Financial Adviser Dawn Bennett interview John Berlau on the Securities Exchange Commission's in-house court.
BENNETT: John Berlau is a senior fellow at the Competitive Enterprise Institute. He has testified on the impact of financial regulations before the House Committee on Financial Services, and House Committee on Energy and Commerce. He is also a recognized expert on the phenomenon of crowdfunding, a contributing editor of CrowdFund Beat, and the author of the widely cited paper "Declaration of Crowdfunding Independence: Finance of the People, by the People, and for the People." But where I want to start is with the Securities and Exchange Commission and their in-house court, which some people refer to as a kangaroo court, and many believe makes a mockery of justice. I know this by personal experience. I have worked in the financial industry for the last 30 years, and for the last seven of those 30 years I've been a part of the witch hunt and the target of a small group within the SEC. Again, I am not saying all the SEC, but a small group, and long and short of it, my attorneys and I have adopted the strategy in order to get my case to Federal Court is not to show up in their administrative court because of the fact that in the administrative court, understand that the judge is actually hired and paid for by SEC and I think they have a win rate of like 99.9 percent. Interestingly enough, they had to go ahead and run the court without us there presenting our evidence because we're not going to present it. We're waiting to get into the federal court to show them what we have. And the SEC then represents this as a win. Yet in reality it was a hollow win for them because as we know that was all decided in advance. And so, here we are. We made a decision not to appear in SEC court system because we knew we wouldn't be able to get a fair and honest hearing. At this point this SEC administrative court rule dispenses a very rough and ready form of justice because they are allowed to be outside the bounds of a formal constitutional, judicial process. The only easier way to explain it is the SEC Court is rigged against everyone but themselves. So advisers and law firms representing them who understand that they are up against, see this as a cold war between us and them. John, welcome to Financial Myth Busting.
BERLAU: Thanks, Dawn, it's good to be on.
BENNETT: The SEC court, ois set up very similarly to courts that you would see during war time of cruel dictatorships. It's much like they're operating under a dual state where the normal judicial system coexists with the arbitrary power of the SEC. Of course, this is detrimental to all of us who have been accused of something, because they're trying to force all of us to lose sight of our constitutional rights. They're forcing all of us to lose our inherent right to freedom in this great country. If the SEC is so confident about the preponderance of guilt, and its cases against financial advisors, why aren't they using actual federal courts?
BERLAU: That's a very good question. With the SEC there seems to be a pattern after they lose some high profile cases in federal court, like say with insider trading, they'll move more cases into the in-house court. They're not the only agency. In fact, it's a disturbing trend, and that which Dodd-Frank pushed along with the SEC, as well as limiting judicial review for these new bureaucracies that created the Consumer Financial Protection Bureau, and the Financial Stability Oversight Council. But with the SEC, it seems to be uniquely bad.
In some of the courts there have been inconsistent rulings. But here this, the SEC has been slapped down, and some of the cases may ultimately go to the Supreme Court. Because they've been just careless in appointing the administrative law judges. They haven't applied the constitutional rights, the Appointments Clause that they have to be appointed by the head of the department, which would be the commissioners, or the chairmen in this case. They were just appointed by other bureaucrats, and it's like the offices spawning offices, there are bureaucrats creating judicial positions, which was why the founding fahers created the separation of powers. We've probably gone along the road too far with administrative courts, but the Supreme Court has said there are at least some checks and balances on these. It looks like the SEC has even exceeded those. Commissioner Michael Piwowar on the SEC has spoken out against this, and said they need at the very least more clear guidelines about this.
BENNETT: These administrative law judges, their positions are created and paid for by the SEC, and it goes against human nature to bite the hand that feeds you. But what that means is that they are judge, jury, and executioner, right?
BERLAU: Yes. They perform, as the Supreme Court would say quasi-legislative, and quasi-judicial functions in these agencies. The Supreme Court has said that if there is a lack of due process it's reviewable in federal court, but that laws like Dodd-Frank have put limits on that judicial review, probably unconstitutional limits. That's why we're suing to get that part of Dodd-Frank overturned. But it has just gone on, and it has expanded.
BENNETT: How can due process be insured when the judicial branch is completely cut out from the equation? Do you think there's any way to do it?
BERLAU: Well, I think you and your attorney maybe may have found a way to do that. But hopefully the courts will put more oversight on it, will limit the use of administrative courts, because everybody should have their day in court. The right to a jury trial by your peers is in the Constitution. And there's a distinction between civil and criminal law, but especially when things can have criminal implications people should have their day in court.
