Opinion ID: 2802953
Heading Depth: 2
Heading Rank: 2

Heading: The Fraudulent Concealment Exception

Text: “[T]he party challenging an agency’s action as arbitrary and capricious bears the burden of proof.” San Luis Obispo Mothers for Peace v. Nuclear Regulatory Comm’n, 789 F.2d 26, 37 (D.C. Cir. 1986) (en banc). Pierce has not discharged his burden with respect to his claim that the Commission 13 erred in determining that he fraudulently concealed the evidence supporting the second enforcement action. The Supreme Court has recognized the application of the doctrine of res judicata in administrative proceedings. United States v. Utah Constr. & Mining Co., 384 U.S. 394, 422 (1966). “[N]ewly discovered evidence normally does not prevent the application of res judicata.” Guerrero v. Katzen, 774 F.2d 506, 508 (D.C. Cir. 1985) (emphasis omitted). However, as we have made clear, “[e]xceptions to this general principle occur when evidence is either fraudulently concealed or when it could not have been discovered with due diligence.” Id. The former exception is recognized in the Restatement. RESTATEMENT (SECOND) OF JUDGMENTS § 26, cmt. j (1982) (“A defendant cannot justly object to being sued on a part or phase of a claim that the plaintiff failed to include in an earlier action because of the defendant’s own fraud.”). Courts have broadly adopted the rule that “the doctrine of res judicata will not shield a blameworthy defendant from the consequences of his or her own misconduct.” 47 AM. JUR. 2d Judgments § 537 (2006) (citing cases). Although Pierce “maintains that he did not fraudulently conceal any facts from the Commission” and “also maintains that the Division was not diligent in attempting to uncover the facts underlying the Second Proceeding,” Br. of Petitioner 33 n.37, he does not object to the Commission’s findings that he lied in his investigative testimony and omitted information requested by the Division’s subpoena. See Second Proceeding, 2014 WL 896757, at . Rather, he argues that, “even assuming [that his] actions amounted to fraudulent concealment . . . any concealment ultimately failed [because the] Division captured the cause of action and supporting evidence in time to seek disgorgement in the First Proceeding.” Br. of Petitioner 32. In Pierce’s view, “[t]he 14 claim was not fraudulently concealed. It was asserted.” Id. at 46. We disagree. Contrary to Pierce’s assertions, the Commission found that the Division could not charge the violations relating to the unlawful trading in corporate accounts in the first enforcement action because Pierce had fraudulently concealed the evidence. As the SEC stated, “because of lies and omissions in” Petitioner’s response to the investigative subpoena and in his testimony, “the Division could not support the allegations necessary to establish its prima facie case” of liability for unlawful sales through the corporate accounts. Second Proceeding, 2014 WL 896757, at . Accordingly, the SEC found that Pierce fraudulently concealed the evidence. Id. at . The Commission noted that, “[t]o find otherwise would reward Pierce for his duplicitous conduct.” Id. Moreover, the SEC’s Rules of Procedure make it clear that the OIP – and not any motion, brief, or other filing by the Division – establishes the scope of the charges in SEC enforcement proceedings. 17 C.F.R. § 201.200(b)(3) (“The order instituting proceedings shall . . . [c]ontain a short and plain statement of the matters of fact and law to be considered and determined[.]”). The SEC’s Rules further provide that the ALJ may only admit “new matters of fact or law that are within the scope of the original order instituting proceedings.” Id. § 201.200(d)(2); see also Rules of Practice, 60 Fed. Reg. 32738, 32757 (June 23, 1995) (adopting revisions to SEC’s Rules of Practice) (“[ALJs] do not have authority to initiate new charges or to expand the scope of matters set down for hearing beyond the framework of the original order instituting proceedings.”). 15 Therefore, Pierce’s assertion that the “cause of action” in the second enforcement action “was actually asserted in briefs . . . in the first case,” Br. of Petitioner 33 (emphasis added), is completely off the mark. The mention of the belatedly discovered unlawful trading in corporate accounts after the close of the evidence in the first enforcement action did not indicate that the charges filed in the second enforcement action were a part of the first enforcement action. Furthermore, the Division’s motion to admit the belatedly discovered evidence and to seek disgorgement from the corporate accounts did not put those charges at issue in the first enforcement action. The ALJ in the first action found that the unregistered sales of Lexington stock through the corporate accounts were outside the scope of the first OIP and that she lacked authority to expand the scope of the OIP to hear the