When SEC Receivers Go Too Far: Russ Ryan on Barton v. SEC

Mark Chenoweth: Welcome to Unwritten Law with Mark Chenoweth and John Vecchione. We are delighted to be joined by our colleague, Senior Litigation Counsel Russ Ryan, to discuss yet another interesting amicus brief that you have submitted to the Supreme Court on NCLA's behalf. Russ, tell us about Barton v. SEC. What is going on in this case?

Russ Ryan: Sure. It starts as an SEC enforcement case against Mr. Barton, and I think maybe one or two of his companies. The SEC, as it not infrequently does, sought a TRO and an appointment of a receiver in a federal district court, and the court appointed the receiver, who has been in that role for a couple of years now and has not only taken custody of assets but has taken over control of, I think, most of the corporations, which are many, that Mr. Barton is associated with. And so, he's got quite a fiefdom there going on. So, Mr. Barton does not like the receiver, doesn't like having all of his assets tied up. In particular, there's a parallel criminal case going on, and the receiver has seized essentially all of his assets, some of which would have been used to pay for his criminal defense.

Mark Chenoweth: I was going to say, how do you pay for your criminal defense if all your assets are tied up?

Russ Ryan: Apparently, he can't. I know in the civil case he's got pro bono counsel. I'm not sure what he's doing with the criminal case, but according to his briefing, he's simply not able to pay the attorneys he would like to have defend him.

Mark Chenoweth: Yeah, it sounds like a right of counsel problem potentially.

Russ Ryan: Yeah, that's the focus. That's a big focus of Barton, his own briefing, is that a receiver can't take so much of my assets before I'm proven guilty, either in the civil or criminal case, such that I can't defend myself in the criminal case, and that raises a Sixth Amendment problem.

John Vecchione: And there's nothing prosecutors love more than making sure you can't have your own counsel. They do this all the time with whatever method, and this is just a godsend for them.

Russ Ryan: Yep, yep, yep.

Mark Chenoweth: Well, it certainly makes it easier to prosecute somebody if they don't have as talented a counsel defending them.

Russ Ryan: Yeah, that's for sure. So, we jumped in when it got to this search stage, and we took a slightly different angle. Barton is saying you can't appoint a receiver who can do all these crazy things and effectively deny me my Sixth Amendment rights. But we look at it as, "Well, wait a minute, what gives this judge the authority to appoint the receiver in the first place?” So, we focused on, primarily, the Appointments Clause problem that I've always thought was a big one.

Mark Chenoweth: Can we just pause?

Male Speaker: Yeah.

Mark Chenoweth: I'm hearing phones buzzing.

Male Speaker: Phone’s buzzing?

Russ Ryan: Yeah. I think that might be mine.

Male Speaker: I didn't hear it.

John Vecchione: It was boop, boop, boop, boop, like that.

Mark Chenoweth: And I realized I hadn't turned mine off either, so.

Male Speaker: Yeah. I was just confirming mine was off. Maybe you just heard it on that table? ‘Cause I couldn’t hear it over here with headphones. I’m wearing these over-the-ear headphones.

Mark Chenoweth: Yeah, I was getting quite a loud buzz.

Male Speaker: Do we need to start his part over? Do you know at what point you started hearing it?

Mark Chenoweth: Yeah, I didn't pick a very good time to jump in, sorry. I just heard it again.

John Vecchione: Yeah.

Russ Ryan: I got to turn this thing off.

Male Speaker: Is it yours?

Russ Ryan: I don’t know.

Male Speaker: My computer is only giving me audio for this. Let me hear it again. ‘Cause I did hear it at that time.

Mark Chenoweth: Or we can just put it away from the microphone, maybe, if you can't turn it off.

Russ Ryan: Yeah, no. It’s off, sorry.

Mark Chenoweth: That's all right.

Russ Ryan: I should have thought of that.

Mark Chenoweth: We can put that on a checklist or something. We'll make sure we all remember to do that, because it just as easily could have been mine. Let's see. Where were you? You were – I don't want to miss –

Russ Ryan: Talking about our angle is the Appointments Clause.