So my group, the Competitive Enterprise Institute, we represent small businesses, entrepreneurs, in challenging some of these rules. And I guess one of the issues is challenging them before there's an enforcement proceeding, sometimes you have a better chance, like what we're doing with Dodd-Frank, and we had done with Sarbanes-Oxley, with a small accountant challenging that. So anyway, until the Supreme Court puts in limits like there should be we don't know what the court is going to look like. Attorneys and others concerned about liberty, and just concerned citizens should all band with their knowledge together to find ways to challenge this, and make sure that the courts hear these cases.
BENNETT: I've been talking today about my own situation with the SEC. It has been a one sided conversation in the media up until a couple of weeks ago, because we weren't going to, we were going to let them show their evidence. But now we're putting out what we clearly know, and why we feel I'm innocent, and my firm is innocent. But this waging a battle just is so clearly unconstitutional. The executive branch seems to be assuming a greater role over judicial matters. And as an expert in the SEC and financial regulation what's your take on this in the house tribunal? I mean is it really fair for the same agency that brings charges to also adjudicate them?
BERLAU: I'd say it's most often not fair. I mean, it's not just financial regulatory agencies that do that. There are dozens of agencies since the 40's with the passage of the Administrative Procedure Act, that do this. But at the very least there needs to be constitutional safeguards. What's truly alarming is that Dodd-Frank, the way it pushed this along for cases that are clearly inappropriate in these in house courts, and also limited judicial review of what you can, that it says things like the judge has to assume, or has to defer to the Consumer Financial Protection Bureau, to their interpretation of the law if cases are brought forward.
The same with the Financial Stability Oversight Council, to bureaucracies created by Dodd-Frank. Yet at the same time the bureaucrats are complaining about when consumers enter into a voluntary arbitration contract with credit card companies, they said well that's not fair, that denies consumers their day in court. But first of all in many cases there's a voluntary agreement there, and a private dispute resolution. But here what are they doing? The whole purpose of administrative courts seems to be to deny everyday citizens their day in court against the government.
BENNETT: It's known fact by now that the SEC likes to engage in selective pursuit of smaller firms, like mine, instead of larger behemoths, which they end up turning a blind eye to, and require them just to pay a fine, and walking away with their ability to do business intact. At one point Rolling Stone had a political blogger by the name of Matt Taibbi. He once wrote that even if you are wrong for smaller firms, even if it was failure to maintain adequate books and records, that meant to the SEC that they could warrant punishment along the lines of the full Princess Bride torture machine treatment. Trust me, after the seven years I've had, I fully agree.
You're a law abiding citizen, you're supposed to have your constitutional rights, but immediately they treat you like you're a convicted felon. It's as if they've put me and my firm in this carceral state, and the worst part of it all is that they're getting away with it, even before we can present our evidence. So are you aware of any other federal agency that actually operates like that, that uses psychological warfare? I mean the type of propaganda that they put out in the media that drains the public opinion of positivity for you, and only supporting them. Are you aware of anybody who uses that kind of technique that influences the audience's value system, their belief system, their emotions?
BERLAU: Well I don't really know the specifics of your case, just that everyone is entitled to the presumption of innocence. That's one of the fundamental principles of fairness enshrined by our Constitution. But there are unfortunately lots of agencies that have been just extending this use of administrative courts. Even if it's reviewable by the federal courts there's an issue where you shouldn't have to exhaust your resources, and basically bring your business to bankruptcy before you get your day in court. That's one of the problems even with challenging a law as unconstitutional when it's first introduced that we faced with challenging the Public Company Accounting Oversight Board from Sarbanes-Oxley, and here in Dodd-Frank, is that they actually say well you have to break the law in order to test the law.
Basically, Justice Roberts in our case against the Public Company Accounting Oversight Board, which was a good decision, but which was five to four, is that no, you shouldn't have to bet the farm to challenge something as unconstitutional. You shouldn't have to bring your business to bankruptcy. They defer too much in my opinion, but the agencies have no expertise about whether something is constitutional, so that's the thing. The irony is, what would be funny if it weren't so tragic is that an environmentalist can get into court to hold up the construction of a dam, which is vital for public safety, or drilling when they say 'well this damages my view of these trees.' Yet it's going to take a small business years to get into court because of all the administrative courts.
BENNETT: You just can't be fooled by the tactics that the SEC uses. Their business model is to make false accusations. They do it a lot, I'm not the only one. If you don't capitulate and genuflect they actually engage in these awful smear campaigns, name calling. Like I said, they're using these useful tactics of the psychology of hate that have proven in the past to keep us all under control with fear. I'm wondering, do you believe this approach and behavior is eventually going to be a template for eventual collapse for them?
