SEC dismisses 42 cases after admitting enforcement breach larger than reported

The SEC announced Friday it had dismissed 42 pending enforcement cases after discovering enforcement staff had improper access to materials meant for commission officials ruling on those cases.

The watchdog agency, currently helmed by Gary Gensler, initially acknowledged in April of last year that some employees in its enforcement division had improperly downloaded legal memos in 2017 related to two cases — each of which sought to challenge the legality of the in-house proceedings.

Access to those files was meant to be limited to the commissioners and attorneys who advise the SEC on rulings.

But the agency has now admitted that an internal review determined administrative staffers in the enforcement division improperly accessed documents that were specific to 28 additional cases in litigation within the in-house court system.

Additionally, the review uncovered evidence of 61 other instances in which enforcement division officials accessed memos that were “broadly applicable to numerous pending matters” in the court system.

An internal SEC review found that there was no evidence that the improper access had any effect on decisions made by either enforcement staff or officials reviewing those cases, according to SEC officials.

“We deeply regret that the agency’s internal systems lacked sufficient safeguards surrounding access to Adjudication memoranda, and we are continuing our work to ensure that, going forward, work product from the Adjudication staff is appropriately safeguarded,” the SEC said in a statement.

“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,” the agency added.

Law360 was first to report on the SEC’s disclosure.

One of the initial cases impacted by the breach, Cochran v. SEC, was decided in the Supreme Court last month.

The nation’s highest court ruled in favor of accountant Michelle Cochran, clearing the way for defendants who are targeted for enforcement action via in-house legal proceedings at the SEC and the FTC to challenge their constitutionality in federal court.

“It’s the equivalent of a party in litigation having access to a judge’s briefs from her law clerks,” attorney Nick Morgan told the Wall Street Journal last year. “This breach reinforces the problem with the SEC’s administrative process in which the commission has total discretion to deprive parties of their ability to have matters litigated in federal court.”

The SEC said its review team’s findings were based on an intensive document review and interviews with more than 250 current and former staffers across its enforcement division, the office of the secretary and the office of the general counsel.