SEC Suffers Rare “Home Court” Enforcement Setback


SEC Headquarters 3All teams love having home court advantage, and the Securities and Exchange Commission (SEC) is no exception. The SEC’s Enforcement Division has posted an impressive winning percentage in cases heard by the agency’s in-house Administrative Law Judges (ALJ).

The division lost a recent case, however, as ALJ Carol Fox Foelak found that Equity Trust Company, a self-directed individual retirement account custodian, did not cause investor losses. The defeat for the agency occurred in the SEC’s first enforcement case against a passive IRA custodian.

The charges arose from the sales of securities to investors by two unrelated fraudsters who were subsequently convicted on criminal charges. Investors purchased securities from the two promoters and held them in self-directed IRA accounts for which Equity Trust served as custodian.

ALJ Foelak found that the SEC failed to prove that Equity Trust knew, or should have known, that its conduct would contribute to the promoters' violations. In dismissing SEC claims that Equity Trust ignored red flags indicating fraud, the judge concluded that the fact that the custodian knew that the issuer of the securities "was financially pressed and losing money" was not the same as knowing that the promoter was engaged in fraud. She also cited the SEC’s own staff guidance, in which the staff stated that “[s]elf-directed IRA custodians generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.”

In the Matter of Equity Trust Co., Initial Decision Release No. 1030 (June 27, 2016).

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