In an opinion yesterday, Judge Pauley harshly criticized the SEC for obtaining an ex parte freeze on the assets of a Cayman bank premised on the bank’s participation in a pump-and-dump scheme for unregistered securities. The SEC should have known or quickly discovered, according to Judge Pauley, that the bank was acting as a broker on the transactions, not as a principal. The freeze caused a run on the bank, and led to its failure. Judge Pauley was not pleased:
As the “statutory guardian, of the nation’s financial markets, the SEC is imbued with enormous powers to protect the investing public. It can halt securities trades and seek to freeze-through its representations to a court-the assets of any institution. However, the SEC’s canon of ethics cautions: “The power to investigate carries with it the power to defame and destroy.” 17 C.F.R. § 200.66. Judges rely on the SEC to deploy those powers conscientiously and provide accurate assessments regarding the evidence collected in their investigations. In that way, the integrity of the regulatory regime is preserved.
This case reveals the dire consequences that flow when the SEC fails to live up to its mandate and litigants yield to the Government’s onslaught. During an ex parte proceeding to freeze assets, where the adversary process is not in play, the SEC has an obligation to timely alert the court to foreseeable collateral damage. By overstating its case, the SEC can do great harm and undermine the public’s confidence in the administration of justice. And that damage can be compounded when financial institutions, anxious to appease a regulator, submit to unconscionable terms and permit their depositors’ assets to be held hostage without seeking immediate relief from a court. As this case demonstrates, these concerns are not hypothetical.