Controversial Adviser Barred, Fined by SEC; Appointments Clause Appeals Continues


SEC SealIn the opening line of their brief before an administrative law judge, the SEC's Enforcement Division stated that prominent investment adviser Dawn Bennett "is wholly unfit for any role in the securities industry." Administrative Law Judge James E. Grimes agreed, as he concluded that “Bennett is not fit to remain in the industry in any capacity.” ALJ Grimes permanently barred her from the industry and ordered disgorgement and imposed combined civil penalties against Bennett and her firm, Bennett Group Financial Services, LLC, in excess of $4 million. Bennett did not participate in the hearing, and unsuccessfully sued in federal district court to enjoin the proceedings on constitutional grounds under the Appointments Clause.

The case involved SEC allegations that Bennett and Bennett Group grossly overstated the amount of assets they "managed," by at least $1.5 billion, in order to inflate their profile and prestige. The ALJ found that Bennett and her firm made false and fraudulent claims to a national adviser ranking service knowing that the ranking service would publish the misstatements, and made false statements on a Washington, D.C.-area radio program that Bennett hosted. The purpose of these overstatements, according to the SEC, was to create the impression that Bennett and Bennett Group were larger and more successful players in the industry than they actually were. Bennett and the firm also made additional misstatements in an effort to obstruct the SEC investigation and to cover up their prior fraud.

On appeal to the SEC, the Commission reached the same conclusions as ALJ Grimes. Under SEC practice rules, when acting as an appellate tribunal, the Commission has more expansive authority than do most reviewing courts. Once the SEC granted Bennett’s petition for review, the initial ALJ decision ceased to have any force or effect. The SEC has plenary authority to review the case, and is not bound by the ALJ’s factual findings or by the sanctions entered below.

Initially, the Commission held that Bennett and her firm waived any arguments directed to the merits of the merits of the complaint. The SEC stated that it could “raise and determine any matters we deem material, whether or not advanced by the parties or decided by the ALJ,” but added that it is “not obliged to independently sift through the record to identify and develop arguments that a party fails to advance with clarity” and that the agency does not “have the burden, sua sponte, of anticipating an argument that a party did not make.” 

In light of the respondent’s default, the SEC deemed that Bennett and the firm had admitted the allegations in the Order Instituting Proceedings. In addition, the SEC rejected the respondents’ “conclusory assertion that they continue to deny” the allegations, and accepted the Enforcement Division’s proposed findings of fact based on the testimony of several witnesses and the 33 volumes of exhibits introduced at the hearing as evidentiary support for the sanctions sought. According to the SEC, the respondents “did not oppose or contest the Division’s proposed findings of fact regarding their underlying misconduct, which were supported by detailed and specific citations to the record.”

The SEC concluded that:

[B]arring Bennett is in the public interest. Our determination is premised on the egregious and recurrent nature of the fraudulent misconduct (which spanned more than a year and involved repeated, knowing misstatements), the high degree of scienter displayed, the absence of meaningful assurances against future misconduct, and the evident need to protect investors from respondents. Because the securities industry presents continual opportunities for dishonesty and abuse, and depends heavily on the integrity of its participants and on investors’ confidence, we have treated fraud as especially serious and subject to the severest of sanctions under the securities laws [internal citations omitted].

The Commission also agreed with the financial sanctions imposed by the ALJ, because the violations involved fraud or deceit and resulted in a significant risk of substantial loss to others or a substantial pecuniary gain to the violator.

On the Appointments Clause issue, the SEC rejected Bennett’s argument that she based on the Tenth Circuit’s decision in Bandimere v. SEC, in which the court found that the selection process for ALJs was unconstitutional. According to the SEC in its petition for en banc review of the Bandimere ruling, “nothing in the Commission’s use of ALJs warrants setting aside the judgment of Congress, the understanding of the Commission, and many decades of administrative practice.” ALJs are not officers subject to the Appointments Clause, argued the SEC, because they serve only “as an aide to the final decisionmaker.” All adjudicative authority resides in the politically-accountable agency heads, claimed the SEC, and no separate authority is vested in the ALJ.

Bennett’s appeal of the district court dismissal of her claim is still pending before the Fourth Circuit.