SEC Wraps Up Case Against Adviser Challenging In-House Judges

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By Antoinette Gartrell

Former investment adviser Dawn Bennett must pay nearly $4 million for inflating assets and exaggerating investment returns in radio advertisements for her firm, the Securities and Exchange Commission said ( In re Bennett Grp. Fin. Serv., LLC , S.E.C., Admin. Proc. File No. 3-16801, 3/30/17 ).

The commission’s March 30 opinion clears the way for Bennett to move forward with her federal court claims that the agency’s in-house forum is unconstitutional.

The federal appeals courts are divided on the constitutional question. The U.S. Court of Appeals for the Tenth Circuit concluded in a case against Colorado businessman David Bandimere that the way the agency’s administrative law judges are hired violates the Appointments Clause. A D.C. Circuit panel, in a case against investment adviser Raymond J. Lucia, disagreed. However, the full D.C. Circuit has agreed to reconsider the issue.

Bennett’s lawyer, Greg Morvillo of Morvillo LLP, New York, told Bloomberg BNA that his client can finally mount the constitutional challenge that she has been planning. “She looks forward to her opportunity to litigate this issue in an truly objective forum, the federal court of appeals, where she knows she will finally be vindicated,” he said. Morvillo also represented former hedge fund executive Anthony Chaisson in the landmark Second Circuit case United States v. Newman, which overturned his insider trading conviction.

Unconstitutional ALJs

In September 2015, the SEC sued Bennett in its in-house forum for allegedly overstating her firm’s assets under management. She boycotted her hearing and the ALJ found her in default, barring Bennett from the industry and ordering her to pay disgorgement and civil penalties. She appealed the initial decision and also fired back with a federal court lawsuit challenging the hiring of ALJs. The district court denied Bennett’s bid to halt the administrative case pending resolution of the constitutional question and she appealed to the U.S. Court of Appeals for the Fourth Circuit.

In December, the Fourth Circuit, joining the Second, Seventh, Eleventh and D.C. Circuits, said that Bennett couldn’t bring her constitutional challenge until the administrative proceedings against her had ended.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editors responsible for this story: Phyllis Diamond at pdiamond@bna.com; Seth Stern at sstern@bna.com

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