Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, September 18, 2015

SEC finds no constitutional bar to ALJ’s Timbervest decision, upholds sanctions

By Amy Leisinger, J.D.

The SEC issued a final order upholding penalties against an investment adviser, finding no constitutional issue in connection with the agency’s administrative law judge (ALJ). The Commission, with Commissioner Luis Aguilar not participating, determined that Timbervest, LLC, a registered investment adviser, committed fraud by making material misrepresentations and omissions and that its principals aided, abetted, and caused the violations. Concluding that the Appointments Clause of the U.S. Constitution does not apply to SEC ALJs, who are federal employees as opposed to “officers” and that the dual for-cause removal restrictions on these employees are constitutional, the Commission entered a cease-and-desist order and associational bars be and ordered disgorgement of over $400,000 (In the Matter of Timbervest, LLC, Joel Barth Shapiro, Walter William Anthony Boden, III, Donald David Zell, Jr., and Gordon Jones II, Release No. IA-4197, September 17, 2015).

Background. In September 2013, the SEC instituted administrative proceedings against Timbervest and four of its executives, alleging that the company improperly sold a tract of timberland on behalf of a client and caused the client to pay a brokerage fee without disclosing the fee. The SEC also alleged that Timbervest repurchased the same property a few months later on behalf of a different client pursuant to a side agreement and that this was not disclosed to either client.

In August 2014, an ALJ issued an initial decision finding that Timbervest violated Advisers Act Sections 206(1) and 206(2) and that the individual respondents caused, aided, and abetted the violations. The ALJ ordered the plaintiffs to cease and desist from further violations and ordered disgorgement. Both Timbervest and the Division of Enforcement appealed the initial decision to the full Commission, and, at oral argument (covered in the Securities Regulation Daily Wrap Up for June 8, 2015), counsel for Timbervest and the individual respondents contested the ALJ’s initial decision on both substantive and constitutional grounds.

The respondents also filed a complaint in Georgia federal court (covered in the Securities Regulation Daily Wrap Up for June 15, 2015) for declaratory and injunctive relief, challenging the propriety of the SEC’s use of administrative proceedings and the constitutionality of the appointments and decisions of ALJs.

ALJ decision upheld. Unpersuaded by the testimony of the Timbervest principals and rejecting their claims of prejudicial error, the Commission found that the evidence supported the ALJ’s determination that Timbervest sold the property of one of one client to another client to the detriment of the original client and failed to disclose the conflict of interest in violation of the Advisers Act. The Commission also agreed that the company violated the Act by causing its client to pay undisclosed brokerage commissions and using shell companies to hide the commissions and making a series of misrepresentations relating to them. Timbervest’s principals aided, abetted, and caused the violations through their collective control of the company, the SEC found.

The Commission also rejected the respondents’ challenges to the constitutionality of the Commission’s administrative forum. ALJs are federal “employees” and not “inferior officers” covered by the Appointments Clause, the SEC found. Citing a D.C. Circuit decision, the SEC stated that “the touchstone for determining whether adjudicators are inferior officers is the extent to which they have the power to issue ‘final decisions.’” The Commission’s ALJs conduct hearings, take testimony, and make evidentiary rulings, but do not issue the final Commission decisions, the SEC concluded.

Further, the Commission continued, the respondents’ argument that ALJs are unconstitutional due to their two layers of tenure protection must fail. The Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board turned on whether the officers and their appointments and removals impeded the president’s ability to perform his constitutional duties and made clear that it was not addressing ALJs. The Court noted that there would be no separation-of-powers problem if ALJs were deemed “employees” rather than “inferior officers,” and, as the SEC’s ALJs are not impeding the president’s authority, the dual for-cause removal restrictions on these employees are constitutional.

Finally, the Commission rejected the respondents’ contention that the decision to file this action in an administrative forum as opposed to federal court violated their equal protection rights. The choice of where to bring an action is a discretionary decision allowed by Congress, the SEC explained, and “[t]he mere fact that another case involves the same provisions of the Advisers Act does not demonstrate that [r]espondents are being treated differently from others similarly situated for purposes of equal protection.”

As such, the Commission ordered the respondents to cease and desist from further violations and to disgorge, jointly and severally, $403,500, plus prejudgment interest. The decision also permanently barred the respondents from associating with any investment adviser.

The release is No. IA-4197.

Attorneys: Stephen D. Councill (Rogers and Hardin, LLP), and Nancy R. Grunberg (McKenna Long & Aldridge LLP) for Timbervest, LLC, Joel Barth Shapiro, Walter William Anthony Boden, III, Donald David Zell, Jr., and Gordon Jones II. Andrew J. Ceresney for the SEC.

Companies: Timbervest, LLC

MainStory: TopStory Enforcement FraudManipulation InvestmentAdvisers

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.