UNITED STATES OF AMERICA
In the Matter of
ORDER DENYING MOTION FOR DISQUALIFICATION OF THE COMMISSION
Respondent Jean-Paul Bolduc has moved to disqualify the entire Commission from considering this matter. Bolduc contends that the Commission has created at least the appearance that it has prejudged the facts of this case.1 Although Bolduc concedes that this motion is "unique," he asserts that disqualification is necessary in order to satisfy the requirements of due process. For the reasons set forth below, we deny the motion.2
In a December 1998 Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice ("OIP"), the Commission alleged that Jean-Paul Bolduc, Ryan J. Smith, CPA, Richard N. Sukenik,CPA, Philip J. Ryan III, Constantine L. Hampers, A. Miles Nogelo, and Robert W. Armstrong III, CPA (collectively "Respondents"), former senior officers of W.R. Grace & Co. ("Grace") or its subsidiary, National Medical Care, Inc. ("NMC"), violated the antifraud, reporting, and recordkeeping provisions of the Exchange Act. The OIP also alleged that Smith, Sukenik, and Armstrong engaged in improper professional conduct under Rule 102(e).3 The charges against Respondents arose out of Grace's alleged manipulation of earnings reported for NMC from 1991 through 1995.
Bolduc contends principally that the Commission has embarked on a concerted public "campaign" to condemn Respondents for wrongdoing in advance of a due process hearing.4 This "campaign" allegedly began when, during the time that the Commission was considering Respondents' "Wells" submissions in this case,5 the Commissionlaunched its initiative against illegitimate "earnings management"6 and issued statements through individual Commissioners and staff members declaring fraudulent the type of conduct alleged here. Bolduc maintains that the fact that both Chairman Levitt and Commissioner Carey have recused themselves from participating in this proceeding does not remedy the due process violations.7 According to Bolduc, the Commission has shown an "institutional" bias that, in another respondent's words, "transcend[s] different generations of Commissioners."
Bolduc's motion for Commission disqualification fails as a matter of law. An administrative body such as the Commission may not be disqualified from performing its adjudicatory functions based on allegations of bias, prejudice, or prejudgment on the part of the Commission or its members. The United States Supreme Court decided this point in FTC v. Cement Institute.8 In that case, the Federal Trade Commission ("FTC") issued a cease-and-desist order against seventy-four cement manufacturers for using a multiple basing point system of pricing in the sale of cement. Before instituting proceedings, the FTC conducted a full investigation and reported to Congress and the President that the multiple basing point system was the equivalent of an illegal price-fixing restraint of trade. One of the respondent cement manufacturers requested the FTC to disqualifyitself from hearing the cease-and-desist proceeding. The respondent complained that the FTC had demonstrated that it was biased and had prejudged the case. The FTC refused to disqualify itself.
The Supreme Court specifically stated that it was deciding the case "on the assumption that . . . an opinion had been formed by the entire membership of the [FTC] as a result of its prior official investigations."9 The Supreme Court decided that "the fact that the [FTC] had entertained such views as the result of its prior ex parte investigations did not necessarily mean that the minds of its members were irrevocably closed on the subject of the respondents' basing point practices."10 It also determined that sustaining the respondent's position would defeat congressional intent under the Federal Trade Commission Act.11 The Supreme Court stated that, if the entire membership of the FTC were disqualified, neither the FTC nor any other administrative agency could act on the complaint. It elaborated:
Congress has provided for no such contingency. It has not directed that the Commission disqualify itself under any circumstances, has not provided for substitute commissioners should any of its members disqualify, and has not authorized any other governmental agency to hold hearings, make findings, and issue cease-and-desist orders in proceedings against unfair trade practices.12
The Supreme Court's reasoning in Cement Institute applies with equal force here. The Commission is the only governmental agency with the statutory authority to institute administrative cease-and-desist proceedings for violations of the federal securities laws and professional disciplinary proceedings for improper professional conduct that affects its processes.13 Therefore, disqualification cannot be permitted to prevent the Commission, the only tribunal with the power to act in this matter, from performing its duties.14
Bolduc suggests that the charges against Respondents be brought in federal court where the Commission can seek injunctive relief. Federal court, however, does not provide an acceptable alternative forum. Congress' main purpose in granting the Commission cease-and-desist authority was to give the Commission increased flexibility in crafting enforcement remedies.15 Congress intended the cease-and-desist order to represent an "alternative" remedy that would allow the Commission to resolve proceedings without protracted negotiation or litigation and to avoid collateral consequences that imposition of an injunction might entail.16 We conclude that to adopt Bolduc's suggestion would defeat this congressional intent.17 In addition, as noted previously, a federal court does not provide an alternative forum for disciplinary proceedings brought pursuant to Rule 102(e).