Mark Chenoweth: Yeah, let's start with our angle. That's a good place to start. I'll ask a question. Okay. Russ, you focused on a different angle for NCLA's amicus brief in this case. What was it that you were picking up on?

Russ Ryan: Yeah, I started from the beginning, basically. I've always thought there was an Appointments Clause problem when judges appoint receivers in these SEC cases and give them a vast degree of power.

Mark Chenoweth: Executive power.

Russ Ryan: Most of it.

Mark Chenoweth: Right, essentially.

Russ Ryan: Some of it's judicial, I guess. I mean, they're taking custody of assets, holding them for safekeeping, so that when the judge ultimately rules in the case, if those assets will be available. But in these SEC cases over time, the way these receivers operate is they do a whole lot more than just take in assets and hold them for safekeeping, among other things.

Mark Chenoweth: They dissipate them. No way. I'm sorry. That’s –

Russ Ryan: That's how they do get paid.

John Vecchione: No, they do.

Russ Ryan: They do get paid.

Mark Chenoweth: It feels that way a lot of times.

Russ Ryan: But they do perform executive functions. In this case, the receiver is basically managing and running dozens of corporations. But they're given power to issue subpoenas, investigate third parties, sue third parties. Those, to me, are classically executive functions. And so, A, it's an Appointments Clause problem because there's no statute that creates this office of receiver and empowers courts to appoint receivers.

Mark Chenoweth: And you note in the amicus brief that that's unusual because in other contexts in which judges appoint receivers, there is a statute that empowers them to do so.

Russ Ryan: Yeah. And it's not always judicial appointments. But, for example, FDIC can be a receiver in certain bank cases. And we cite a whole number of ones that I really, honestly, wasn't even aware of. But there's plenty of statutes out there in the U.S. Code that says, in certain situations, a receiver or a trustee or a conservator can be appointed by. And it says who can appoint the person and what that person is supposed to be doing. In the SEC receivership case, it's all ad hoc. It's made up.

Mark Chenoweth: So, Congress knows how to do this. But in the SEC context, they haven't done it.

Russ Ryan: Right. There is one. There are two provisions of securities laws that I've found that do have something that approaches an appointment like this. One is in the now repealed Public Utility Holding Company Act, or PUHCA, as they used to say, which did allow an appointment of, I think, it was a receiver in certain circumstances. There's also the Investment Company Act, which is not at issue here. But again, there's a provision right there in a parallel provision of the Investment Company Act that says, in certain circumstances, the SEC itself can be appointed as a trustee or a receiver or something like that.

Mark Chenoweth: And these aren't ambiguous powers when Congress has given them. They're pretty explicit.

y, is one that was enacted in: 2000

Mark Chenoweth: Yeah. It's not equitable relief to appoint someone to run all the companies and take someone's assets.

Russ Ryan: Right. And then to sue like lawyers and accountants for malpractice. That's not an equitable claim. That's a claim at law.

John Vecchione: I have a question about that. What about when they create a constructive trust? That's an equitable claim, and a constructive trust does all those things, doesn't it?

Russ Ryan: Yeah. I don't know. I'm not an expert in that area, but I don't think you can use equity to pursue legal remedies.

John Vecchione: Well, the thing is, they do this preliminarily. This is the thing that gets me. The FTC does this too, and I forget if they have a statute allowing it, but they always follow the SEC.

Russ Ryan: Probably not.

John Vecchione: Yeah, exactly. But the fact that they do this before an adjudication strikes me as completely inequitable. But I've always thought that if they were smart, they would say it is an equitable power because it's constructive trust, because the constructive trustee does everything to keep and gather all the assets.

Mark Chenoweth: But a constructive trustee doesn't then litigate in front of the judge who appointed them to do that?

