cases may slow down the reckoning that is coming...
for unconstitutional adjudication at the SEC and across the Administrative State, the reckoning is still coming. NCLA will accelerate our litigation plans to make sure of that."
There is only one solution to the SEC's complete and utter failure in protecting the rights of those prosecuted by the SEC in enforcement actions and to ensure that the defendants are afforded fair hearings:
@GOPMajorityWhip and Congress should immediately open an investigation into the SEC to determine how this miscarriage of justice was allowed to happen and to determine which, if any, senior SEC department heads & Commission members were aware of the wrongdoing.
Upon completion of that investigation, Congress must take action to ensure that the SEC is not allowed to further violate the law and gain an unfair advantage in enforcement actions.
Time & again the SEC has proven that it does not deserve the trust of the public & this is just one more example of the SEC's failure to act in the best interest of the American people.