SEC ALJ Sent To Woodshed In Remanded Listing Revocation
August 28, 2015
Don't look. Don't stare. Pulhease . . . don't even turn around. I'm afraid that if we call too much attention to what's going on at the Securities and Exchange Commission ("SEC"), that we might inadvertently stop the positive change in its tracks. As reported in "SEC Under Siege! Dramatic Inspector General Report Shakes ALJ System" (BrokeAndBroker.com Blog, August 10, 2015) the SEC's Administrative Law Judge ("ALJ") system has come under scrutiny by the SEC's Office of the Inspector General. More noticeably, emboldened SEC Commissioners seem to be taking their roles a tad more seriously than has been the case in the past -- what we're seeing is the possible retirement of the rubber stamp and the resort to magnifying glasses, erasers, and remands. Consider this recent case.
A Rocky End for RKO?
On May 5, 2015, the Securities and Exchange Commission filed
an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant
to Section 12(j) of the Securities and Exchange Act of 1934 (the "OIP") (OIP, '34
Act Rel. 74869; Admin. Proc. File 3-16525 / May 5, 2015) against four respondents including RKO
Resources, Inc. (a/k/a Shamika 2 Gold, Inc.). In relevant part, the OIP alleged that:
4. RKO Resources, Inc. (a/k/a Shamika 2 Gold, Inc.) (CIK No. 1330323) is a defaulted Nevada corporation located in Montreal, Quebec, Canada with a class of securities registered with the Commission pursuant to Exchange Act Section 12(g). RKO Resources is delinquent in its periodic filings with the Commission, having not filed any periodic reports since it filed a Form 10-Q for the period ended September 30, 2012, which reported a net loss of $3,712,606 from the company's January 13, 2010 inception through September 30, 2012. As of April 28, 2015, the company's stock (symbol "SHMX") was quoted on OTC Link, had eight market makers, and was eligible for the "piggyback" exception of Exchange Act Rule 15c2-11(f)(3) (
Accordingly, Respondent RKO was required to file an Answer
to the allegations within 10 days of after the service of the OIP pursuant to
the SEC's Rule of Practice 220(b). A failure to timely file exposed RKO to
beoing deemed in default and the allegations deemed true and uncontroverted.
SIDE BAR: Consider SEC Rules of Practice 220 and 155:
Rule 220. Answer to Allegations.
(a) When Required. In its order instituting proceedings, the Commission may require any party to file an answer to each of the allegations contained therein. Even if not so ordered, any party in any proceeding may elect to file an answer. Any other person granted leave by the Commission or the hearing officer to participate on a limited basis in such proceedings pursuant to Rule 210(c) may be required to file an answer.
(b) When to File. Except where a different period is provided by rule or by order, a party required to file an answer as provided in paragraph (a) of this rule shall do so within 20 days after service upon the party of the order instituting proceedings. Persons granted leave to participate on a limited basis in the proceeding pursuant to Rule 210(c) may file an answer within a reasonable time, as determined by the Commission or the hearing officer. If the order instituting proceedings is amended, the Commission or the hearing officer may require that an amended answer be filed and, if such an answer is required, shall specify a date for the filing thereof.
(c) Contents; Effect of Failure to Deny. Unless otherwise directed by the hearing officer or the Commission, an answer shall specifically admit, deny, or state that the party does not have, and is unable to obtain, sufficient information to admit or deny each allegation in the order instituting proceedings. When a party intends in good faith to deny only a part of an allegation, the party shall specify so much of it as is true and shall deny only the remainder. A statement of a lack of information shall have the effect of a denial. A defense of res judicata, statute of limitations or any other matter constituting an affirmative defense shall be asserted in the answer. Any allegation not denied shall be deemed admitted.
(d) Motion for More Definite Statement. A party may file with an answer a motion for a more definite statement of specified matters of fact or law to be considered or determined. Such motion shall state the respects in which, and the reasons why, each such matter of fact or law should be required to be made more definite. If the motion is granted, the order granting such motion shall set the periods for filing such a statement and any answer thereto.
(e) Amendments. A party may amend its answer at any time by written consent of each adverse party or with leave of the Commission or the hearing officer. Leave shall be freely granted when justice so requires.
(f) Failure to File Answer: Default. If a party respondent fails to file an answer required by this rule within the time provided, such person may be deemed in default pursuant to Rule 155(a). A party may make a motion to set aside a default pursuant to Rule 155(b).
Rule 155. Default; Motion to Set Aside Default.
(a) A party to a proceeding may be deemed to be in default and the Commission or the hearing officer may determine the proceeding against that party upon consideration of the record, including the order instituting proceedings, the allegations of which may be deemed to be true, if that party fails:
(1) to appear, in person or through a representative, at a hearing or conference of which that party has been notified;
(2) to answer, to respond to a dispositive motion within the time provided, or otherwise to defend the proceeding; or
(3) to cure a deficient filing within the time specified by the Commission or the hearing officer pursuant to Rule 180(b).