additional allegations. First Proceeding, 2009 WL 1684743, at . Pierce does not challenge as erroneous the ALJ’s determination that any liability or disgorgement based on the corporate accounts trading was outside the scope of the first OIP. In sum, Pierce’s assertion that the charges arising from the unlawful sales of Lexington stock out of the corporate accounts were “actually asserted” in the first proceeding is specious. The Division did not obtain the pertinent information regarding Pierce’s unlawful trading through the corporate accounts until after the record had been closed in the first enforcement action. The fact that reference was made to the corporate accounts proves nothing because it was too late for the Division to include the charges in the OIP. Thus, there is no merit to Pierce’s argument that the Commission could not rely on the fraudulent concealment exception to foreclose the application of res judicata in the second enforcement action. 16 Pierce also argues that the Division was required to “formally seek[] an amendment,” Br. of Petitioner 38, or to expressly reserve the charges of unregistered sales through the corporate accounts in the first enforcement action, id. at 41 (citing the RESTATEMENT § 26(1)(b)). He protests that the Division did not “follow[] the rules” when it failed to take additional steps to preserve the charges related to the corporate accounts after the ALJ refused to admit the additional charges. Id. at 38. Pierce’s argument lacks any legal basis. First, and tellingly, the Division was within its authority to pursue the second enforcement action because the basis for the action was not subsumed in the first enforcement action. The two actions were separate because they were based on distinct acts of wrongdoing. As the Commission pointed out, the “[r]egistration of a security is transaction-specific, in that the requirement of registration applies to each act of offering or sale,” and thus each failure to register sales of Lexington stock was a separate violation. Second Proceeding, 2014 WL 896757, at  (internal quotation marks omitted). Moreover, it does not matter that the same evidence that was used in the first proceeding might also be relevant to prove separate violations in the second proceeding. Counsel for Pierce conceded both of these points at oral argument. Oral Argument at 5:27–6:41. Counsel also agreed that the SEC – in carrying out its enforcement duties – has authority to file charges for individual violations separately and has no obligation to join them. Id. at 8:10–8:20. In addition, the Division was under no obligation to seek interlocutory review of the ALJ’s ruling on the motion to admit additional evidence. Indeed, there is good reason why it did not, as the Commission’s rules state that “[p]etitions by 17 parties for interlocutory review are disfavored, and the Commission ordinarily will grant a petition to review a hearing officer ruling prior to its consideration of an initial decision only in extraordinary circumstances.” 17 C.F.R. § 201.400(a). The Commission also explained why, in the context of administrative enforcement proceedings, it is undesirable to require the Division to expend resources in seeking to amend the OIP to add additional charges while a prior action is pending. Judges in the federal courts have discretion to permit parties to amend and supplement pleadings. “[I]n contrast,” the ALJ “lacks the authority to amend an OIP to include matters outside its original scope; expanding the scope of the OIP requires action by the Commission.” Second Proceeding, 2014 WL 896757, at . The Commission further explained that an interlocutory appeal to amend the first OIP would have resulted in delay, which would run counter to the enforcement agency’s goal to swiftly address violations of the securities laws. Id. at –19. In conclusion, we find no merit in Pierce’s objections to the SEC’s application of the fraudulent concealment doctrine. We want to be clear, however, about the reach of our decision in this case. First, we do not face a situation here where the OIP in the first enforcement action subsumed the charges brought in the second action. Second, we express no view on what the outcome might have been if the evidence regarding the corporate accounts had been provided to the SEC before the first OIP was issued. We leave the possible issues relating to these scenarios for another day. Here, Pierce’s conduct in concealing the additional sales of Lexington stock through the corporate accounts had the intended consequence of preventing the Division from including those charges and seeking disgorgement of the additional unlawful profits in the 18 first proceeding. Under these circumstances, we find no error, let alone arbitrary or capricious action, in the Commission’s ruling that Pierce could not use res judicata to avoid the consequences of his own misconduct.