The original idea of the “independent” administrative agencies was to place the details of governing a complex economy in the hands of wise experts. These experts would be removed from tawdry and corrupting political influences, and would straightforwardly apply neutral principles to achieve fairness and justice in our society.
In the real world, every federal administrative agency, with especial emphasis on the supposedly “independent” ones, becomes larger, more power-hungry, and more corrupt with every passing year. Somehow, it’s in the nature of the job as federal bureaucrat to believe that you can perfect the world by seizing ever more power unto yourself, imposing more and more rules whether or not authorized by statute, and crushing anyone who gets in your way. Biden’s presidency has accelerated these trends toward infinity.
Consider for today the SEC. Since April 2021, its Chair has been Biden appointee Gary Gensler. Gensler, now 65, spent the first half of his career at Goldman Sachs, but for the last 20+ years has mostly moved from one federal or state or Democratic Party job to another. In 2015-16 he was the CFO of Hillary Clinton’s campaign for President, which really tells you all you need to know about him. Here are a few developments on Gensler’s watch at the SEC:
SEC Enforcement Actions Before Its Own Administrative Law Judges
When the SEC claims that someone has violated the federal securities laws, they have a staff that can bring an “enforcement action” against the alleged perpetrator. These actions are civil rather than criminal, but can include very severe and even career-ending sanctions, like banishment from the securities industry. The SEC also has a staff of what they call Administrative Law Judges, who work for the Commission, and many of its enforcement actions have long been brought before these in-house judges. (To be fair, the ALJs are provided for by statute, and long pre-date Gensler.) The ALJ thing is part of the progressive vision of governance by “experts.” The poorly-reasoned thought is that the securities business and the securities laws are rather complex; so wouldn’t it be best to have these kinds of cases decided by people who are specialists in the subject matter? After all, these people are all perfectly fair and apolitical.
It turns out that if you should have the misfortune to have your case brought before one of these ALJs, you are facing a procedural morass. First, the cases can drag on for years, costing you a fortune. Then, the ALJs, not surprisingly (since they are not really independent fact-finders), almost always side with the Commission staff and against defendants. Then, your first appeal goes to the Commission itself, the opposite of a neutral party. By the time you can get to a District Court for review, you are probably several years and multiple million dollars of legal fees into this — and then, the review is on a highly deferential standard. How does all of that comport with due process of law and with Article III of the Constitution (that vests all the “judicial power” in the courts)?
Multiple litigants over the years have attempted to object to this treatment on the ground of incompatibility with due process and/or the Constitution’s Article III. But every attempt to short-circuit an enforcement action by removing the SEC into court got shot down. That is, until a case called Cochrane/Axon reached the Supreme Court in April of this year. The Cochrane case arose from an SEC enforcement action before one of its own ALJs; and the Axon case came from a comparable enforcement proceeding by the FTC before one of its ALJs. Defendants in the two cases attempted to assert their rights to have their cases heard in a District Court with an impartial judge and a jury. Axon lost on that assertion in the Ninth Circuit; but an en banc Fifth Circuit ruled in favor of Cochrane’s ability to present her constitutional claim to a District Court before having to submit to the SEC’s ALJ. The Supreme Court unanimously affirmed the Fifth Circuit and reversed the Ninth. From Justice Kagan’s unanimous opinion (page 15):
[H]ere, both parties object to the Commissions’ power generally, not to anything particular about how that power was wielded. The parties’ separation-of-powers claims do not relate to the subject of the enforcement actions—in the one case auditing practices, in the other a business merger. . . . Nor do the parties’ claims address the sorts of procedural or evidentiary matters an agency often resolves on its way to a merits decision. . . . The claims, in sum, have nothing to do with the enforcement-related matters the Commissions “regularly adjudicate[]”—and nothing to do with those they would adjudicate in assessing the charges against Axon and Cochran. . . . Because that is so, the parties’ claims are “ ‘collateral’ to any Commission orders or rules from which review might be sought.”
