initiated, yet, only one, Commissioner Hunt, approved the action. The SEC responds that
Commissioner Hunt acted under the “duty officer” rule. Section 4A of the Exchange Act grants
the Commission the authority to delegate non-rulemaking functions to one Commissioner. The
Commission promulgated Rule 43, the “duty officer” rule, to allow for such delegation. See 17
CFR. § 200.43. Defendants also argue that the duty officer rule is void, since it was
promulgated pursuant to a repealed statute, and that the duty officer rule cannot be invoked in
this case since the Commission did not comply with the procedural requirements of Rule 43.
However, the SEC contends that the August 2002 ratification of Commissioner Hunt’s action by
a quorum of the Commission renders defendants’ arguments about the duty officer moot.
Defendants then respond that, because the statute of limitations on civil monetary penalties
expired between the time Commissioner Hunt initiated this lawsuit and the time that the newly .
appointed Commissioners ratified his action, the ratification has no legal effect.

A. Validity of SEC Rule 43

Defendants assert that Rule 43 is invalid because it was promulgated on the basis of
legislation that has since been repealed and the SEC has failed to reissue a tegulation based upon
the new statute. Rule 43(a)(1) states:

Pursuant to the provisions of Pub. L. No. 87-592, 76 Stat. 394, as amended by § 25 of

Pub. L. 94-29, 89 Stat. 163, the Commission hereby delegates to an individual

Commissioner, to be designated as the Commission’s “duty officer” by the Chairman of

the Commission (or by the Chairman’s designee) from time to time, all of the functions of

the Commission ....
17 CFR. § 200.43(a)(1). In 1987, after the issuance of SEC Rule 43, P.L. 87-592 was repealed
by P.L. 100-181. See 101 Stat. 1249, § 308(a) (1987). The SEC did not subsequently issue a

new duty officer order pursuant to the new statute.



alternative, recently suggested by defense counsel, of initiating new proceedings in the model of
mst & Y

On August 14, 2002, a quorum of the Commission approved the determination of the
duty officer to commence this action. The Commission’s decision to affirm the duty officer’s
action is conclusive of any objections concerning the appropriateness of the duty officer’s
decision, Rule 43(c)(2) enables any person to petition the full Commission to “review any
unaffirmed action taken by a duty officer.” Defendants were aware, prior to filing their motion to
dismiss, that Commissioner Hunt was purporting to act pursuant to the duty officer rule, but they
chose not to exhaust their administrative remedies. Defendants allege improprieties, but, in the
absence of clear evidence to the contrary, it must be assumed that the Commission adhered to its
own rules and exercised its discretion as Congress intended. See United States v. Chemical
Found., Inc., 272 U.S. 1, 14-15, 47 S.Ct. 1 (1926). It is well-settled that an agency’s construction
of its own regulations is entitled to substantial deference, and its interpretation is controlling

unless plainly erroneous and inconsistent with the regulation. See Global Relief Found., Inc. v.

O'Neill, 207 F. Supp. 2d 779, 792 (N.D. Ill. 2002) (citing Stinson v. United States, 508 U.S. 36,
113 S.Ct 1913 (1993)).
CONCLUSION
The SEC has made serious allegations in this case. If the complaint survives the still-
pending motions to dismiss, then these allegations need to be addressed on the merits so that any
wrongly accused defendants can be exonerated and any properly accused defendants held

accountable. This will be the focus of this Court and this lawsuit.



appointment to the Commission, was employed by Ernst & Young, Waste Management’s auditor
at the time of the Restatement.

In early July 2002, defense counsel telephoned counsel for the Commission and asked
how this enforcement action had been authorized. On July 9, 2002, Commission counsel
informed defense counsel that this action had been authorized by Commissioner Hunt, acting as
duty officer. The defendants filed a motion to dismiss six days later.

STANDARD OF REVIEW

Rule 12(6)(1) provides for dismissal of claims over which the federal court lacks subject
matter jurisdiction. Jurisdiction is the “power to decide” and must be conferred upon the federal
court. In re Chicago, Rock Island & Pacific RR. Co., 794 F.2d 1182, 1188 (7th Cir. 1986). In
reviewing a 12(b)(1) motion to dismiss, the Court may look beyond the complaint and view any

extraneous evidence submitted by the parties to determine whether subject matter jurisdiction

exits. See United Transp. Union v. Gateway Westem Ry. Co., 78 F.3d 1208, 1210 (7th Cir.
1996) (citing Bowyer v. United States Dep’t of Air Force, 874 F.2d 632, 635 (7th Cir. 1989)).
The plaintiff bears the burden of establishing that the jurisdictional requirements have been met.
See Kontos v. United States Dep’t of Labor, 826 F.2d 573, 576 (7th Cir. 1987). When a party
moves for dismissal pursuant to Rule 12(b)(1), the nonmoving party must support its allegations
with competent proof of jurisdictional facts. See Thomson v. Gaskill, 315 U.S. 442, 62 S.Ct. 673
(1942). It is with these principles in mind that we address the motion before us.
DISCUSSION
The motion to dismiss argues that the Commission’s actions were not appropriate under

its own quorum rules. Three commissioners were in office when the enforcement action was



