The First Circuit’s decision was a complete exoneration of Mr. Flannery after long-running litigation brought by the SEC in 2010, in which it alleged a host of securities violations against Flannery and his co-defendant, James D. Hopkins, arising from communications to investors during the subprime mortgage crisis.
Following a win by the McDermott trial team before the SEC’s Chief Administrative Law Judge in 2011, the SEC’s Division of Enforcement appealed its loss to the five-member Commission. In a 3-2 decision over three-years later, the Commission reversed its own judge and held Flannery liable under a single statutory provision, Section 17(a)(3), issued cease-and-desist order, barred him from working in the securities industry for one year, and imposed a $6,500 penalty. (The Commission also held Hopkins liable). In doing so, the Commission issued what many critics have characterized as a grossly overreaching opinion.
Flannery appealed to the First Circuit, which yesterday reversed and vacated the Commission, holding that the Commission’s findings were “not supported by substantial evidence.”
Observing that Flannery “had an unblemished record in the industry and a reputation for being very honest and having a great deal of integrity,” the First Circuit held that a key letter at the heart of the Commission’s findings against Flannery was simply not misleading. The First Circuit concluded that not only was there no proof that the letter was untrue, but the Commission had misread the letter. “Indeed, at oral argument, the Commission acknowledged that there was no particular sentence in the letter that was inaccurate.” Accordingly, the First Circuit declined even to reach the legal challenges raised by Flannery’s appeal, resting its decision entirely on the total lack of evidence to support the Commission.
This case has received extensive attention, in part due to mounting criticism of the SEC’s increased use of its own administrative tribunal, rather than federal district courts, to bring fraud charges. Critics argue that the SEC’s approach unfairly stacks the deck against defendants, who tend to lose far more often than they win at trials in the SEC’s home court. Against this backdrop, the Flannery case was particularly unique and remarkable because Flannery and Hopkins prevailed at the trial before the SEC’s own chief judge, but the divided Commission nonetheless reversed and held them liable. The First Circuit’s decision vacating the Commission on the evidence was a resounding rebuke to Commission overreach in a baseless case that never should have been brought.
The McDermott trial and appellate team was led by Mark Pearlstein, who argued the appeal, and Laura McLane, who was principal author of the briefs, along with Frederic Firestone and David Chen. Eugene Goldman and Michael Ungar also provided valuable securities expertise throughout the process.
The First Circuit’s Opinion can be found here.
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