(b) A motion to set aside a default shall be made within a reasonable time, state the reasons for the failure to appear or defend, and specify the nature of the proposed defense in the proceeding. In order to prevent injustice and on such conditions as may be appropriate, the hearing officer, at any time prior to the filing of the initial decision, or the Commission, at any time, may for good cause shown set aside a default.
The Initial Decision
On May 26, 2015, SEC Administrative Law Judge Foelak issued
an Initial Decision Making Findings and Revoking Registrations by Default (the "Initial
Decision") (Initial Decision, Initial Decision 798; Admin. Proc. 3-16525 / May
26, 2015. As set forth in the Initial Decision, ALJ Foelak revoked RKO's
registration based upon a finding that the Respondent failed to file an Answer
to the OIP within the requisite 10 days of service.
If At First You Don't Succeed . . .
In a somewhat rare move, the SEC declined to affirm the ALJ's Initial Decision and found that RKO had, in fact, engaged in post-OIP
conduct that supported the setting aside of the default for good cause. In the Matter of RKO Resources, Inc. (a/k/a/
Shamika 2 Gold, Inc.) (Order Remanding Case for Further Proceedings (Order, '34
Act Rel. 75765; Admin Proc. File 3-16525 / August 26, 2015).
As explained in the Order, Respondent RKO was required to
file an Answer within ten days of the May 8, 2015, service date of the OIP.
Admittedly, no such Answer was timely filed; however, RKO did file a Motion to
Vacate on June 4, 2015. As more fully explained in the Order [Ed: footnotes
omitted]:
We find that RKO has satisfied the
procedural and substantive components of the standard.8 First, RKO made its
motion within a reasonable time after entry of default. The law judge issued
the Initial Decision defaulting RKO on May 26, 2015, which was then sent to RKO
by certified mail the next day. RKO filed the present motion eight days later,
which is faster than other such motions we have found to have been brought
within a reasonable time. 9 Thus, RKO has satisfied the first Rule 155(b)
element.
Second, RKO stated a sufficient
reason for failing to file a timely answer in that it did not intentionally
default or otherwise fail to make defense of the proceeding a priority. RKO
stated that it went through a change in control in May 2015, with a new
president and CEO acquiring his predecessor's controlling interest in RKO and
being appointed by the Board of Directors. RKO stated that the turmoil
surrounding its change in control resulted in confusion and inadvertent mistake
about how long it had to answer. We find that this claim of inadvertence, which
is supported by the speed with which RKO filed its motion to vacate after
default was entered, satisfies the second Rule 155(b) element.10
Third, RKO sufficiently articulated
a proposed defense.11 RKO stated, in an affidavit from its current president
and CEO, that before its recent change in control it "lacked the resources
necessary" to prepare the periodic reports required by Exchange Act
Section 13(a) and Rules 13a-1 and 13a-13, but that it is now "fully
prepared to cure any deficiencies and make all requisite filings, past and
present, so as to avoid having its registration permanently revoked."12
Although RKO appears to acknowledge its violations,13 we find that its proposed
defense to sanctions satisfies the third element of Rule 155(b).14
Accordingly, we find that RKO has
satisfied our standard for setting aside default.15 We further note, as we have
stated in similar contexts, that "we generally consider it a prudent
practice for a law judge who is considering the issuance of a default order
against a respondent to first order that respondent show cause why a default is
not warranted."16 That practice was not followed here. We reiterate our
encouragement of such practice, which we believe furthers fairness in our
administrative proceedings and efficiency by facilitating resolution of
default related issues at the hearing level, when they can be most expeditiously
addressed.
Accordingly, it is ORDERED that the
entry of default is set aside and the Initial Decision is vacated as to RKO
Resources, Inc. (a/k/a Shamika 2 Gold, Inc.), and the matter is remanded to the
law judge for further proceedings consistent with this order;17 . . .
Pages 2 - 4 of the
Order
Bill Singer's Comment
Compliments to the SEC Commissioners for doing their jobs.
More often than not, companies such as RKO deserve to have their registrations revoked. There is nothing laudatory in failing to timely file important financial disclosures, all the more so when we're dealing with a Nevada corporation located in Canada and with a hemorrhaging bottom line. The company's investors and the markets are entitled to more timely compliance when given the circumstances of companies such as RKO. So, no, I'm not terribly sympathetic to this respondent's plight.
On the other hand, as the Order admonishes in stark and damning language, ALJ Foelak did not follow the "prudent practice" and did not further "fairness in our administrative proceedings and efficiency." After the Commissioners considered RKO's Motion to Vacate, the company's change of control, and the reasons offered in mitigation of the untimely filing, they concluded that the ALJ's conduct was hasty and unnecessary -- she dumped the case into the laps of the Commissioners when the ALJ could have and should have short-circuited the revocation on her own motion.
In fairness to both the ALJ and the Commissioners, there are a lot of ifs, buts, and howevers in this case. Many market and investor advocates will applaud ALJ Foelak's conduct as one designed to protect the public. On the other hand, I commend the Commissioners for recognizing that the SEC has an image problem in terms of the integrity and fairness of its administrative system. If the message of the Order to all the SEC's ALJs is that are expected to exercise independence, commonsense, and fairness, then I applaud what happened here.
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