Defendants cite Aerolineas Argentinas v. United States, 77 F.3d 156 (Fed. Cir. 1996), to
support their contention that SEC Rule 43 is null and void, but Aerolineas Argentinas involved a
direct conflict between old regulations and new legislation. With regard to the instant case,
Congress did not enact P.L. 100-181 for the express purpose of invalidating SEC Rule 43 or
limiting the delegation authority of the SEC. In fact, the new law made only minor changes to
the delegation provisions of P.L. 87-592, substituting the phrase “administrative law judge” for
“hearing examiner.” The Senate Report accompanying the bill stated that the additions would
not make any substantive changes in current law. S. Rep. No. 100-105, at 20 (1987), reprinted in
1987 U.S.C.C.A.N. 2089, 2108. The re-enactment of the same statute without substantive
change does not deprive the regulations of legal validity. See United States v. Sheffield Board of
Comm’rs, 435 U.S. 110, 134, 98 S.Ct. 965 (1978). Thus, we conclude that SEC Rule 43 is not
invalid.

B. Commission Compliance with SEC Rule 43

SEC Rule 43 allows an individual Commissioner to be designated as the Commission’s
duty officer by the Chairman of the Commission. In this case, the SEC claims that
Commissioner Hunt was acting as duty officer when he authorized the enforcement action
against the defendants. Defendants, however, assert that no evidence has been offered to prove
Commissioner Hunt was appointed as deputy officer. The SEC has not indicated when or by
whom Hunt was appointed.

The parties also dispute the meaning of the “urgency” requirements of 43(b)(1). The

disputed provision states:



This complaint, construed in the light most favorable to the plaintiff, is within the subject
matter jurisdiction of this Court. The duty officer rule is a valid means of delegation of the
Commission’s authority to initiate enforcement actions. Commissioner Hunt acted pursuant to
the duty officer rule and his action was subsequently affirmed by the Commission. The
defendants failed to utilize the review provisions of Rule 43, which allows any person to petition

the Commission to review the propriety of the duty officer’s actions. The motion to dismiss for

lack of subject matter jurisdiction is denied.

It is so ordered.

thy. CL.

7 Wayne R. Anderseit
United States District Judge

Dated: bee al



‘Minute Order Formg06/97)
United States District Court, Northern District of Illinois

Na n c
nor Magia Tue Wayne R. Andersen “Than haigned Judge
CASE NUMBER 2C 2180 DATE 11/21/2002
CASE S.E.C. vs. Buntrock
TITLE

[ln the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
‘of the motion being presented.]

MOTION:

DOCKET ENTRY:

(i) Oo Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due

(3) Oo Answer brief to motion due___. Reply to answer brief due

(4) o Ruling/Hearing on setfor___at

(5) o Status hearing[held/continued to} [set for/re-set for]on__——s set for saat

(6) Oo Pretrial conference[held/continued to] [set for/re-set for]on__setfor___—at_—.
7) o Trial{set for/re-set for]on__at

(8) o [Bench/Jury triat] [Hearing} held/continued to____at

(9) BD This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) (Local Rule 41.1 CFRCP41(a)(1) [1 FRCP41(a)(2).

do [Other docket entry] Enter MEMORANDUM, OPINION AND ORDER: Motion to dismiss
is [35-1] denied.

aid [For further detail see order attached to the original minute order.]
No notices required, advised in open court.

No notices required.

number of notices
Notices mailed by judge's staff. NOV. 2 6 2002
Notified counsel by telephone. date.

vo | Docketing to mail notices,

Mail AO 450 form. gyuisid sn
Copy to judge/magistrate judge. 1uno2 daa
soutroom an 38 HY $2 NON 20 dust ti
TSA deputy’ °
initials tates} -—_
J central Clerk's Office ring deputy ita



The authority delegated by this rule shall be exercised when, in the opinion of the duty

officer, action is required to be taken which, by reason of its urgency, cannot practicably

be scheduled for consideration at a Commission meeting. After consideration of a staff
recommendation involving such a matter, the duty officer shall forthwith report his or her
action thereon to the Secretary.

