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  • Writer's pictureNicolas Morgan

Spotlight: Due Process and the SEC: Congressional Testimony

May 29th, 2024

 

Dear ICAN Partners,


I recently returned from Washington, D.C., where I was invited to provide expert testimony before a Congressional Committee looking at SEC enforcement. Refreshingly, the hearing revealed that people from both sides of the aisle and across the country are aligned on some common goals when it comes to our capital markets- from keeping investors safe to ensuring transparency and protecting due process. Digging into how the SEC is executing, and should be executing, those goals provided for a robust discussion.


From the perspective of Investor Choice Advocates Network (ICAN), more due process doesn't have to translate into less deterrence, but less due process surely deters small investors and entrepreneurs from accessing capital markets. The SEC's current disregard for due process is ruining the lives of everyday people who haven’t harmed anyone, and it’s scaring away untold numbers of other innovators and small entrepreneurs who can’t risk incurring the unpredictable ire of the regulatory behemoth. 


While large corporations have the resources to defend themselves, far too many small business owners and investors find themselves in the SEC’s crosshairs without the means of recourse. They become easy targets for the SEC to push its agenda in precedent-setting matters where they expect to get an easy settlement. With your help, ICAN is now stepping in to protect and advocate for these small investors and entrepreneurs and push back against a regulatory body that has for far too long relied on predatory practices instead of due process. 


I wanted to share highlights of the hearing with you because I think it represents a critical wave of momentum building against the SEC’s overzealous actions. I left the hearing more confident than ever that the tide is turning, and ICAN is at the vanguard of this shift, corralling the agency’s unwieldy powers back within their rightful boundaries and constructing a legal bulwark to restrain SEC overreach that is all too often ensnaring the everyday Americans who help drive our economy. 


If you would like to support our work, please consider sharing this message or reaching out to discuss a donation or partnership. With the generous support of our network, we can represent more of these critical cases. 



With thanks, 

Nick Morgan

Founder and President of ICAN


 




Highlights from the U.S. House Financial Services Committee, Capital Markets Subcommittee hearing, “SEC Enforcement: Balancing Deterrence with Due Process”


In early May, ICAN was invited to provide expert testimony on Capitol Hill before the U.S. House Financial Service Committee. In his opening remarks, ICAN Founder and President Nick Morgan provided a unique perspective of the SEC's impact on everyday people through the stories of two ICAN clients, Eric and Joseph


As Nick shared with the Committee:


“The vast majority of people facing the SEC Enforcement Division are ordinary people and those are the people who need proper representation. In the case of our clients that I talked about today, they’re not accused of fraud, they’re not accused of harming investors, they’re caught up in the SEC machinery for a technical violation.” 


You can watch the exchange here, but it was clear that ICAN’s mission resonated with the Committee, which seemed concerned about what Rep. Bryan Steil called the SEC's “overwhelming power” over everyday individuals, with legislation effectively being made through SEC settlements. 


As Nick pointed out in answering some of Rep. Steil’s questions, defendants in an SEC investigation can spend hundreds of thousands of dollars on legal representation before they even step foot in a courtroom. If it weren’t for ICAN and our partners helping people like Eric and Joseph, the SEC would steamroll them into a settlement and rack up more precedent-setting “wins” at the expense of someone’s livelihood. 


The hearing covered a wide range of ways the SEC’s unrestrained crusade hurts many facets of our capital markets, and Nick was able to speak from firsthand experience on each of the key issues. A few highlights:


SEC’s “Gag” Rule Violates First Amendment Rights and Transparency Goals


Committee Chair Ann Wagner brought up ICAN’s amicus briefs in SEC v Jarkesy and Romeril v SEC. Regarding Romeril, she asked: “In Romeril, you filed another brief with Elon Musk and Mark Cuban, this time raising First Amendment and due process concerns with the SEC's so-called gag rule. Would you explain why the gag rule is problematic, and should the SEC get rid of the gag rule?”


First Amendment rights violations are central to that case, but as Nick explained, ICAN’s brief focused on the lack of transparency that the “gag rule” creates for investors. If the company has information contrary to what the SEC has claimed, investors should be informed. The “gag rule” practice contradicts the SEC’s mission of transparency for investors. 


You can watch this exchange here.