John Vecchione: They could if they're gathering assets. So, if you have a chosen action in a constructive trust, you have the whole thing; they are allowed to go collect the assets. And so, I have always had, as I said, I think the FTC does the same thing. And I do not think that Congress meant to do that by saying that there's equitable powers, but I've always thought that's the one that they should be hanging their hat on.

Russ Ryan: Well, you've hit on something there, and Mark was getting to it, I think, which is – it's bizarre that the court appoints a receiver, the receiver goes out there and investigates and sues people like lawyers, accountants, and so forth. And where do they bring those cases? Before the appointing judge. I mean, so the judge is, in a literal sense, deciding his own case because the receiver is an agent of the judge.

Mark Chenoweth: Right. Did I do a good job in appointing this person?

John Vecchione: And I have a question about that. Why doesn't… In a constructive trust situation, you go wherever the guy is? You don't sue in front of the judge.

Russ Ryan: Well, sometimes receivers do go beyond. I don't know why they do it. I think whenever they can, they bring it back before the appointing judge, which to me has always been just, you know, how can that be due process if...

John Vecchione: Right. He's your guy.

Russ Ryan: Yeah. But the other issue, and all these issues are of intellectual curiosity to me, but they really weren't… We really couldn't get them into this brief because the petition...

Mark Chenoweth: Was a little too focused on other issues.

Russ Ryan: Just focused on basically the appointment itself.

Mark Chenoweth: Right.

Russ Ryan: But there's just all manner of problems with these. I mean...

Mark Chenoweth: But what's really going on here? I mean, one of the things that I learned in reading your brief was the reason that the judges are doing this is essentially to evade the bankruptcy.

Russ Ryan: Yeah. That's a really bad thing.

Mark Chenoweth: So, explain that. What's going on there?

Russ Ryan: Well, in most of these situations, the reason why they're appointing a receiver is because there's not enough money to go around to pay all the creditors. And so, it...

Mark Chenoweth: As a result of some sort of securities fraud, potentially.

Russ Ryan: Right. But Congress has a statute for that. It's a big process to deal with situations where there's not enough money to pay all the people making claims.

John Vecchione: And it has receivers in that statute.

Russ Ryan: Yeah, trustees. It does.

Mark Chenoweth: Yeah. It's the bankruptcy code. And there's a whole bunch of judges appointed that have expertise in dealing with that situation.

Russ Ryan: But the SEC does not like the bankruptcy process for one main reason, which is Congress put equity shareholders at the bottom of the priority list. In the bankruptcy code. In the bankruptcy cases. And the SEC has always believed, because of its mission, that those people should be at the top of the pecking order. And so, you've got a disconnect. So, the SEC, if it can avoid it, wants to rush to the courthouse and get a receiver appointed. And worse yet, most of these receivership orders say that all other litigation involving the company is now stayed. And like, so –

John Vecchione: So, if I file a notice of bankruptcy –

Mark Chenoweth: I think that's fascinating. It's fascinating.

John Vecchione: If I file a notice of bankruptcy, it doesn't override that order?

Russ Ryan: Usually, the order says that proceeding has got to be stayed –

John Vecchione: Oh, my gosh.

Russ Ryan: In deference to the receivership.

John Vecchione: Because of that, I'll never forget my first trial I ever had; it was a one-day trial on a note. And I go in there; I'm 26 years old, and the guy goes, “Suggestion of bankruptcy.” And the judge looks at me, he says, "Mr. Vecchione.” There were libraries then. "Do you want to spend an hour in the library taking a look?” And I went upstairs, and there was no loopholes to that then, I'll tell you that.

Russ Ryan: But in the bankruptcy code, there's a provision for the automatic stay. If you put yourself in bankruptcy or somebody throws you into bankruptcy, all other litigation essentially stops. Now, it's a little more complicated –

Mark Chenoweth: Because Congress said so.

Russ Ryan: But SEC enforcement investigations are part of an exception to this day, which is, generally speaking, for law enforcement. But I think the way that works is the SEC can reduce its case to a judgment, but it can't then collect on the judgment. That judgment just becomes like any other creditor in the bankruptcy. But by appointing a receiver and basically saying you can't go into bankruptcy now, this ad hoc shadow process gets created on a case-by-case basis that effectively does an end run around the statutory bankruptcy provisions. The whole thing is just crazy.

