SEC In-House Judge Challenge Leaves Other Cases in Limbo

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By Antoinette Gartrell

An investment adviser who allegedly swindled $3.8 million from elderly investors, a stock promoter who allegedly didn’t disclose his compensation, and a chief financial officer who allegedly inflated revenues have more in common than being sued by the Securities and Exchange Commission.

All three are parties in seven SEC administrative proceedings on hold indefinitely within the Tenth Circuit, which ruled late last year in Bandimere v. SEC that the way the agency appoints its administrative law judges violates the Constitution.

The commission ordered the stay May 22, two days before the full U.S. Court of Appeals for the District of Columbia Circuit was slated to hear debate in a different case challenging the constitutionality of the agency’s in-house courts. A D.C. Circuit panel concluded in August that the administrative forum passed constitutional muster, but a few months later, the Tenth Circuit in Bandimere disagreed.

The circuit split, assuming it survives the D.C. Circuit’s en banc decision, could mean the U.S. Supreme Court will take up the controversy. Meanwhile, the SEC has stayed all pending ALJ enforcement proceedings that could end up before the Denver-based court—a move one securities lawyers says indicates the agency is concerned about the future viability of its administrative forum..

Real Question

The SEC wouldn’t have agreed to stay administrative proceedings subject to the Tenth Circuit’s jurisdiction if it didn’t “legitimately fear” that the Supreme Court will affirm the Bandimere decision, Chicago securities lawyer Alan M. Wolper of Ulmer & Berne LLP said. In his view, SEC ALJ cases should have been stayed across the board. For parties that can’t appeal to the Tenth Circuit, “[i]t would provide little solace to learn, well after the fact, that the SEC had erred and should not have been able to bring the case in the first place,” he told Bloomberg BNA. “By that time, your reputation will be tarnished, you will have spent hundreds of thousands of dollars, and may, in fact, already be put out of business,” he said.

San Francisco securities litigator Jonathan A. Shapiro, Baker Botts LLP, called the stay a “no-brainer” that should have been ordered earlier. “The real question about the ALJ process is why the SEC is so publicly committed to bringing cases in a venue that everyone agrees is so lopsidedly unfair,” he told Bloomberg BNA. “If the cases are strong, the SEC should be able to win them on a level playing field"—i.e., in federal district court.

Stock promoter Alexander Kon’s lawyer Todd Feinstein of Feinstein Law, P.A., Sequim, Wash., said his client is being denied due process. “This could go on for years,” Feinstein told Bloomberg BNA. He said Kon has been unemployable and “reputationally destroyed” since the launch of the investigation. The SEC has a “viable forum in the federal courts and it should give parties the right to the due process they deserve,” he said.

The SEC declined to comment on the stay order.

Here’s a look at the cases now on hold in the six states within the Tenth Circuit’s boundaries: Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah.

1. In re Snisky. The SEC sued Gary Snisky, a Colorado man, saying he fraudulently lured elderly investors to invest in supposedly government-secured bonds while using their money to pay his mortgage. Snisky raised at least $3.8 million from more than 40 investors and misappropriated approximately $2.8 million of investors’ funds to pay his salespeople and make personal mortgage payments.

2. In re Longwei Petroleum Investment Holding Ltd. The SEC sued Longwei and its CFO, Michael Toups, for making fraudulent misrepresentations about the company’s storage capacity. The duo also allegedly misled Longwei warrant holders into exercising their warrants in a bid to inject needed funds into the company.

3. In re Marshall. The SEC alleged that Clayton T. Marshall, CFO of now failed, China-based AgFeed Industries Inc., reported revenues that were overstated by approximately $239 million due to actions by former members of AgFeed’s Chinese management.

4. In reCapitol City Bancshares Inc. The SEC sought to revoke the registration of two companies’ securities for failure to file required periodic reports.

5. In re Kon. The SEC sought to bar stock promoter Alexander Kon from the penny stock industry and impose civil penalties over his alleged failure to disclose that he was paid to tout certain microcap securities.

6. In re Zufelt. Anthony C. Zufelt allegedly acted as an unregistered broker-dealer and sold unregistered securities in connection with two Ponzi schemes. He solicited approximately 46 investors into one or both of the companies, and defrauded them of nearly $2.4 million, the SEC said.

7. In re Prospect Ventures, Inc. The SEC sued to revoke the registration of the securities of several companies for failing to file periodic reports or to heed delinquency letters from the SEC staff requesting compliance with their periodic filing obligations.

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