Unpredictability Harms Businesses, Markets, and Investors


The SEC’s practices can be unpredictable from one administration to the next, but also when the agency engages in “forum shopping” to try and obtain a different decision on what would otherwise be considered settled law (like with our clients in SEC v Barry), and in unforeseen regulation through litigation. 


When businesses don’t know what to expect, the uncertainty stifles innovation. Market participants hear horror stories about other entrepreneurs who have been destroyed by the SEC machine and decline to take on risk. When that happens, we all lose out, and our economy becomes less competitive globally. 


“Not only is it unfair, it harms investors and professionals, they have to live with decades of uncertainty just waiting for the SEC to bring another case in another jurisdiction…”

- Nick on forum shopping and the impacts of the SEC not respecting settled law.


You can hear the discussion between Nick and committee members about all three of these unpredictable SEC behaviors:


  • Rep. Frank Lucas on changes in SEC behavior between administrations here

  • Forum shopping with Rep. Steil here

  • Unforeseen regulation with Rep. Nunn here. 



Instilling Confidence and Trust in SEC Practices Benefits the Market


A lack of trust in public institutions harms the markets and erodes America’s competitive advantage in the global economy. The SEC's disregard for due process is at the center of this issue. 


We were pleased to discuss this with Rep. Huizenga, who asked about the recent sanctions against the SEC for its egregious behavior in SEC v Debt Box, and Rep. Juan Vargas, who discussed how sometimes the system gets it wrong. When the SEC gets it wrong, there are no public defenders like in a criminal case, nor is there a guarantee of due process. That’s where ICAN comes in. 


With real people's livelihoods, reputations, and more at stake, it’s critical that ICAN is able to intervene. In the next section, we elaborate on one of the clients that Nick discussed with the committee, Eric Cannon. We’re sure he never imagined his job as a sales representative could lead to an almost decade-long nightmare with the SEC. 


Securities Professionals Beware: Follow-On Proceedings




As Nick explained in his Congressional testimony, one of ICAN’s client’s predicaments demonstrates very well the SEC’s disregard for due process in the context of so-called follow-on administrative proceedings.


Did you know that following the conclusion of federal court litigation, the SEC may prosecute you a second time for the same conduct in a follow-on administrative proceeding seeking to bar you from your chosen profession? 


Worse, the SEC may do this even if you were never accused of fraud or harming investors. Or if you were simply an employee of a company where the SEC alleged technical violations. 


You may remember reading about our clients in SEC v Barry et al in an email earlier this year. Eric Cannon, an employee of PacWest, is one of the defendants in that case. In 2016, the SEC sued PacWest, its founder, and other personnel, including our clients, alleging the life settlement arrangements they sold should have been registered as a securities offering and that Brenda, Eric, and Caleb should have been registered as securities brokers. This is all even though no statutes or regulations existed to classify whether the life settlement arrangements were securities, and some courts had previously ruled (including the prominent federal appellate court for the District of Columbia, SEC v Life Partners in 1996) that life settlement arrangements were not securities.


Eric and his co-defendants continue to battle the SEC in federal court, with ICAN’s support, with an appeal now pending in the Ninth Circuit Court of Appeals. On top of that, Eric is now dealing with a follow-on proceeding in which the SEC is attempting to directly destroy his livelihood. 


In this episode of SEC Roundup, Eric describes his difficult experience. ICAN Advisory Board member Keri Axel, a former SEC enforcement attorney and Assistant United States attorney, also joins us. Keri describes the problematic nature of these follow-on administrative proceedings at a time when the constitutionality of SEC administrative proceedings more generally is currently at issue before the United States Supreme Court. 


Eric’s ordeal fighting the SEC on two fronts to preserve his ability to work in the financial services industry, as he has done for over 20 years, has severely impacted his life and ability to make a living. The extreme duration of these legal battles and the associated costs underscore the lack of transparent and equitable processes within the SEC’s absurd administrative framework. But, thanks to ICAN and our supporters, he has the ability to continue to fight to maintain his livelihood.




Wrapping Up and How You Can Help


Our clients are ordinary people who have found themselves in extraordinary circumstances, facing a regulator with unlimited resources and time. 


The more resources available to ICAN, the more cases the organization can take on. The greater the number of cases, the greater the legal bulwark we can build to corral the unwieldy powers of the SEC back within rightful boundaries.


If you’d like to donate to our legal fund to support this case and future cases, please click here or reply to this email.


Sharing this newsletter post with your networks is another great way to support our mission.











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