© 2015 The Texas Lawbook.
By Mark Curriden
(March 20) – An administrative law judge ruled Thursday that two Colleyville financial executives did little-to-nothing wrong in their leadership positions at Dallas-based Penson Financial, a now-defunct clearing service for U.S. brokerage houses dealing in stock trades.
The decision is a significant blow to the U.S. Securities and Exchange Commission, which had won 22 of the 23 previous cases it prosecuted before the agency’s internal tribunal.
The SEC claimed Penson Financial broker-dealers violated new regulations that governed “naked” short sales by not borrowing the securities in time to make the delivery to the buyer within the three-day settlement period.
The SEC claimed that former Penson Financial Chief Compliance Officer Thomas R. Delaney II assisted in the rule violations and helped to conceal them from regulators from 2008 to 2011. The agency also accused Penson’s former CEO, Charles W. Yancey, of ignoring “significant red flags” about the alleged misconduct, which allowed his employees to conceal the rule violations.
Judge Jason Patil, a former federal prosecutor, rejected most of the SEC’s allegations.
The ALJ concluded that Delaney technically violated SEC 204, but said his actions were not intentional, reckless or meant to defraud. The judge fined Delaney only $20,000 and told him to go forth and sin no more.
Judge Patel completely cleared Yancy of any wrongdoing.
“I am unconvinced that Yancey was confronted with any ‘red flags’ requiring follow up that he failed to take,” said Judge Patil, who noted in his opinion that the evidence presented by Yancey’s lawyers “was frankly overwhelming.”
“This is an action that never should have been instituted and we told the staff and senior management in enforcement that many times,” said Haynes and Boone partner Kit Addleman, who represents Yancey.
“The [SEC] staff members in this matter ignored key facts and overstepped boundaries in recommending that this action be brought,” said Addleman, who is a former director of the Atlanta Regional SEC Office. “They were blinded by their aggressiveness and personal feelings. A comparison of the staff’s contentions in its order instituting the action and Judge Patil’s recitation of the facts in his decision demonstrates the ‘overwhelming evidence’ of how the facts were skewed when the action was initiated.”
The SEC has increasingly sought to bring charges against broker-dealers and others involved in alleged securities fraud matters to administrative law judges employed by the SEC, instead of filing its cases in federal court where they will be handled by an independent federal judge and possibly a jury.
During the past three years, the SEC lost only one of the 23 cases it filed with ALJs. By comparison, the agency lost one-third of the cases it brought in federal court during the same time period.
Addleman said Yancey’s case embodies the problems with the SEC’s administrative trial alternative.
“We faced a trial in which the accused individuals had little opportunity to develop any defensive evidence through discovery, were not allowed to take a single deposition, and had to rely almost entirely on the record that the enforcement staff had nearly three years to develop,” she said. “Because the administrative process does not provide a genuine opportunity for dispositive motions prior to trial, we could not seek to dismiss the action based on the objective facts adduced even before trial.
“The enforcement staff’s choice of venue meant Mr. Yancey, as well as the SEC and taxpayers, incurred enormous and unnecessary trial costs.”
The SEC has the right to appeal the Thursday’s decision to the SEC’s five-member commission, which is the body that authorized the agency to bring the case at the start.
The trial team for Haynes and Boone consisted of Dallas Partners Addleman and Ron Breaux and Dallas Associates Scott Ewing and Sarah Mallett. They were aided by Houston Associate Robert Carlton and Dallas Associate Jamee Cotton.
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