Friday, June 05, 2015

Inside Trader Failed to Show Selective Enforcement in SEC's Choice of Forum

By Rodney F. Tonkovic, J.D.

A request by Charles L. Hill, Jr., who has been charged with insider trading, for a subpoena to be issued against the SEC has been denied. Broadly, Hill sought information about the Commission's forum selection process and, specifically, how the forum for his case was chosen. The administrative law judge partially denied Hill's request, finding that Hill failed to show selective enforcement in the Commission's pursuing its case against him administratively rather than in district court (In the Matter of Charles L. Hill, Jr., Release No. AP-2757, June 2, 2015).

Background. Hill, a real estate developer, was a friend of a friend of the chief operating officer of Radiant Systems, Inc. According to the Commission, Hill purchased over 100,000 Radiant shares between June 1 and July 8, 2011. Radiant announced a tender offer on July 11. On the next day, when Hill sold his shares, Radiant's stock price increased by more than 30 percent, earning Hill a profit of $744,000.

Constitutional objections. The Office of the General Counsel objected to Hill's subpoena request. In response, Hill stated that he sought evidence in relation to his due process and equal protection defenses. Hill's due process claim, he said, is based on the lack of procedural safeguards in an administrative proceeding compared to those available in federal court. Hill's equal protection argument is that he is, to his knowledge, the only "unregulated person" accused of violating Section 14(e) whose case has been pursued administratively instead of in a district court. Hill asserts that the decision to proceed against him is arbitrary because there is no "meaningful guidance" for the Commission's forum selection.

The administrative law judge rejected Hill's due process argument, stating that procedural differences between cases adjudicated in federal court and those adjudicated administratively are unrelated to the information sought by Hill. These differences, the judge said, are the result of the various statutes and regulations governing those proceedings, and those differences "will exist no matter what forum is selected or who is involved in the decision to select the forum." The information sought by Hill would not help his due process argument, the judge concluded.

Regarding Hill's equal protection argument, the judge said that it appeared that Hill was attempting to raise a "class of one" claim. In other words, Hill claimed that the SEC acted arbitrarily or irrationally in regulating him in comparison to other individuals. In order to bring this type of claim, the judge explained, Hill needed to show that he was treated differently from individuals similarly situated to him, and identical in all relevant respects, with no rational basis for doing so. The judge found that Hill failed to make this threshold showing, noting that Hill neither pointed to any Section 14(e) case brought in district court since the Commission was given the authority to pursue such cases in 2010, or explained how he was prima facie identical to the defendants in those cases

According to the judge, the Commission "enjoys a presumption of regularity" in its decision to bring an action, and Hill failed to carry the burden of showing clear evidence that the Commission acted impermissibly. Hill, the judge said, failed to show that the Commission pursued similarly situated individuals in district court rather than administratively. Hill's subpoena request was accordingly partially denied

The Release is No. AP-2757.

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