Bolduc's premise for seeking an alternative forum is legally flawed as well. He argues that disqualifying bias on the part of the Commission may be inferred from alleged bias of its members or staff. Bolduc has not cited any authority, and we have found none, for that proposition. A similar notion was rejected in Blinder, Robinson & Co. v. SEC.18 There, the petitioner Meyer Blinder contended that certain Commission procedures deprived him of due process, including the Commission's first refusing to accept his settlement offer, and thereafter imposing administrative sanctions against him. In finding no bias or prejudgment in the Commission's rejection of Blinder's settlement offer, the court observed that only one sitting Commissioner had participated in both the order imposing sanctionsand the earlier rejection of the settlement order. The court then stated:
It would be a strange rule indeed that inferred bias on such a tenuous basis, and then presumed that the bias spread contagion-like to infect Commissioners who were not even called upon to consider the settlement offer. To do so would manifest profound disrespect for Congress' deliberately structuring agencies as (typically) multi-member bodies, with staggered terms and with requirements that the President appoint a certain number of members from the political party other than his own. To give credence to Mr. Blinder's dark suspicion of bias notwithstanding this carefully crafted structure would flout what Justice White, in writing for the [Supreme] Court in Withrow [v. Larkin], called `a presumption of honesty and integrity' on the part of those who serve in office.19
As in Blinder, Robinson & Co., we believe that acceptance of Bolduc's argument would undermine the strong presumption of "honesty and integrity" accorded the Commission and its members in performing the Commission's diverse functions.
While we have concluded that Bolduc's motion to disqualify has no legal basis, we also observe that the factual allegations of bias appear insufficient to support Bolduc's claims. For example, Bolduc finds bias on the part of the Commission reflected in the settlement of its previously-filed civil injunctive action against Grace. The Commission issued, by consent, findings that Grace, through unnamed former senior management, fraudulently manipulated NMC's reported earnings and made false and misleading filings and statements.20 Bolduc argues that those findings, "publicized" in the Commission's press release announcing the settlement, were identical to the allegations made against Respondents in this proceeding and signaled the Commission's conclusion that Respondents had committed the violations charged.
Bolduc's argument ignores the plain language of the settlement order, which expressly states that the findings contained therein are "not binding on any other person or entity in this or any other proceeding."21 In addition, Bolduc's argument ignores established Commission precedent holding that in multi-party cases the Commissiondoes not prejudge the issues relating to certain respondents because it accepts settlement offers with respect to other respondents.22
Bolduc sees bias further reflected in various statements made by four Commissioners. Chairman Levitt and Commissioner Carey have both recused themselves from this case. Commissioner Johnson has left the Commission. Bolduc fails to refer to any statement made by Commissioner Unger, but he does complain about two statements made by Commissioner Hunt. Only one of these statements mentioned Grace. That statement was made during a speech at the "SEC Speaks in 2000" conference in March 2000. Commissioner Hunt reviewed developments in the financial fraud area, and remarked that, "in an action against W.R. Grace, we charged seven [respondents]." The other statement was made at the 31st Annual Institute on Securities Regulation conference in November 1999, and addressed the topic of accurate financial reporting. Although Commissioner Hunt is the judge of his own qualification to participate in this matter,23 we observe that his remarks did not touch on any of the specific factual issues raised in this case or on the ultimate issue of Respondents' liability.24
Finally, Bolduc alleges bias in statements made by employees of the Office of the Chief Accountant and the Division of Enforcement. These offices are prosecuting the instant case. Due process does notrequire a neutral prosecutor.25 Further, issuance by the Office of the Chief Accountant of a general policy statement like Staff Accounting Bulletin No. 99 does not constitute "participat[ion] or advi[c]e in the decision upon
this matter" so as to violate any separation of functions requirement.26
Accordingly, IT IS ORDERED that Respondent Bolduc's Motion to Disqualify the Commission be, and it hereby is, denied.
By the Commission (Commissioners HUNT and UNGER); Chairman LEVITT and Commissioner CAREY not participating.
Jonathan G. Katz
|1||Respondents Nogelo, Hampers, Smith, Sukenik, and Armstrong have joined this motion, with Smith and Sukenik requesting dismissal rather than reinstitution of the proceeding in federal district court. Respondent Ryan agrees with the substantive position taken in the motion, but does not join the motion, because he believes that the only appropriate remedy is a dismissal with prejudice.|
|2||Respondent Bolduc's request for oral argument on this motion is also denied. See 17 C.F.R. § 201.154(a) ("No oral argument shall be heard on any motion unless the Commission . . . otherwise directs."). Bolduc has made no showing that oral argument would aid the decisional process.|
|3|| 17 C.F.R. § 201.102(e). By order dated August 31, 1999, the Commission stayed the hearing and all prehearing deadlines before the law judge pending its interlocutory review of the law judge's dismissal of the Rule 102(e) allegations against Armstrong. Jean-Paul Bolduc, Exchange Act Rel. No. 41812 (Aug. 31, 1999), 70 SEC Docket 1492 ("Stay Order").
