More Parallel Proceedings Issues

The SEC, DOJ and other regulatory authorities are conducting an increasing number of parallel investigations.  While those proceedings offer potential efficiencies for both the government and persons involved, they also offer potential downfalls, as yesterday’s decision by the SEC demonstrates. In In the Matter of Warren E. Turk, Admin. Proc. File No. 3-12404, the SEC remanded a disciplinary proceeding with respect to Mr. Turk to the New York Stock Exchange (“NYSE”) for further consideration.  

The NYSE disciplinary proceeding was brought against Mr. Turk, a former member of the Exchange and a specialist, because he invoked his constitutional right not to testify in an investigation being conducted by the NYSE Division of Enforcement.  The NYSE censured and permanently barred Mr. Turk for failing to testify.  

Mr. Turk claimed, however, that the action of the Exchange was precluded by the Fifth Amendment.  While constitutional limitations only apply to the government and typically and not to self-regulatory organizations (“SROs”), that is not always the case.  Under certain circumstances where the action of the SRO becomes intertwined with that of the government, the SRO may effectively be engaging in state action.  At the time Mr. Turk declined to testify, there was a parallel criminal investigation into certain practices by NYSE specialists.  While Mr. Turk was not charged criminally, he was named as a defendant in an SEC enforcement action.  

While the SEC expressed doubt about the validity of Mr. Turk’s claim, and noted that he bore a heavy burden of proof, it remanded the case to the Exchange for further development of the record.  In doing so, the Commission noted that Mr. Turk had not had the benefit of the decisions in Quatrone, 87 SEC Docket at 2166 and Ficken, 89 SEC Docket at 696, at the time he asserted his claim.  Those cases involved similar claims which resulted in remands for the development of the evidentiary record.  

While it is not clear whether Mr. Turk will prevail after remand, the case is just another reminder of the complexities of parallel proceedings.  The question of intertwined government action is also pending before the Ninth Circuit Court of Appeals, as we have reported earlier in U.S. v. Stringer (post of Nov. 2, 2006).  In that case, a criminal indictment was dismissed where the District Court concluded that the U.S. Attorney’s office effectively concealed the existence of its inquiry behind that of the SEC, thus deceiving the defendants.  With the continuing increase in parallel proceedings, no doubt these and similar issues will continue to develop.