Washington, D.C. (June 6, 2023) - The U.S.
Securities and Exchange Commission announced on Friday, June 2, 2023 that an
earlier-announced breach (described as a "control
deficiency") between the agency's enforcement and
adjudicatory functions was even more expansive and serious than
previously announced. As a result of the internal breach, the
agency has dismissed 42 pending enforcement cases, and has agreed
to lift industry bans on 48 people whose cases were also involved
in the breach.
By way of background, as mandated by the Administrative Procedure
Act (APA), the Enforcement wing of the SEC must be separate and
apart from its Adjudicatory wing, housed in the Office of General
Counsel. As such, Enforcement Division staff who are investigating
or prosecuting a matter filed, or to be filed, in the SEC's
internal administrative court system should not participate in the
Commission's decision-making of that matter.
For example, an Enforcement Division trial attorney who files an
administrative action against a registered broker-dealer is
precluded from engaging in any private discussions with
Adjudicative staff assigned to the case or, as relevant here, from
reviewing a memo that Adjudication staff drafted to the
Commissioners to summarize legal issues in the case. Any breakdown
in the wall between Enforcement and Adjudication has the potential
to compromise ongoing investigations and administrative actions,
and to taint any orders or remedies entered in cases where such
breaches in protocol occurred.
As the SEC announced on June 2, certain databases maintained by the
SEC's Office of the Secretary in or around 2017 were not
configured to restrict access by Enforcement Division staff to
documents drafted by Adjudication staff. As a result, in a number
of adjudicatory matters, Enforcement staff accessed Adjudication
memoranda via the Office of Secretary's databases. In many
other instances, confidential Adjudication memoranda were uploaded
into Enforcement Division databases; once uploaded, the memoranda
became accessible broadly to Enforcement staff.
The SEC stated in an earlier April 2022 announcement that the 2017
breach affected only two cases, one of which has since been decided
by the U.S. Supreme Court. But the agency further stated on June 2,
2023 that additional investigation revealed that Enforcement staff
accessed the files of 28 other cases, as well as internal memoranda
meant to advise Commissioners about ongoing cases. The improperly
uploaded internal memoranda touched on 61 additional cases.
Due to this serious breakdown between the SEC's Enforcement and
Adjudicative functions, any persons or firms who have had
administrative matters before the SEC in the past six years or so
would be well-advised to investigate whether their cases, and any
bars or orders entered in these cases, are or may be affected by
the breach, and the SEC's remedial actions in response to these
breaches.
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