Curiously, although Armstrong has joined Bolduc's motion, he does not seek to disqualify the Commission from deciding his interlocutory Rule 102(e) appeal. Rather, Armstrong requests "immediate Commission action" on that appeal. The Commission will decide Armstrong's Rule 102(e) appeal consistent with its interest in the "just, speedy, and inexpensive determination" of all proceedings before it. See 17 C.F.R. § 201.103(a).
|4||Of five Commission members, Chairman Levitt withdrew from participation in this proceeding in January 2000; Commissioner Carey has recused himself from all matters relating to Grace since joining the Commission; and Commissioner Johnson left the Commission when his term ended in May 2000. The only sitting members of the Commission who are participating in this matter are Commissioners Hunt and Unger. Under our quorum rule, a decision by two Commissioners can be valid action by the agency. See 17 C.F.R. § 200.41.|
|5|| Individuals involved in an investigation may present a written statement to the staff and the Commission explaining why no enforcement action should be brought against them. See 17 C.F.R. § 202.5(c).
We reject Bolduc's suggestion that his voluntary submission of "Wells" statements disqualified the Commission from deciding this case. An administrative decisionmaker's mere exposure to adjudicative facts is not a basis for disqualification. See Withrow v. Larkin, 421 U.S. 35, 55 (1975).
|6||"Earnings management" is the practice of companies manipulating their earnings in order to meet analysts' expectations.|
|7||Several respondents suggest that the recusals resulted from improper ex parte contacts between the Division of Enforcement staff and the Commission. Accordingly, they have moved for limited discovery, apparently in the belief that any such contacts, once uncovered, would further support this motion. Because we find no basis for granting the motion to disqualify the entire Commission, we deny the related motion for limited discovery filed by Respondent Hampers and joined by Respondent Smith. Consistent with our August 31, 1999 Stay Order, further discovery requests should, in the first instance, be filed with, and resolved by, the law judge.|
|8||333 U.S. 683 (1948).|
|10||Id. at 701.|
|13||Respondents Smith and Sukenik concede that only the Commission can initiate Rule 102(e) proceedings.|
|14||In Otis & Co., 31 S.E.C. 380 (1950), a case decided two years after Cement Institute, we applied the Supreme Court's rationale in denying a motion to discontinue proceedings based on the contention that the Commission and four of its memberswere disqualified. We held that "even if there were grounds for disqualification of a majority of our members, such fact could not operate to prevent this Commission, the only tribunal with power to act with respect to respondent's broker-dealer registration, from performing its duties." 31 S.E.C. at 381 (footnote omitted). Our decision in Otis & Co. was reaffirmed twenty years later in Augion-Unipolar Corp., 44 S.E.C. 438, 440 & n.3 (1970) (stop-order proceeding).|
|15||See H.R. Rep. No. 101-616, at 13-14 (1990), reprinted in 1990 U.S.C.C.A.N. 1379, 1380-81.|
|16||See id. at 23-24, reprinted in 1990 U.S.C.C.A.N. 1379, 1390-91.|
|17||Congress also believed that the Commission's specialized expertise would best enable it to choose among available sanctions and to discern the interests of the investing public. See Blinder, Robinson & Co. v. SEC, 837 F.2d 1099, 1107 (D.C. Cir. 1988).|
|18||837 F.2d 1099 (D.C. Cir. 1988).|
|19||837 F.2d at 1106-07 (citation omitted).|
|20||See In the Matter of W.R. Grace & Co., Exchange Act Rel. No. 41578 (June 30, 1999), 70 SEC Docket 170.|
|21||In the Matter of W.R. Grace & Co., Exchange Act Rel. No. 41578 (June 30, 1999), 70 SEC Docket 170, 171 n.1.|
|22||See Stuart James Co., 50 S.E.C. 468, 469-72 (1991); Steadman Sec. Corp., 46 S.E.C. 896, 920 n.82 (1977); Edward Sinclair, 44 S.E.C. 523, 528-29 (1971), aff'd, 444 F.2d 399 (2d Cir. 1971) (per curiam); Atlantic Equities Co., 43 S.E.C. 354, 366 (1967), aff'd, 396 F.2d 694 (D.C. Cir.) (per curiam), cert. denied, 393 U.S. 847 (1968).|
|23||Under the Commission's Canon of Ethics, a decision concerning disqualification must be made by the individual Commissioner. 17 C.F.R. § 200.60; see also Otis & Co., 31 S.E.C. 380, 382 (1950)(holding that the Commission has no authority to rule on the qualification of its members; each member must determine his or her own qualification); The United Corp., 32 S.E.C. 633, 634 n.3 (1951) (same).|
|24||The Supreme Court has held that a decisionmaker is not disqualified from participating in a proceeding simply because he has expressed an opinion on a legal or policy issue related to the dispute. See, e.g., Hortonville Joint School Dist. No. 1 v. Hortonville Educ. Ass'n, 426 U.S. 482, 493 (1976); Laird v. Tatum, 409 U.S. 824, 831-36 (1972); FTC v. Cement Institute, 333 U.S. at 702-03.|
|25||See Marshall v. Jerrico, Inc., 446 U.S. 238, 248 (1980).|
|26||Release No. SAB 99 (Aug. 12, 1999), 70 SEC Docket 1043. Bolduc mistakenly argues that bias is inherent in the Commission's authorization of the publication of Staff Accounting Bulletin No. 99. The bulletin expressly states that the statements contained therein "are not rules or interpretations of the Commission, nor are they published as bearing the Commission's official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws." Id.|