SEC's fix to bureaucratic blunders releases advisors from years of regulatory limbo

The SEC's recent disclosure that it mishandled internal documents is bringing some long-sought regulatory relief to one of the key players in the biggest insider trading scandal of the 1980s.

But it's everyday advisors who have been tussling with the Wall Street regulator's in-house judges for years who are likely to benefit most. 

The Securities and Exchange Commission, which oversees financial markets and professionals, announced Friday that it was dismissing 42 pending enforcement cases and taking other regulatory steps in response to the mishandling of internal memoranda by its staff. Among the beneficiaries of the SEC's internal blundering is Dennis B. Levine, a disgraced trader at the now-defunct Drexel Burnham Lambert whose conviction in 1986 on insider trading eventually helped build cases on similar charges against the prominent arbitrageur Ivan Boesky and "junk bond king" Michael Milken. As part of a deal with the SEC, Levine accepted a permanent bar from the securities industry.

In May 2017, under a provision of the 2010 Dodd-Frank Act's overhaul of Wall Street regulation, Levine was able to apply for the removal of certain "collateral" industry bans applying to his ability to work in capacities other than a broker-dealer. Levine's collateral bars, as well as those on 60 other financial professionals, were lifted as part of the SEC's announcement Friday. 

That means Levine can now try to associate again with investment advisors, investment companies and municipal security dealers. But his chances of returning to the industry remain slim, said Howard Rosenburg, a securities attorney at Chicago-based Kopecky Schumacher Rosenburg who started his legal career in the SEC's enforcement division.

Rosenburg said even if Levine could pass muster with the SEC, he'd still have to be registered with at least one state.

"That will be a challenge, as any states he wants to register in will likely want to conduct their own investigation of his past and there's a good chance they won't license him," Rosenburg said.

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The SEC's announcement Friday to provide greater relief advisors with cleaner pasts. To Marian Young, a former advisor and broker who started in the industry in 2007, it promises to bring about the end of nearly a decade of struggle with the federal regulators' bevy of investigators and in-house tribunals known as administrative law judges.

"I'm glad my case has been dismissed," Young said. "When something like this is hanging out there, you are consumed by it, because you know it's still there. But also I went through all of this harm through this 9-year process. So what about that? They still haven't addressed everything."

Young's troubles with the SEC date to 2014. That's when regulators began investigating her and her Sugar Land, Texas-based firm, Saving2Retire, over concerns that they had been misusing an exemption from standard SEC registration meant exclusively for firms that offer financial advice over the internet. 

The SEC brought charges in 2016 and hauled Young before its in-house judges twice. An administrative law judge eventually ruled in August 2019 that Young and Saving2Retire had abused the exemption for online advisories, in part because she had taken too long setting up her website, and committed various recordkeeping and accounting failures. Although the judge found no evidence that clients had been defrauded, he banned Young from the industry for two years and ordered her to pay a $13,000 civil penalty. 

Young was eager to move her case into the regular court system but had to file an appeal with the SEC first. And regulators have been in little hurry to reach a resolution. The SEC announced on April 10 that it was pushing back its deadline for issuing a decision in the case for another 90 days.

Young turned to the New Civil Liberties Alliance, a nonprofit legal organization that has been challenging the SEC's use of administrative law judges, in March. The group filed paperwork in the U.S. Fifth Circuit of Appeals roughly two months later seeking an order to force the SEC to issue a decision.

Young said although it's a relief that her case was ultimately dismissed, she has been denied the sense of vindication she might have had from a court victory.

"It was unfair, and I deserved better," Young said. "I did not deserve to have my business destroyed over something so minor."

The SEC said in its statement Friday that it regrets mishandling the internal documents.

"We take this lapse in controls very seriously and are committed to both informing the public about the scope of this issue and preventing any similar lapses in the future," according to the SEC's statement.

The SEC's in-house judges, known as administrative law judges, have long been a source of controversy. Critics contend their cohabitation under the same roof as SEC prosecutors makes for the sharing of uncomfortably close quarters by the officials who bring regulatory cases and those who preside over them.

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The SEC's admission of mishandling internal memoranda rising out of these exact concerns. In instances dating back as far as February 2016, the SEC said, enforcement officers were able to see memoranda prepared for use by in-house judges and their staff. Although the SEC said it found no evidence that its prosecutors had used that information to improve their chances of winning cases, the possibility of such contamination was enough to warrant dismissing a huge swath of pending enforcement actions.

Russ Ryan, a senior litigation counsel at the New Civil Liberties Alliance who represents Young, said he shares his client's sense of relief at seeing the SEC's case dropped. But he's not ready yet to say Young's legal struggles are over.

"We are still evaluating what additional steps, if any, we want to take to clear her name," Ryan said.

Ryan said the SEC's mishandling of its internal memoranda is a reminder of the risks agencies run when they concentrate "prosecutorial power and pseudo-judicial power in the same organization."

Young isn't the only advisor who's receiving relief from the SEC's announcement on Friday. Christopher Gibson, a former part owner of an investment advisory firm named Geier Group, also had a pending case that was dismissed. Gibson was accused by the SEC in 2016 of running a front-running and nepotism scheme at the expense of investors in a large fund called Geier International Strategies. 

Gibson went before two administrative law judges before he sued the SEC in federal court in Atlanta over the constitutionality of its in-house justice system. Gibson's lawyer, David Hudson of Hull Barrett in Augusta, Georgia, declined to comment on what the dismissal of the SEC's enforcement action means for his client.

Gibson's court case questioning the constitutionality of in-house judges was filed in the wake of the U.S. Supreme Court's decision on April 14 in the monumental SEC v. Michell Cochran case. The high court justices then unanimously found that Cochran, an accountant from Texas accused by the SEC of abbeting audits that weren't conducted in compliance with federal accounting standards, had the right to challenge the constitutionality of the SEC's in-house judges in federal district court.

Peggy Little, a senior litigation counsel at the New Civil Liberties Alliance who represented Cochran, said the SEC could have expected only more lawsuits over its in-house judge system. By dismissing its pending cases involving administrative law judges, the watchdog has found a convenient way to evade that reckoning.

"It's a strategic move on their part to avoid adverse federal court decisions in these cases," Little said.

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As for Levine, it was not clear whether he would attempt to use the lifting of his ban from certain parts of the industry to start a career as a financial advisor. His LinkedIn profile lists his current titles as investment banker, corporate strategist and international business development executive. 

It states that he is the CEO of Adasar Group, a firm whose website says it provides advice on capital markets, corporate strategy and obtaining high-level access. A phone number for the firm listed online no longer works.

Levine's LinkedIn page also lists him as the founder Water Garden Farms, a market and grower of organic produce. Attempts to reach Levine through Water Garden Farms' website and his LinkedIn page were unsuccessful.