Topic: Regulatory Studies

Ending the SEC’s Antique Prosecutions

Since at least the days of ancient Athens—which Demosthenes tells us had a five-year statute of limitations for nearly all cases—governments have limited the time period within which punishment or compensation may be sought. Statutes of limitations exist to protect defendants from vindictive or arbitrary lawsuits and prosecutions brought long after their memories have faded and records that might have been used to rebut a claim lost. They ensure that we need not spend our lives constantly anxious about the possibility of the distant past coming back to haunt us over half-forgotten slights.

These are the basic animating purposes behind 28 U.S.C. § 2462, which imposes on the federal government a five-year limitations period for any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise,” and the Supreme Court’s unanimous 2013 opinion in Gabelli v. SEC (in which Cato also filed a brief) finding no valid justification for the Securities and Exchange Commission to pursue enforcement actions seeking civil penalties more than five years after the relevant conduct had occurred.

Unfortunately, the SEC didn’t learn its lesson and has consistently attempted to circumvent and subvert Gabelli by arguing that the relief it seeks in its years-overdue enforcement actions—monetary disgorgement, injunctions requiring defendants to obey the law, and declaratory judgments that laws were violated—is actually “equitable” and not a form of civil penalty covered under § 2462. Disgorgement—requiring a defendant to return their ill-gotten gains—has indeed traditionally been a way to remedy unjust enrichment rather than a punishment, but the SEC’s use of it has been anything but equitable.

The agency has brought disgorgement actions not to make the victims of wrongdoing whole, aid in public securities-law enforcement, or encourage private compliance, but to punish unsuspecting defendants for decades-old conduct, destroy their reputations and careers, and score massive financial judgements that go straight to the vaults of the U.S. Treasury rather than the pockets of any victims. When one actually looks at what the SEC is doing in context, it becomes clear that this “equitable” relief is functionally a “civil fine, penalty, or forfeiture, pecuniary or otherwise,” subject to § 2462’s five-year limitations period.

While a careful application of § 2462 is itself sufficient to resolve this case, it is also important to note the serious reasons that actions like those taken by the SEC are in deep opposition to good public policy. Allowing the SEC—an administrative juggernaut more than capable of bringing meritorious claims in a timely manner—to pursue antiquated claims distracts the agency from its stated priorities of pursuing current malfeasance. It also misleads Congress and the public into believing that modern markets are rife with misconduct, in addition to casting a never-ending shadow of potential liability over anyone involved in financial markets.

This is why Cato has filed an amicus brief in support of Charles Kokesh, a man now entangled in the SEC’s stale web, to urge the Court to put an end to the SEC’s gamesmanship and categorically hold that the agency may not institute an enforcement action seeking disgorgement or injunctive/declaratory relief more than five years after the underlying conduct occurred.

The Supreme Court will hear argument in Kokesh v. SEC on April 18, with a decision expected by the end of June.

How Does One Justify One of the Most Expensive Regulations in American History?

In an effort to justify its massive global warming regulations, the Obama Administration had to estimate how much global warming would cost, and therefore how much money their plans would “save.” This is called the “social cost of carbon” (SCC). Calculating the SCC requires knowledge of how much it will warm as well as the net effects of that warming. Needless to say, the more it warms, the more it costs, justifying the greatest regulations. 

Obviously this is a gargantuan task requiring expertise a large number of agencies and cabinet departments. Consequently, the Administration cobbled a large “Interagency Working Group” (IWG) that ran three combination climate and economic models. A reliable cost estimate requires a confident understanding of both future climate and economic conditions. The Obama Administration decided it could calculate this to the year 2300, a complete fantasy when it comes to the way the world produces and consumes energy. It’s an easy demonstration that we have a hard enough time getting the next 15 years right, let alone the next 300.

Consider the case of domestic natural gas. In 2001, everyone knew that we were running out. A person who opined that we actually would soon be able to exploit hundreds of years’ worth, simply by smashing rocks underlying vast areas of the country, would have been laughed out of polite company. But the previous Administration thought it could tell us the energy technology of 2300. As a thought experiment, could anyone in 1717 foresee cars (maybe), nuclear fission (nope), or the internet (never)? 

On the climate side alone, there’s obviously some range of expected warming, often expressed as the probabilities surrounding some “equilibrium climate sensitivity” (ECS), or the mean amount of warming ultimately predicted for a doubling of atmospheric carbon dioxide. In the UN’s last (2013) climate compendium, their 100+ computer runs calculated an average of 3.2°C (5.8°F). A rough rule of thumb would be that this is also an estimate of the total temperature change predicted from the late 20th century to the year 2100.

