• All TROs, All the Time: Can the SEC be trusted to Exercise its Discretion?
  • April 17, 2009
  • Law Firm: Holland & Hart LLP - Denver Office
  • As I previously have noted, a major component of the SEC’s response to the economic crisis is obtaining TROs and asset freezes against defendants in civil actions filed in U.S. District Courts around the country.   Yesterday, the SEC filed two more emergency civil actions in Texas and Arizona, obtaining TROs and asset freezes in both cases.   This means the SEC has already obtained TROs in at least 21 cases since the beginning of the year, which is far more than it obtained during all of 2008.   To justify its actions, the SEC issued press releases describing many of these cases as  Ponzi schemes. 

    Courts are no obstacle to the SEC’s applications for emergency relief, so TROs are largely a matter of the SEC’s exercise of prosecutorial discretion.  Judges are not immune from popular anger directed at the financial services community.  As noted in a recent National Law Journal article, “government lawyers want to show they are doing all they can to recover fraudulent funds, and judges are going along.” [1] The SEC is presumed to represent the public interest, and the preliminary evidence it submits is presumed to be sufficient, even if it consists largely of the self-serving affidavits of SEC employees who worked on the underlying investigation.  Once a TRO is obtained, defendants theoretically have the opportunity to overturn the asset freeze after its expiration in ten days by opposing the SEC’s motion for a preliminary injunction.  As a practical matter, however, the entry of the TRO means the case is all but over as soon as it begins.  This is because, due to the court’s asset freeze, the defendant cannot hire a lawyer.  Even if funds from other sources are located to retain counsel, the short time period before the TRO hearing makes it extremely difficult to present a meaningful defense.

    Needless to say, pro se defendants are unlikely to be successful litigating against the SEC.   The Law Journal article’s discussion of the plight of former hedge fund operator Arthur Nadel typifies the problems faced by defendants with frozen assets.  The SEC froze his assets and then the U.S. Attorney’s Office indicted and arrested him.   As is always the case, the SEC opposed, and the Court denied, Nadel’s motion to free up some frozen assets so he could pay legal fees.  Not only is Nadel reduced to filing handwritten, self-prepared pleadings in the SEC civil case, he is entirely unrepresented in the criminal case.  The court likely will provide Nadel with representation in the criminal case by appointing a public defender or other counsel under the Equal Access to Justice Act, but his court-appointed lawyer is unlikely to have the securities law expertise needed to provide him with effective representation.  The proliferation of asset freezes and parallel criminal proceedings raises fundamental questions about fairness and the right to counsel.

    The SEC pursues its own self-interest in obtaining these emergency remedies.  Publicizing these asset freezes, particularly in the Ponzi scheme context, demonstrates the virility of the Enforcement Program and helps mute calls for legislation abolishing the the agency.  Further, since the TROs effectively prevent defendants from presenting a meaningful defense, they promote the early termination of litigation on terms favorable to the agency.  Since the SEC’s motivations are suspect, whether the SEC can be trusted to appropriately exercise its discretion is an open question.  The defense bar should initiate a public dialogue with the agency on this important issue.


    [1] “Defendants, With Assets Frozen, Find It Tough to Hire Attorneys,”  National Law Journal (Apr. 1, 2009), available at http://online.wsj.com/article/SB123863238155080505.html.