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SEC Admits to Unethical Breach

Business, Featured

A man in business suit reviewing paperwork with a magnifying glass. | Image by Getty Images

The Dallas Express has received information from the New Civil Liberties Alliance (NCLA) that the United States Security and Exchange Commission (SEC) has admitted to allowing enforcement staff to access restricted documents related to adjudicatory matters currently being litigated the federal court. 

There are at least two known cases of the breach, including the case of accountant Michelle Cochran, a resident of Coppell, Texas.  

Cochran — represented by the NCLA, a non-profit civil rights organization — has sued the SEC for unconstitutionality over its use of in-house administrative law judges (ALJs). The NCLA argues that ALJs allow the SEC to encompass all three government sectors in one: the ability to create rules and regulations, the ability to enforce laws, and the ability to prosecute.  

In 2016, Cochran was accused of violating federal accounting standards. An ALJ ruled against Cochran in 2017, fined her $22,000, and banned her from working as an accountant for five years. 

In 2018, Lucia vs. SEC was sent before the U.S. Supreme Court. The court ruled that SEC ALJs were not correctly appointed under the Constitution. 

According to the NCLA, the court ruling stated that ALJs are “officers of the United States” under the Appointments Clause of Article II and must be appointed by the president, not hired by the agency. This discovery seemed like a sign of relief as pending cases were to be retired and set to appear before an appropriately appointed ALJ.

However, the NCLA claims a significant discrepancy has yet to be addressed. If the president has the power to appoint ALJs, he should also have the ability to remove them. Otherwise, the law will not be “faithfully executed.” 

These judges have what can be seen as a lifelong tenure in their positions as “civil servants.” The NCLA argues that if the president cannot remove these “officers,” then the agencies that appoint them will continue to abuse their power.  

In December 2021, a U.S. Court of Appeals for the Fifth Circuit reviewed Cochran’s case en banc (a session in which a case is heard before all court judges) and ruled in her favor. The ruling declared that Cochran had the right to challenge the constitutionality of her ALJ’s removal protections in federal court before undergoing administrative adjudication.  

The SEC released a public statement admitting that “administrative support personnel from Enforcement, who was responsible for maintaining Enforcement’s case files, accessed [restricted] adjudication memoranda via the Office of the Secretary’s databases.”

Peggy Little, Senior Litigation Counsel for NCLA, had this to say, “This week’s revelation shows, as nothing else can, that SEC allowed its enforcement staff to read the adjudicatory staff’s work product on cases where respondents were fighting for their professional lives and reputations. This problem will never be solved until the adjudicative function is returned exclusively to Article III courts.”

The SEC claims that the decisions made in the cases involving the scandal were not influenced by the information seen.

The NCLA rebuffed the SEC’s comments regarding the breach and Cochran’s case, stating that there is no way to verify that the breach did not affect Cochran’s case. The organization also said that the violation is precisely why the Constitution forbids performing prosecutorial and adjudicatory functions in a single agency.     

Neither Cochran nor her representing law firm, NCLA, were made aware of the breach until the information was publicly released. Kara Rollins, a litigation counselor for NCLA, stated, “This week’s revelation shows, as nothing else can, that SEC allowed its enforcement staff to read the adjudicatory staff’s work product on cases where respondents were fighting for their professional lives and reputations. This problem will never be solved until the adjudicative function is returned exclusively to Article III courts.”

The SEC, however, had known about the incident long enough to hire outside investigators, hold dozens of interviews, and collect necessary documents. Still, the specifics of who knows what and when it happened remained undisclosed.  

Additionally, the outside investigation firm that the SEC hired regularly does millions of dollars in business with the agency, resulting in what the NCLA describes as a conflict of interest.  

The SEC self-describes the error as a “control deficiency.” 

statement released by the agency reads: 

“When it was discovered that enforcement staff had access to Adjudication memoranda, the Chair immediately directed the implementation of remedial measures, including enhanced access controls, to ensure that enforcement staff would no longer be able to access these memoranda in the Office of the Secretary databases or through enforcement databases. The Chair also initiated an internal review to assess the scope and impact of the control deficiency. That review is ongoing and is being conducted by experienced investigative staff from the Division of Examinations under the supervision of the Commission’s General Counsel.”  

While this may be true, the NCLA points out that there is no accurate way to monitor the agency’s inner workings to ensure a similar issue will not happen again. 

The alliance argues that the ability to combine enforcement and adjudication is too great a power for any one agency to hold. According to the NCLA, until the adjudicative function is returned exclusively to Article III courts, the SEC has the ability to abuse this power.     

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