WSJ: How ObamaCare Punishes the Sick

In today’s Wall Street Journal, I discuss new economic research showing ObamaCare is making health insurance worse for patients with high-cost medical conditions.

Republicans are nervous about repealing ObamaCare’s supposed ban on discrimination against patients with pre-existing conditions. But a new study by Harvard and the University of Texas-Austin finds those rules penalize high-quality coverage for the sick, reward insurers who slash coverage for the sick, and leave patients unable to obtain adequate insurance…

If anything, Republicans should fear not repealing ObamaCare’s pre-existing-conditions rules. The Congressional Budget Office predicts a partial repeal would wipe out the individual market and cause nine million to lose coverage unnecessarily. And contrary to conventional wisdom, the consequences of those rules are wildly unpopular. In a new Cato Institute/YouGov poll, 63% of respondents initially supported ObamaCare’s pre-existing-condition rules. That dropped to 31%—with 60% opposition—when they were told of the impact on quality.

Republicans can’t keep their promise to repeal ObamaCare and improve access for the sick without repealing the ACA’s penalties on high-quality coverage.

The lesson is clear. To repeal ObamaCare, opponents need to talk to voters about how the law is reducing the quality of health insurance and medical care for the sick.

Read the whole thing.

The Road to Cordray’s Removal Just Got Longer

The plot thickens in the ongoing battle for the Consumer Financial Protection Bureau, the controversial agency created in the wake of the 2008 financial crisis.  Yesterday, a federal appeals court decided it would grant rehearing of last year’s case, PHH v. CFPB, which held the agency’s structure to be unconstitutional.  The decision issued last year not only ruled the agency’s structure to be unconstitutional, but also placed the director under the president’s authority, giving the president the power to fire the director at will.  Now that the court will rehear the case, its earlier decision is no longer binding, meaning the president can no longer rely on it if he wishes fire Director Richard Cordray.

You Shouldn’t Be Criminally Liable If You Don’t Have a Guilty Mind

Todd Farha, CEO of WellCare Health Plans, was convicted of knowingly executing a fraud by submitting false expenditure reports to the state. However, the district court decided that “knowingly” didn’t actually have to mean that Farha knew that the reports were false, but only that in submitting the reports Farha acted with “deliberate indifference” as to whether they were accurate. Essentially, a non-lawyer was convicted for being insufficiently cautious in adopting an interpretation of an ambiguous regulatory statute.

The U.S. Court of Appeals for the Eleventh Circuit upheld Farha’s conviction even in the absence of the required statutory mental-state element (what lawyers call mens rea). The appellate court decided, in agreement with the district court, that deliberate indifference toward falsity may stand in for knowledge of falsity. The practical implication is that the court lowered the mens rea standard and used a civil standard of liability to a criminal case. (You can be liable in a civil lawsuit even if you’re not guilty for criminal-punishment purposes.)

Cato has now filed a brief supporting Farha’s request that the Supreme Court review his case. The lower court’s holding is out of step with precedent, with bedrock principles of statutory interpretation regarding the mental-state elements of a criminal offense, and with common sense notions of justice. The most egregious aspect of the ruling is that mens rea elements are seen as so crucial to the criminal law that the Supreme Court has been willing to read them into a statute when the statute is silent regarding necessary mental state.

Yet the Eleventh Circuit took the opposite approach and read out of the statute mental-state elements that make the crime too hard to prosecute. This decision is especially troubling in an era of over-criminalization, with an estimated 300,000 separate federal crimes. This situation is exacerbated by the fact that many of the crimes are inherently complex, leading to ambiguity in underlying regulatory-compliance requirements that makes it incredibly challenging for people to understand what they must do to avoid liability.

Unfortunately, instead of attempting to rectify some of this ambiguity, the court here added more ambiguity—because arguably any crime can have a lower mental-state requirement added by the court at trial. This ruling has given prosecutors more weapons and made it even harder for businesses to comply with rampant regulations and made their owners and officers subject to arbitrary legal jeopardy. Many people will now be stripped of their liberty simply on the grounds of an incorrect interpretation of complex and ambiguous statutes. With the deck already stacked in favor of the government—and with myriad civil remedies available—there’s no logical reason to add the weapon of a diluted mens rea to the government’s arsenal.