So far, this comes as a shock to the long-standing arrogance of the SEC that they are above having their procedures reviewed for constitutional compliance; but that issue long pre-dates Gensler. So let’s now get to the next step. The decision of the Supreme Court is only that a District Court should hear the constitutional challenge prior to the SEC’s ALJ enforcement action going forward; the Court did not actually itself rule on the issue of whether the SEC’s procedures are constitutional. So the case got remanded to the lower courts to consider the constitutional challenge. But then, instead of moving forward on that issue, the SEC suddenly, on June 5, voluntarily dismissed the Cochrane case — along with more than 40 other enforcement actions that were pending before its ALJs. The New Civil Liberties Alliance — which has represented Cochrane in her constitutional challenge — issued this press release on that date. Excerpt:
This landmark [Cochrane] ruling was a major victory for NCLA—and a major blow to SEC and to administrative adjudication generally. It freed Americans, many of whom had been trapped in interminable regulatory purgatory, to seek relief in federal court from these ersatz proceedings where the agency is prosecutor, judge, jury and first court of appeal. Now, rather than defend against allegations of unconstitutionality before real judges in real federal courtrooms, SEC has waved the white flag. This decision demonstrates just how significant the Cochran victory was. When forced to defend its unconstitutional conduct in front of Article III judges, SEC cannot. Indeed, it will not even try.
Was anything more going on here? Now we are talking about things going on on Gensler’s watch:
[The] SEC publicly admitted in April 2022 to the existence of a so-called control deficiency within its administrative adjudication system. It said the agency’s Chair had launched an internal review of the issue (using a contractor dependent on staying in SEC’s good graces for its other agency business). At that time, the agency specifically divulged that SEC Division of Enforcement personnel had accessed adjudication material in the SEC v. Cochran case, temporarily making the material available to everyone in the Division, including attorneys who prosecuted Ms. Cochran on SEC’s behalf. Now it turns out agency personnel had done the same thing in dozens more cases.
Aha! — no wonder the SEC seemed to win so often before its own ALJs. The SEC staff (i.e., prosecutors) were able to get sneak peaks at the legal analysis memos used by the ALJs in making their decisions. Here is a link to an SEC April 5 release admitting to its wrongdoing (and wildly trying to spin its gross misconduct as nothing really that important). You need to go back to the NCLA release to learn that NCLA had been trying to find out about the SEC’s cheating in the ALJ proceedings via FOIA requests, only to be met by SEC stonewalling. In November 2022 NCLA had filed a federal court complaint to pry loose the documents, which is likely what forced the SEC to finally fess up to its wrongdoing and dismiss the 40+ cases.
So will there now be any accountability for anyone at the SEC for this gross misconduct in these already-rigged proceedings? Don’t count on it.
SEC’s Lawless War on Cryptocurrencies
The Congressionally-authorized mission of the SEC — via the Securities Act of 1933 and the Securities Exchange Act of 1934 — is to regulate “securities” and “securities exchanges.” And then there are cryptocurrencies. Cryptocurrencies had not been invented back in 1933 and 1934, and nothing in those two statutes (and their many subsequent amendments) specifically addresses them. Are cryptocurrencies securities? Some academics have argued that at least some of them are, while others have argued that none of them are. And the latter position is not just held by a few right-wing kooks.
Here is a piece from the Harvard Law School Forum on Corporate Governance from December 2022 taking the position that cryptocurrencies are not securities (although the piece does argue that initial coin offerings are securities). You might think that in the absence of a clear statutory mandate, the right thing for the SEC would be to keep out of this, or maybe at the most to offer a proposal to Congress to give them the authority to regulate in this area.
But that’s not the way a good progressive regulator operates. A good progressive regulator does not look to the substance of Congressionally-granted authority to determine the limits on his authority. Rather, he looks to use every “tool” at his disposal to achieve perfection in the world according to his own vision.
Gary Gensler does not like cryptocurrencies, nor does he like the people who seem to be making lots of money creating them and trading them. So the question is, what can he do to get his way? On June 5 the SEC filed a lawsuit against Binance, and on June 6 it filed a second lawsuit against Coinbase. These are the two largest exchanges for trading and doing other transactions involving cryptocurrencies.