BERLAU: Again, I'm not familiar with the specifics of your case.
BENNETT: But they're doing this to everybody. It isn't just me, this is how they're bringing down the smaller guy. They're using public opinion. It's like this form of aggression that's really hard to defend against, because there isn't an international court of justice capable of protecting against psychological aggression, since it can't be legally adjudicated. But boy, that's what they do when they put the propaganda out there before you get the opportunity to fight them.
BERLAU: Again, in-house courts have this inherent tension. As you said, they're paid by the agencies. They don't have lifetime tenure, so they're subject to this. So it does make it more prone to abuse, particularly when even with the administrative, even your basic constitutional safeguard procedures and safeguards aren't followed. So Dodd-Frank which celebrated its unhappy sixth birthday, was to be about the accountability of the private sector, and the big banks, and they should be accountable. But what about big government being accountable?
BENNETT: Exactly. John, we're heading into break. Will you stay with us? Because I do want to ask you more about what's going on with the Labor Department.
BERLAU: Of course.
BENNETT: John, before we went to break I wanted to ask you about the Labor Department. The Feds have just recently pushed through this massive change to the way Americans' IRAs and 401Ks can be managed. The Labor Department is actually saying that Americans aren't sophisticated enough to make financial decisions for themselves, and now they're going to try to micromanage those decisions for us. I think this is odd, since these are the same people that can't pay our own debt, and we've got about 18 trillion in short term debt, not to mention the trillions that are coming due on our unfunded liabilities. What's going on here?
BERLAU: Yes. And these same people have given grants to companies like Solyndra, the solar energy company that went bankrupt.
The Labor Department rammed through this rule, which basically they explicitly say American's can't "prudently manage retirement assets on their own." So they said we're going to mandate that anyone we label as a fiduciary, and they have a broad definition that could even get to the brokers, insurance agents, they could even get to talk show hosts like you, and like Dave Ramsey. The problem is the one size fits all government definition. I think you and many other financial professionals believe they are working in the best interest of your client, but the government may have a different view. If they say well you could have recommended this was the best…No, this was the better choice. So you're seeing when something similar was done in Great Britain, people making under about 150,000 a year are having trouble finding anyone to service their accounts.
BENNETT: We just seem to be in a period where the government wants us to abandon any personal responsibility towards anything. They want to be the decision maker in every part of our lives.
BERLAU: Personal responsibility and personal freedom.
BENNETT: Personal freedom. As soon as the rule was finalized a number of organizations immediately sued the Labor Department arguing, among other things, that it has no constitutional authority to try to micromanage how investment advisors advise and charge their clients. What's the latest with these legal challenges, and what are your expectations for these challenges to succeed?
BERLAU: I'm always hopeful on these. Although any time you're challenging a law it's a tough challenge. But in this case you did have both houses of Congress do a resolution of disapproval, and even some democrats joined trying to overturn the rule. It's handled by one of the attorneys for local groups. Like in Texas they have the Texas Chamber of Commerce, some Texas insurance agency whose livelihood are really being affected. They're being represented by Eugene Scalia, who is the son of the late Justice Scalia.
This is just so blatant a power grab where they really don't have any authority from the laws that Congress passed. They're claiming authority from a 1970s law that gave them limited jurisdiction over union defined benefits plan, and saying well this gives us jurisdiction over all the IRAs, the health savings accounts, 401Ks. Also the limits on the first amendment as far as advice goes, and as far as advice where it's not in a client relationship, like say a radio host. This is such an abuse, and so beyond even normal power grabs by agencies that will stretch what Congress meant and other things. I really think that a fair minded person would say they've exceeded their bounds, and are going to strike down at least some of this.
BENNETT: Texas can succeed if they want to, but what will the rest of us do?
BERLAU: That's the thing. I imagine the US government, if it wins the good news, if they win in Texas, and everybody picks what they think will be the best venue, then the government will probably challenge that, and then it would go to the federal appeals court in Texas. If Eugene Scalia prevails there then the government will appeal that too. That's when it goes to the United States Supreme Court. So much depends on who is sitting on the Supreme Court. You hope fair minded individuals of any persuasion will look at this, and say this was an abuse of process.
BENNETT: We've got to head off. Thank you so much for your time John.
BERLAU: Thank you. CEI.org is our website.
Read the full interview at Digital Journal.