THE SECURITIES AND EXCHANGE COMMISSION’S HOME FIELD ADVANTAGE

Securities and Exchange Commission The expansion of the rule making powers of our federal bureaucratic agencies has led to the increasing use of in-house judges to decide regulatory enforcement actions. Currently more than two dozen federal agencies regularly use in-house administrative law judges. One of those agencies is the Securities and Exchange Commission. The SEC has been in the news lately as it attempts to defend its own increased use of in-house judges as a result of the Dodd-Frank financial reform law. For many years critics of the SEC’s administrative process have claimed that the process is suspect because the SEC gets to hand pick the judge who will decide the case. Not surprisingly, getting to pick the judge gives you a significant home field advantage. According to the Wall Street Journal, between October 2010 and March 2015 the SEC won 90% of the cases which were decided by its in-house judges. This 90% success rate is much better than 69% success rate the SEC achieved over the same period when the enforcement action was brought in a federal court. The SEC’s home field advantage continues on appeal where the initial review is before the SEC’s own Commissioners rather than a federal appeals court. According to the Wall Street Journal, on the Commissioners found in favor of the SEC 95% of the time. The SEC’s justification for using internal administrative law judges is that the process is faster and more efficient than cases in federal court. Obviously, one of the reasons that the process is faster is because the due process rights of the accused are limited. Although the...

MISSISSIPPI CROWDFUNDING RULES (INTERNET BASED INVESTING)

Yesterday we had the opportunity to attend the Invest Mississippi Crowdfunding Seminar put on by the Mississippi Secretary of State which went over the new crowdfunding rules set to become effective May 26, 2015. This is important to Mississippian entrepreneurs for a number of reasons. First, the crowd funding rules create new opportunities to cost effectively access equity funding through the internet. Second, while there are still a number of requirements and limitations, this new process is less restrictive and should be a less expensive alternative to federal registration pursuant to Rule 504 of the SEC regulation D, 17 CFR Section 230.504. Third, these new rules are expected to create new investment opportunities for Mississippians looking to invest their money locally. Although the new rules are specifically intended to simplify the procedure for raising smaller amounts, what is small to some is still a lot of money to others. Under the new rules, during any 12-month period a Mississippi business may raise up to $1 million from both residents and non-residents of Mississippi, or up to $2 million by soliciting investments from Mississippi residents only. While new procedure is relatively straightforward, there are a many things that may impact the effectiveness of crowdfunding in your specific situation. For example, there is a requirement that at least 50% of the offering amount must be raised by the deadline stated in the Offering form or the money raised is refunded. Another is the requirement that at least 80% of the funds raised must be used in the State of Mississippi. And perhaps the most significant requirement or limitation deals with advertising...

EPA CLAIMS RIGHT TO UNILATERALLY GARNISH WAGES

According to an article from the Washington Times, the Environmental Protection Agency has given itself the power to unilaterally garnish wages of persons accused of violating EPA rules. this was accomplished by putting a notice in the Federal Register stating that the EPA can garnish non-Federal wages to collect delinquent non-tax debts owed the United States without first obtaining a court order. This rule change was fast tracked and not subject to review because the EPA classified the changes as not as “significant regulatory action.” The EPA does say that it will give the debtor prior notice and give the debtor the opportunity to “review, contest or enter into a repayment agreement.” The process being used by the EPA is an “Administrative Wage Garnishment” under the Administrative Procedure Act. There appear to be a number of legitimate criticisms of this process. One criticism of this new rule is that it shifts the burden of proof on the alleged debtor to prove by a preponderance of the evidence of the correctness of the debtor’s position. Another is that the rule lets the EPA decide if the debtor will actually get a chance to appear in person or have the case decided on a paper record. A third criticism is that the EPA gets to chose the site of the hearing. Perhaps the biggest cause for concern is that if the debtor gets a hearing at all it will be before a hearing officer hand picked and paid for by the EPA. As with most administrative hearings, the ability of one side to select and pay for the hearing officer unquestionably...

CHANGING THE RULES

We came across this interesting Washington Post article yesterday that illustrates some of the problems with our bloated federal bureaucracy. The story starts with Congress lifting the 10 year statute of limitation applicable to the Government’s right to pursue old debts. As a result, the US Treasury Department and other agencies are now able to go back forever to pursue old debts. State of the Union While we are troubled at our Government retroactively changing the rules, in our view that is just the tip of the iceberg. Not only did this change allow the government to go back and attempt to collect old debts, but it expanded the number of potential people responsible for that debt. In one collection action discussed in the article, 58 year old Mary Grice had her tax refund seized without notice. The Social Security Administration claimed that back in 1977 it overpaid someone in the Grice Family. In 1977, Mary Grice was 4 years old and her father had died leaving her mother with five children. Until the children were 18, the government paid them Social Security survivor benefits. Although the Social Security Administration today can’t actually prove who received the over-payment, it still seized Mrs. Grice’s refund. The Social Security Administration has taken the position that the money can be recovered from anyone in the family who “indirectly” received any benefit or assistance from public dollars. Another concern with this process is the fact that the Social Security Administration is using a private contractor to handle the collection efforts. This is likely to create perverse enforcement incentives. Also not surprising is the...

MISSISSIPPI SECRETARY OF STATE IMPROPERLY CALCULATES SECURITIES LAW PENALTIES

In a recent case we handled before the Mississippi Supreme Court, the Court significantly limited the power of the Secretary of State to impose administrative penalties for securities law violations. The amount a person or company may be fined for securities violations is covered by state statute. Under the applicable statute (currently Miss. Code. Ann. § 79-11-509) , the Secretary of State may impose “an administrative penalty up to a maximum of Twenty-five Thousand Dollars ($25,000.00) for each offense and each violation shall be considered as a separate offense in a single proceeding or a series of related proceedings.” Historically, the Mississippi Secretary of State has multiplied the number of violations by the number of investors in order to increase the total fine. Calculating fines this way has given the Secretary of State enormous leverage when it comes to forcing alleged violators to settle rather than contest the allegations. For example, in the case we appealed the administrative hearing officer recommended a fine of $1,585,000. It goes without saying that for an individual corporate officer or small company, the potential for such a large and devastating fine makes it harder not to accept a lesser sanction even when there was no wrongdoing. On behalf of our client, on appeal we argued that the Secretary of State’s method of calculating the penalties was illegal, and that the penalty itself was imposed in an arbitrary and capricious manner. In the decision recently handed down by the Mississippi Supreme Court, the Court stated that “we do not find a basis in the law for the Secretary of State’s method of calculating the...