Mark Chenoweth: It really is. Do you think that is something that the courts can get a handle on? If the Supreme Court were to take this case and say, “No, no, no, no, there's an appointment problem here,” would that solve this race to the courthouse between the SEC and the bankruptcy?

Russ Ryan: Well, we stop short of saying courts can't appoint any receivers. We are fairly careful about that because if the receiver is just doing some ministerial work that the judge otherwise would have to be dealing with, that's one thing I think we could get comfortable with, that being not an officer and thus not requiring some statute.

Mark Chenoweth: Being judicial power and not executive power, maybe.

Russ Ryan: Yeah, and one of the problems here is that the receiver does things that the court itself, I don't think, could ever do. Courts don't go out there and file tort lawsuits on behalf of the parties before them. And if the court itself can't do it, I don't understand how the court can appoint an agent to go out and do something that the court itself can't do.

Mark Chenoweth: It seems like the principal-agent problem.

Russ Ryan: Yeah, courts and parties are not grappling with just those basic problems that I've seen now. I've been on this bandwagon for probably 15 years.

John Vecchione: And it is even worse than that in some ways, in that because these receivers get paid a lot of money, the actual recovery for people. Not only have you taken out a bankruptcy so that the stockholders are ahead of the creditors in a lot of things, which is just outrageous, but –

Mark Chenoweth: If there's anything left.

John Vecchione: If there's anything left because these receivers, in my experience, they take a lot of money out of these things. It's a good racket.

Russ Ryan: Yeah, it's a cottage industry, and it's repeat players. They've got a whole apparatus, and they make millions of dollars.

John Vecchione: Millions. That's why I wanted to get that number out because that's exactly it. And so, the people who have been either defrauded or creditors are out of luck. But I will say this: as I understand the receiver, the reason they're allowed to sue is they step into the corporate body, and a corporation is allowed to sue. And that's how they say they're allowed to do it.

Russ Ryan: Yes, but could the judge himself do that?

John Vecchione: No, no.

Russ Ryan: Yeah. Say, you know what? I'm taking over this corporation, and I'm gonna file some lawsuits, and then I'm gonna have venue transferred to my courtroom so that I can decide those cases. If you just step back and look at what's actually going on, it's an end-run-around bankruptcy to pull these cases in front of a single federal judge who basically makes up the rules in any given case according to whatever he and the SEC decide is equitable. And so, you could flip the priority on its head where the shareholders are on top and the creditors are just kind of looking at this like, “How did this happen? I get to the bottom. I thought I had a pretty secure plan.”

John Vecchione: And the last shall be first.

Mark Chenoweth: Yeah, right. Well, John, my question with a lot of these things that Russ brings to the program is he's been sitting on these ideas for like 15 years. Where's the rest of the securities bar? And how come they don't come up with these ideas of all the problems?

John Vecchione: Well, you know who I wonder about? I wonder what Rakoff thinks about this because he's a big critic of the SEC, but he's also a main guy for judges should be able to do everything. So, I would really like to see Judge Rakoff.

Skip [inaudible - crosstalk] [: 00:18:22

John Vecchione: Yeah. Exactly.

Russ Ryan: When I talk about this stuff at the cocktail hours among the defense bar, usually I get either polite looks, like, "This guy's off his rocker. What's in that drink? What is this guy even talking about?"

Mark Chenoweth: Cognitive dissonance. That was the term I was trying to think of, John.

John Vecchione: Exactly.

Mark Chenoweth: So, what happens next with Barton?

Russ Ryan: It's on for the conference for the justices to decide whether to take it. I think, December 5th, the government waived its right to put in a response to the petition.

Mark Chenoweth: Which is like giving it the back of the hand, saying, "Yeah, we know you're not going to be interested in this."