17 CFR. § 200.43(b)(1).

Contrary to defendants’ assertions, 43(b)(1) does not require a “reasonable belief” of
urgency. It defers to the opinion of the duty officer that action is warranted by urgent
circumstances. In Emst & Young, the duty officer could not provide any plausible explanation as
to why initiating the proceeding at that time was an urgent action that could not be scheduled for
Commission consideration. The administrative law judge noted that there were no statute of
limitations concerns, and, thus, dismissed the action without prejudice. The Commission
subsequently initiated new proceedings that are substantially similar to those that were dismissed.

With regards to the instant case, the SEC has identified statute of limitations concerns as
the basis for urgency. The enforcement action was initiated on March 26, 2002 and it sought
monetary penalties against all of the defendants. Suits for civil monetary penalties under the
securities acts for primary violations must be brought within five years of the time of violation.
See 28 U.S.C. § 2462. The last alleged act of fraudulent misstatement was on May 8, 1997 and
the last alleged sales by Rooney and Buntrock in violation of insider trading rules were on April
18, 1997 and August 13, 1997, respectively. Commissioner Hunt could not practicably schedule
this matter for a future Commission meeting because there was a great deal of ‘uncertainty as to

when a non-conflicted Commissioner would be appointed and confirmed by the Senate. These

Statute of limitations concerns support the duty officer’s finding of urgency and argue against the



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETED

ROONEY, JAMES E. KOENIG,
THOMAS C. HAU, HERBERT A.
GETZ, and BRUCE D. TOBECKSEN,

Defendants.

NOV 26 2002

SECURITIES AND EXCHANGE y
COMMISSION, )
)
Plaintiff, )

) No. 02 C 2180
v. )

) Wayne R. Andersen

DEAN L. BUNTROCK, PHILLIP B. ) District Judge
)
)
)
)
)

MEMORANDUM OPINION AND ORDER

This case is before the Court on the motion of the defendants to dismiss the plaintiff's
complaint for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure
12(b)(1). Defendants claim that dismissal is warranted because a quorum of the Commissioners
failed to authorize this lawsuit. For the following reasons, the motion to dismiss is denied.

BACKGROUND

On March 26, 2002, the Securities and Exchange Commission (“SEC” or “the
Commission”) instituted this civil action against the defendants, the highest-ranking officers of
Waste Management, Inc. (“Waste Management”). The complaint alleges that the defendants
falsified Waste Management's earnings and other measures of financial performance. It further
claims that the defendants improperly eliminated or deferred current period expenses in order to
inflate earnings and that they used one-time gains realized on the sale or exchange of assets to

eliminate unrelated current period operating expenses. The Commission asserts that these acts

‘on



violated section 17(a) of the Securities Act of 1933 (“Securities Act”), section 10(b) and 13(a) of
the Securities Exchange Act of 1934 (“Exchange Act”), as well as Exchange Act rules 10b-5,
12b-20, 13a-1, and 13a-13.

In February 1998, Waste Management acknowledged past accounting errors and
announced that it would restate its financial statements for the period 1992 through the first
three-quarters of 1997 (the “Restatement”). The Restatement acknowledged that Waste
Management had overstated its net after-tax income by over $1 billion. The Commission claims
that the overstatement of earnings resulted in a shareholder loss of $6 billion in market value
when the stock price plummeted from $35 to $22 per share. The defendants allegedly received
ill-gotten gains from their bonuses, retirement benefits, trading, and charitable giving. These
benefits allegedly range from $403,779 for Mr. Tobecksen to $16,917,761 for Mr. Buntrock.

The Commission is seeking disgorgement of any ill-gotten gains and civil monetary
penalties. It requests that each of the defendants pay penalties pursuant to section 20(d) of the
Securities Act and section 21(d)(3) of the Exchange Act. The Commission further requests,
pursuant to section 21A of the Exchange Act, that defendants Buntrock and Rooney pay penalties
in the amount of three times any illegal trading profits gained or losses avoided.

At the time Commissioner Isaac Hunt initiated the enforcement action, he was the only
eligible Commissioner to participate on the matter. The Commission had only three
Commissioners at that time, and two of them, Chairman Harvey Pitt and Cynthia Glassman, had
conflicts of interest. Chairman Pitt, while in private practice, tepresented Arthur Andersen,

Waste Management's auditor prior to the Restatement. Commissioner Glassman, prior to her