24/7 Rapid Response - On Call Transportation Attorneys | 24/7 Data Breach Response - breachresponse@lewisbrisbois.com

Legal Alerts

SEC Announces Expansive Internal Breach, Dismissal of 42 Pending Enforcement Cases

Washington, D.C. (June 6, 2023) - The U.S. Securities and Exchange Commission announced on Friday, June 2, 2023 that an earlier-announced breach (described as a “control deficiency”) between the agency’s enforcement and adjudicatory functions was even more expansive and serious than previously announced. As a result of the internal breach, the agency has dismissed 42 pending enforcement cases, and has agreed to lift industry bans on 48 people whose cases were also involved in the breach.

By way of background, as mandated by the Administrative Procedure Act (APA), the Enforcement wing of the SEC must be separate and apart from its Adjudicatory wing, housed in the Office of General Counsel. As such, Enforcement Division staff who are investigating or prosecuting a matter filed, or to be filed, in the SEC’s internal administrative court system should not participate in the Commission’s decision-making of that matter.

For example, an Enforcement Division trial attorney who files an administrative action against a registered broker-dealer is precluded from engaging in any private discussions with Adjudicative staff assigned to the case or, as relevant here, from reviewing a memo that Adjudication staff drafted to the Commissioners to summarize legal issues in the case. Any breakdown in the wall between Enforcement and Adjudication has the potential to compromise ongoing investigations and administrative actions, and to taint any orders or remedies entered in cases where such breaches in protocol occurred.

As the SEC announced on June 2, certain databases maintained by the SEC’s Office of the Secretary in or around 2017 were not configured to restrict access by Enforcement Division staff to documents drafted by Adjudication staff. As a result, in a number of adjudicatory matters, Enforcement staff accessed Adjudication memoranda via the Office of Secretary’s databases. In many other instances, confidential Adjudication memoranda were uploaded into Enforcement Division databases; once uploaded, the memoranda became accessible broadly to Enforcement staff.

The SEC stated in an earlier April 2022 announcement that the 2017 breach affected only two cases, one of which has since been decided by the U.S. Supreme Court. But the agency further stated on June 2, 2023 that additional investigation revealed that Enforcement staff accessed the files of 28 other cases, as well as internal memoranda meant to advise Commissioners about ongoing cases. The improperly uploaded internal memoranda touched on 61 additional cases.

Due to this serious breakdown between the SEC’s Enforcement and Adjudicative functions, any persons or firms who have had administrative matters before the SEC in the past six years or so would be well-advised to investigate whether their cases, and any bars or orders entered in these cases, are or may be affected by the breach, and the SEC’s remedial actions in response to these breaches.

Lewis Brisbois’ attorneys are available to assist clients in investigating and communicating with SEC staff regarding such actions. For more information on this development, contact the authors of this alert. Visit our SEC Enforcement & Litigation Practice page to learn more about our capabilities in this area.

Authors:

Paul W. Kisslinger, Partner

Sean P. Shecter, Partner

Related Practices


Related Attorneys

Find an Attorney

Each of the firm's offices include partners, associates and a professional staff dedicated to meeting the challenge of providing the firm's clients with extraordinary service.