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Dodd-Frank significantly added to the weapons available
to the SEC. New provisions extended its authority to bring actions based on
aiding and abetting while lowering the proof requirements to recklessness.
Collateral bars were added and a provision making civil penalties available
against all respondents in administrative proceedings.
While this new authority clearly applies to future
conduct, a critical question is whether it can be applied to acts which
occurred prior to the passage of Dodd-Frank. Stated differently can these new
weapons be applied retroactively?
Earlier this year Commissioner Kathleen Casey discussed
the retroactivity of the Dodd-Frank provisions in enforcement actions. While
the Commissioner outlined the basic principles which stem from the Supreme
Court's decision in Landgraf v. USI Film Products, 511 U.S. 244 (1994)
she did not specifically analyze the various Dodd-Frank provisions where such
an issue might arise. Rather, the Commissioner stressed the key to resolving
these issues is fairness: "But is it necessary for us to decide exactly where
the line of legality lies? Could the Commission instead choose to be guided . .
. by notions of fairness and a respect for the principle of anti-retroactivity?
Could the Commission elect to stand comfortably behind the line of legality in
order to ensure that it does not inadvertently cross it?" SEC Commissioner
Kathleen Casey, Address at PLI's SEC Speaks in 2011 Program,
Perhaps a partial answer to this question came in a
recent Initial Decision by Chief Administrative Law Judge Brenda Murray in In
the Matter of John W. Lawton, Adm. Proc. File No. No. 3-14162 (April 29,
2011). The action was brought under Section 203(f) of the Advisors Act which
permits the Commission to order certain sanctions in the public interest if the
Respondent is found to have been criminally convicted or enjoined under certain
Mr. Lawton, who apparently appeared pro se,
previously managed a multi-million hedge fund through an investment adviser,
Crossroads Capital Management, LLC. As a result of his misconduct over fifty
investors lost somewhere between $2.5 million and $7 million. The Respondent
pleaded guilty to one count of mail fraud and one count of false statements in
a criminal case. U.S. v. Lawton, No. 09-cr-319 (D. Minn.). He also
consented to the entry of a permanent injunction in SEC v. Lawton, No.
09-cv-00368 (D. Minn.). Based on this record a request for summary disposition
The critical question in the case was the application of
Section 925 of Dodd-Frank. That Section amended Advisors Act Section 203(f).
Previously the Section only authorized the imposition of a bar from associating
with an investment adviser. The amendment expands that into a collateral bar.
The Division of Enforcement argued for a collateral bar.
Judge Murray, sua sponte, raised and analyzed the question of
retroactivity, rejecting a portion of the Division's request. Citing Landgraf
the Initial Decision notes that there is a presumption against retroactivity.
That presumption is grounded in elementary notions of fairness. In addition,
provisions which attach new legal consequences to events which previously took
place thereby enhancing the penalty are not retroactive. There is an exception
where the new provision provides for prospective relief.
Here Section 203(f) prior to amendment provided only for
the imposition of a bar from the investment advisory industry. Exchange Act
Section 3(a)(39) however provided a statutory disqualification which
effectively prohibited Respondent from association with a broker, dealer,
municipal securities dealer, and transfer agent the court found. To the extent
these provisions correspond to the new Dodd-Frank Section, there is nothing
new. What is new however is the ability to impose a bar as to municipal
advisors and NRSROs. Since that bar did not exist at the time of the conduct,
Judge Murray concluded that it would be impermissible to apply it here.
In the future there will undoubtedly be other cases which
present difficult questions regarding the application of the Dodd-Frank
provisions.. The section providing that reckless conduct is sufficient for
aiding and abetting could, for example, significantly ease the burned of proof
for the Commission if applied retroactively in some jurisdictions. The new
provision granting the Commission authority to seek a civil money penalty
against all respondents in an administrative proceeding could be result in
enforcement cases which traditionally were brought in district court being
instituted in that forum for similar reasons. Such gamesmanship decries the
principles of fundamental fairness which are suppose to guide retroactivity. It
would also ignore the Commission's traditions as outlined by Commissioner Casey
in her call for fundamental fairness.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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