The SEC and Consistency

The SEC and Consistency

          Thomas O Gorman, Partner,    Porter, Wright, Morris & Arthur

Consistency is sometimes a virtue and, at other times, the "hobgoblin of small minds" to borrow an old phrase. In SEC v. Pentagon Capital Management PLC, Case No. 08 Civ. 3324 (S.D.N.Y. Filed April 3, 2008), the SEC learned in a ruling issued on St Patrick's Day that it should pay more attention to the virtue. No luck of the Irish for the SEC.

Pentagon Capital is a market timing case brought against a UK-based hedge fund adviser and its principal. The amended complaint alleges that the two defendants orchestrated a scheme to defraud U.S. mutual funds and their investors through late trading and deceptive market timing. Defendants sought to establish that the U.S. mutual funds the SEC claimed to have been deceived in fact permitted market timing. This would undercut the position of the SEC.

To prove their point, the defendants sought to admit in evidence the Orders from a series of settled SEC administrative enforcement actions. The settled proceedings were against Alliance Capital Management, Banc One Investment Advisors, Deutsche Asset Management, Evergreen Investment and several others. The findings in each administrative order contradicted the SEC's position that the U.S. mutual funds were deceived.

Admissibility of the SEC OIPs is governed by Rule 803 of the Federal Rules of Evidence. That Rule provides that certain kinds of evidence are not excluded by the hearsay rule even though the declarant is available as a witness. Subsection (8) applies to research, reports, statements of public officials or agencies, "setting forth . . . factual findings resulting from an investigation made pursuant to authority granted by law."

Here, in each instance, the order resulted from an investigation which the SEC was empowered by statute to conduct. In each instance, the order contains findings regarding the conduct of the respondent.

Read The SEC and Consistency in its entirety on SEC Actions.


Thomas O. Gorman is the chair of the securities litigation practice group and a partner in the Washington, D.C. office of Porter Wright Morris & Arthur. He is also the co-chair of the ABA White Collar Crime securities subcommittee. Previously he served in positions of increasing responsibility on the staff of the Securities and Exchange Commission, the division of enforcement and the office of the general counsel. He is the author of a blog dedicated to securities litigation,

See Mr. Gorman's Martindale-Hubbell® profile here.