SEC’s Ignorance of Due Process


By Mark J. Astarita, Esq.


The Securities and Exchange Commission decided in May to test it’s new procedure – the one where they get to be the judge, jury and prosecutor, at the same time, and get to impose whatever sanctions they deem appropriate on a broker-dealer.

When did the due process clause of the constitution get repealed? Well it didn’t, but apparently the Commission is not aware of the clause. On May 23, 1996, the Thursday before the Memorial Day weekend, the Commission’s staff presented their bosses, the Commission itself, with an order to show cause, which the Commission signed, which ordered a New York brokerage firm to appear in Washington DC on Wednesday, May 30, at 9:00 AM, to show cause why the firm should not be ordered to hire, at their own expense, a “special compliance agent”, selected with the approval of the Commission, to oversee the operations of the firm.

Of course, the documents in support of that order were approximately a foot high, with documents and letters the Staff had been preparing for over a year. The Commission gave the firm until noon on the 29th to respond – less than two business days to respond to work the Commission’s employees prepared over the period of a year.

Given less than a two day’s notice, the firm could not respond, and was forced to consent to the temporary order.

Is this the way the United States government is supposed to operate? On two days notice they have the ability, without a hearing, to force a corporation to respond, in a distant state, to a stack of affidavits that the government prepared and investigated over the course of a year? To put a small business to the unbearable financial burden of responding to a mountain of allegations of events that occured over the past year, by various employees, some of whom were no longer with the firm, over a holiday weekend?

It is easy for some to dismiss this story as the Commission’s attempt to shut down a “bad” broker-dealer. The allegations put forth by the Commission’s staff were very serious. The issue is that the firm was not given the opportunity to defend itself. We will never know if the allegations were true or not, because the government made it impossible for the firm to present an answer to the charges.

One of the hallmarks of this nation’s legal system is the concept that charges are brought, the defendant investigates, prepares a defense, and presents that defense in response to the charges, to an impartial third party, a judge.

Now, imagine a system where the prosecutor is employed by the Judge. The prosecutor takes years to “investigate” a matter, put together a set of allegations, leaving out facts that show that the defendant may not be guilty of the charges, presenting only those that tend to indicate his guilt. Then haveing spent years putting together a case, the prosecutor says to his boss, the Judge, here it is, the work you told me to do, now make the defendant respond, and the Judge says, Yup, this is serious, defendant, appear before me in two days, respond to these hundreds of pages of documents, containing allegations involving 40 different people, over the course of a year, about people who are no longer your employees, and be here in two days with your response.

Couldn’t happen right. Well, it did, for the SEC could decide that YOU are the next person who doesn’t deserve the basic guarantees of the Constitution of the United States. Imagine, they actually gave themselves powers that the Courts of this Nation do not have.

My closing line was supposed to be a joke, a play on words, but I don’t feel much like playing this month. When the government can get unconstitutional relief by brute force, something is seriously wrong.


Sallah Astarita & Cox, LLC - Securities Litigation Attorneys - former SEC Staff Attorneys and Brokerage Firm Counsel representing issuers, advisors and investors nationwide in securities investigations, disputes, and arbitrations, nationwide. Call 212-509-6544.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.