Russ Ryan: So, I guess on or around the 5th, we'll probably either have the court ask for a response or they'll decide. I don't think they grant certs without asking for a response.

Mark Chenoweth: No, that's right.

Russ Ryan: So, it'll either be denied on the 5th, or we'll get an order saying we want a response by X day.

Mark Chenoweth: And it only takes one justice to ask for a response. So, we could get that. Well, if nothing else, hopefully your amicus brief has put this issue in front of many more people.

Russ Ryan: Yeah, it was very cathartic to get it out there. I did do a brief in a case when I was in private practice back 15 years ago. But the district judge would have none of it. He just gave the back of his hand. The oral argument lasted, I think, like maybe three minutes.

John Vecchione: Because in the back of their heads is we do this all the time. We do this all the time.

Russ Ryan: He literally said that.

John Vecchione: I have no question; that's what he said. And they say that, and then they don't have to look underneath.

Russ Ryan: Right. And then he issued a written decision. I think it was two or three pages where he spent one paragraph on the whole receivership problem. So, it was good to be able to get it back out there.

Mark Chenoweth: But our colleague Peggy has a riff or soapbox. She gets on about this: "We do this all the time” problem in the judiciary. And a lot of times there isn't a lot of reflection over some of these things that do happen with great frequency.

Russ Ryan: Yeah, and it's because it's done all the time. You have even the defense lawyers. It doesn't occur to them that maybe there's a square one problem with this.

Mark Chenoweth: But it occurs to Russ Ryan.

Russ Ryan: Yeah, I try to do that. I always go back and say, "All right, well, by what authority is this happening?" And then usually you peel back the onion, and you start realizing this just doesn't work.

Mark Chenoweth: Well, it makes a great case for the new Civil Liberties Alliance. And whatever happens with Barton, if we come across another case where there's an opportunity for us to make this sort of a claim.

Russ Ryan: Separation of powers would be great. I mean, it's a Morrison-against-Olson problem. For sure. That a court is appointing someone to do executive work. And Morrison, they got away with it.

Mark Chenoweth: Yeah.

John Vecchione: Eight, one.

Russ Ryan: Yeah, I think in the long run, people sort of think Scalia got it right.

Mark Chenoweth: Oh, yeah. No, I think Morrison has been sub silentio been overruled at this point.

Russ Ryan: But even if Morrison is good and was good law, this receivership type of situation is totally distinguishable. So, it doesn't even satisfy the prerequisites that got Morrison over the hump because the cases are brought before the appointing judge. I don't know if you remember, but back then, the three – the special panel that appointed the independent counsel was basically done at that point. No cases would ever come before them.

Mark Chenoweth: This was the D.C. Circuit.

Russ Ryan: Right.

Mark Chenoweth: Like three judges in the D.C. Circuit or something appointed.

Russ Ryan: And the independent counsel, I think, in some way was after the appointment, was supervised by the attorney general ultimately, and I think could be removed. I can't remember who could remove him, but there were just a lot of safeguards there where the separation of powers was at least…

John Vecchione: Not in tune.

Russ Ryan: Debatable. And of course, eight justices found there wasn't a problem. But here, the reasons they cited for it not being a problem with the independent counsel are absent or the opposite in these situations.

Mark Chenoweth: Well, let's hope that, like I say, whatever happens with the Barton case. And we'll keep track of that. We'll let folks know. But maybe this issue that you've identified in the amicus brief will come up in an even better vehicle down the road. We get the Supreme Court judge –

Russ Ryan: My dream is that the court will ask for a response and say. And in your response, I want you to address whether there's an appointments clause.

Mark Chenoweth: Wouldn't that be nice?

Russ Ryan: That would be a dream come true, but I'm not going to get my hopes up.

Mark Chenoweth: Well, thank you for bringing this issue to Unwritten Law, Russ.

Russ Ryan: Pleasure. Thanks for having me.

Mark Chenoweth: Yeah, always great to have you. You've been listening to Unwritten Law.

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Duration: 24 minutes