For further discussion of Farha v. United States and other issues attending regulatory crimes, tune into this Federalist Society teleforum today at 3pm ET (and the audio recording should appear at that link later).

Yes, Suspend — Then Repeal — Dodd-Frank’s Conflict Minerals Rules

Here’s good news: President Trump may sign an executive order suspending the failed conflict minerals provisions of the Dodd-Frank law. Days before, Securities and Exchange Commission Acting Chairman Michael Piwowar had issued two statements directing the SEC to revisit its enforcement of the same provisions.

The provisions, enacted in 2010 as part of the wider Dodd-Frank law, impose a complex and in places impractical disclosure regime on publicly held companies that make products containing such minerals as tin, tungsten, tantalum, and gold. The idea is that laying bare supply chains leading to war-torn areas of central Africa will facilitate consumer boycotts. Some reports on the draft executive order, such as that in the Guardian (via Simon Schama on Twitter), seem intent on judging the Loi Obama (as it was known in some of the affected regions) by these original intentions rather than by its actual results. Yet those actual results are no secret. More than two years ago, the Washington Post, confirming what was widely known already, ran front-page reportage about how the law had

set off a chain of events that has propelled millions of miners and their families deeper into poverty, according to interviews with miners, community leaders, activists, and Congolese and Western officials, as well as recent visits to four large mining areas.

As the economy of the area had destabilized, some miners with no other way to support their families had themselves thrown in with lawless armed groups.

At the same time, the law was set to impose billions of dollars in cost on American companies and consumers. I won’t repeat the case against the rules, since I summarized it in this space two years ago, and little appears to have changed since. (For more, check the coverage at Overlawyered.)

The rumored draft of the executive order looks good, but a president’s leeway under the law extends only to suspending its effect for a time. Putting this fiasco to an end will call on Congress to repeal the relevant sections of Dodd-Frank, and that is what it should now proceed to do.

President Trump’s “One-in, Two-out” Rule: Lessons from the UK

Monday saw President Trump force through another executive order - “Reducing Regulation and Controlling Regulatory Costs. The headline was the introduction of a new “one-in, two-out” rule for new regulations:

for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.

Anything that can be done to focus regulators’ minds on the costs imposed on private businesses and groups of new regulation is probably, on net, positive. But the UK has had a policy like this since 2005, first adopting a “‘one-in, one-out” rule, then a “one-in, two-out” rule and now a “one-in, three-out” variant. The results are widely acknowledged to be mixed. Here are 4 lessons from the UK the Trump administration should bear in mind.

1. Focus on costs, not counting regulations

What really matters is not the number of regulations but the costs imposed on private businesses and civil society organizations. A “numbers” approach could be gamed: a department could introduce a new regulation, and remove a defunct one, while imposing new business costs. Thankfully, both the UK government and Trump’s executive order now recognize this. Section 2, part c) of the order says:

any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations

In the UK though, “one-in, one-out” eventually meant that for every new regulation introduced with a net cost to business, regulations up to an equivalent net cost would be eliminated. It would be better named a “pound-for-pound” rule. When upgraded to “one-in, two-out” every new regulation with net costs to business had to be compensated for by regulatory removal or revision at double the monetary cost of the new regulation. And so on. Whether badly drafted or otherwise, Trump’s version reads more like the “one-in, one-out” rule on cost, albeit having to find the cost compensation across two regulations. If implemented in this way, it could become messy to implement for many agencies. Judging regulation by pure cost rather than numbers, as the UK has done, would be a stronger constraint.

2.  Judge by net costs rather than gross costs

Any new measure, whether regulatory or deregulatory, will generate some costs to private businesses and civil society. If Trump is serious about deregulation, it therefore makes much more sense to assess “net” costs, rather than “gross” costs as a target for the new rule. This was recognized in Britain which now carries out the net cost methodology. Otherwise perverse incentives are created: departments or agencies will be cautious about ever proposing deregulatory measures where benefits to business exceed new costs, because they would still have to find gross cost savings elsewhere. As Stuart Benjamin outlines, steps taken to make pipeline construction easier, for example, otherwise might end up delayed as the agency scrambles around finding existing regulations with gross costs to remove to compensate for the very small costs of a deregulating measure. This might seem an obvious point, but at the moment the order is ambiguous – simply stating that the Director of the OMB will provide guidance “for standardizing the measurement and estimation of regulatory costs.”