Securities and Exchange Commission v. Michelle Cochran
Washington, D.C., April 06, 2022 (GLOBE NEWSWIRE) -- The U.S. Securities and Exchange Commission (SEC) has disclosed that its enforcement staff accessed documents in at least two adjudicatory matters currently in litigation in federal court, including SEC v. Michelle Cochran. The New Civil Liberties Alliance represents Ms. Cochran in a lawsuit challenging the constitutionality of SEC’s in-house Administrative Law Judges (ALJs), who enjoy multiple layers of protection from removal by President Biden. In December 2021, the en banc U.S. Court of Appeals for the Fifth Circuit ruled in favor of Ms. Cochran, declaring that she has the right to challenge the constitutionality of her ALJ’s removal protections in federal court before undergoing an administrative adjudication.
SEC released a statement yesterday admitting that “administrative support personnel from Enforcement, who were responsible for maintaining Enforcement’s case files, accessed [restricted] Adjudication memoranda via the Office of the Secretary’s databases.” This self-described “control deficiency” is actually an outrageous breach of ethics—and possibly law—by SEC that illustrates why the Constitution forbids housing prosecutorial functions and adjudicatory functions in a single agency.
SEC filed in Cochran simultaneously with publishing the statement, so Ms. Cochran was not informed of SEC’s “control deficiency” when it was discovered. NCLA and Ms. Cochran were only made aware of the Commission’s breach when it was publicly disclosed. The Commission has known about this issue long enough to hire outside investigators, conduct an audit with “dozens of interviews,” and collect documents. Yet critical details, including who knew what and when, remain undisclosed. If this breach of ethics had occurred in private litigation or before a federal court, it would raise red flags. SEC claims “this access did not impact the actions taken by the staff investigating and prosecuting the cases or the Commission’s decision-making in the matters.” At present, there is no way to verify that this breach did not impact Ms. Cochran’s case. To make matters worse, SEC hired an outside firm that regularly does millions of dollars of business with the agency to investigate the scandal. Hiring a firm with a conflict of interest to investigate a conflict of interest hardly inspires confidence.
Restoring the “controls” that were disregarded here is not enough. As this breach has demonstrated, it would be impossible to monitor the internal controls at SEC sufficiently to guarantee that agency staff would not make the same error again. A computer correction of a purported “control deficiency” cannot repair the all-too-human impulse to abuse power, win at all costs, and share information inside an agency. Whatever controls are baked into the software, none of those can remedy the inherent problems that combining the enforcement and adjudication power inside an agency create. The two powers must be structurally separated. Until the adjudicative function is returned exclusively to Article III courts, and those courts rein in SEC’s abusive regulation by guidance and other efforts to expand their regulatory power far beyond what Congress ever contemplated under the Securities Exchange Act of 1934, constitutional order will not have been restored at the SEC.