Wednesday, April 05, 2017

SEC upholds ALJ’s Bennett decision, declines to apply Bandimere

By Amanda Maine, J.D.

The SEC imposed disgorgement, civil penalties, and a cease-and-desist order on Bennett Group Financial Services, LLC and its founder, majority owner, and CEO Dawn Bennett for violating the antifraud provisions of the securities laws. The administrative law judge had entered a default order against the respondents, who had declined to participate in the administrative proceeding to preserve their constitutional argument that the ALJ was unconstitutionally appointed under the Appointments Clause. The Commission rejected the respondents’ appeal based on the recent Tenth Circuit case Bandimere v. SEC that SEC ALJs are unconstitutionally appointed inferior officers (In the Matter of Bennett Group Financial Services, LLC, Release No. 33-10331, March 30, 2017).

Allegations. The SEC instituted administrative proceedings against the respondents in September 2015, alleging that they made material misstatements and omissions about investment returns, as well as additional misstatements made to obstruct the investigation and cover up their prior fraud. In December 2015, the respondents stated that they would decline to participate in the proceeding, and when they did not appear at the hearing, the ALJ found them in default and imposed the cease and desist-orders, disgorgement, and penalties.

Commission decision. The Commission, consisting of Acting Chairman Michael Piwowar and Commissioner Kara Stein, first noted that the respondents, having been found in default, had waived any arguments on the merits, including arguments directed to the merits of the proceedings.

Next, giving effect to the respondents’ default, the Commission deemed as admitted the allegations contained in the Order Instituting Administrative Proceedings. The Commission’s order cited testimony and exhibits produced by the Division of Enforcement at the hearing, which were not contested by the respondents.

The Commission also determined that the respondents’ misconduct warrants significant sanctions. Observing that Bennett’s fraudulent conduct was “egregious and recurrent,” that it displayed a high degree of scienter, that she had not given reasonable assurances against future misconduct, and the need to protect investors, the Commission imposed industry, penny stock, and associational bars on Bennett.

A cease and desist order, disgorgement, and civil penalties for both respondents are also warranted, according to the Commission. A cease and desist order is appropriate for essentially the same reasons the bars were imposed. The Commission also ordered the respondents to disgorge the amount of the commissions they received when they were circulating false advertisements—$556,000—plus prejudgment interest.

In addition, the Commission found that third-tier penalties were appropriate because the violations involved fraud or deceit resulting in a significant risk of substantial loss to others or a substantial pecuniary gain to the violator. The Commission imposed a $600,000 penalty on Bennett and a $2.9 million penalty on Bennett Group.

Appointments Clause argument rejected. The respondents argued that the ALJ presiding over the proceeding was an inferior officer unconstitutionally appointed under the Appointments Clause. The SEC acknowledged that the Tenth Circuit’s Bandimere decision held that SEC ALJs are inferior officers, but respectfully disagreed with that reading, as detailed in its petition for a rehearing en banc.

Bennett has previously been unsuccessful in the federal courts in her challenge to the constitutionality of the SEC’s ALJ regime, with the Fourth Circuit in December 2016 affirming a lower court decision that the federal district courts lack subject matter jurisdiction to hear challenges to the constitutional status of SEC ALJs.

The release is No. 33-10331.

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