Here is a copy of the Complaint against Coinbase. It’s about 100 pages long, but the basic theory is that Coinbase is operating an illegal “securities exchange” because it is not properly registered as such with the SEC and is engaged in trading securities. As you can see, the theory depends on the idea that cryptocurrencies are securities as defined in the SEC’s governing statutes.
But with or without statutory authority, the SEC has set out to play hardball. The prayer for relief in the Coinbase Complaint basically seeks to shut down this major business, plus forfeit all the money they have made to date and pay lots of penalties as well:
[T]he Commission respectfully requests that the Court enter a Final Judgment: . . . Permanently enjoining Defendants, . . . , from violating, directly or indirectly, [the sections of the statutes requiring “securities” and “securities exchanges” to be registered with the SEC]; Ordering Defendants to disgorge on a joint and several basis all ill-gotten gains resulting from their Exchange Act violations . . .; Ordering Defendants to pay civil money penalties. . . .
And so on and so forth. The Binance case is in DC, while the Coinbase case is in New York. Just today, the judge in the Binance case in DC declined an SEC request to freeze the exchange’s assets pending trial. Had that request been granted, it likely would have been the end of Binance right there, whether the SEC had any authority to do what it is doing or not. Sentence first, verdict afterwards, as the Red Queen said. But fortunately this cases is in the courts, rather than before an ALJ.
Back in March, at the time it received a Wells notice from the SEC, Coinbase put out a statement on the Commission’s case against it that makes for very interesting reading. The gist is that Coinbase has no way of complying with the SEC’s existing regulations, which don’t fit its business, and the SEC has flatly refused to provide Coinbase with any means to get into “compliance,” whatever that may mean. In other words, the SEC is just bent on a mission of destruction, whether it has authority for what it is doing or not. A few excerpts:
The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. . . . [T]he SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none. We met with the SEC more than 30 times over nine months, but we were doing all of the talking. In December 2022, we asked the SEC again for some feedback on our proposals. The SEC staff agreed to provide feedback in January 2023. In January, the day before our scheduled meeting, the SEC canceled on us and told us they would be shifting back to an enforcement investigation.
This one could easily go on for years. The term “jihad” would be an appropriate descriptor.
The SEC Seeks To Save the Planet
And then there the the Gensler SEC’s foray into the effort to “save the planet” by forcing enormous and costly disclosures relating to wholly imaginary “climate risks.”
The whole idea of these independent agencies was that they would be staffed by “experts” and specialists in the various subject matter areas. It’s hard to think of an area where the securities-law specialists at the SEC have less expertise than atmospheric physics, aka “climate science.” But hey, President Biden wants an all-of-government effort to “save the planet,” so why not use the occasion for another massive power grab?
So without anything in its statutes speaking to the subject, in March 2022 the SEC proposed a gigantic regulation requiring all public companies to disclose all kinds of information as to greenhouse gas emissions. Here is the proposed rule. It’s 490 pages long, because, you know, no self-respecting agency puts out a completely lawless regulation that is less than 400 pages. The proposed rule requires disclosure by issuers not only of their own greenhouse gas emissions, but also those of the suppliers and customers — known to the cognoscenti as “scope 2” and “scope 3” emissions. How are the companies supposed to figure that out? Who knows?
We’re now a year and three months on, and the proposed climate disclosure rule has still not taken effect. But why does that matter? By its terms (at least as currently proposed) it will be effective for mandatory disclosure statement beginning with the start of 2024 — so issuers have no practical choice other than to begin the onerous work of attempting to comply. From the Wall Street Journal, April 25:
A sweeping U.S. climate-disclosure rule isn’t yet in place, and it is sure to face legal challenges when it is, but many companies have begun assessing greenhouse-gas emissions from parties in their supply chain as if it were.
It’s just another routine day in the operations of a government agency that has become completely unmoored from its stated mission and its statutory authorization. How much economic destruction will it bring about? That’s really none of its concern.
Anyway, those are a few highlights for today in what’s going on at the SEC. I’m sure that if I had a few more hours to look into this, I could find another five or ten equally upsetting power grabs. And that’s just at this one agency.
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