RIA Compliance Blog
In October 2018, the South Carolina Court of Appeals vacated a $540,000 civil penalty that the South Carolina Securities Commissioner had imposed against John M. McIntyre and his company, Silver Oak Land Management, LLC. The Commissioner imposed the penalty upon a determination that McIntyre and Silver Oak Land Management had committed securities fraud in the offer, sale, and management of various limited liability company interests. The Court of Appeals, however, found that in the course of a hearing the Commissioner conducted, the Commissioner did not grant McIntyre and Silver Oak Land Management adequate procedural due process.
According to the Court of Appeals’ decision, the Commissioner served McIntyre and Silver Oak Land Management a Cease and Desist order in August 2013. The Cease and Desist order alleged that McIntyre and Silver Oak Land Management had engaged in thirty-nine acts of securities fraud pertaining to their offer and sale of various limited liability company interests. After a four-day hearing, a hearing officer determined that the limited liability company interests were securities and imposed a civil money penalty of $540,000. McIntyre and Silver Oak Land Management appealed the decision to the Court of Appeals.
In their appeal, McIntyre and Silver Oak Land Management claimed that the Commissioner had not given them adequate procedural due process because the Commissioner had not promulgated any rules governing the process of the hearing. McIntyre and Silver Oak Land Management argued that because of the absence of rules, they did not have access to crucial information regarding aspects of the hearing, such as the burden of proof, standards for the admission of evidence, and subpoena rights. In making their argument, McIntyre and Silver Oak Land Management relied on a section of the South Carolina Code which provides that the Securities Commissioner “may” adopt and amend rules to assist in carrying out South Carolina’s Securities Act.
The Commissioner argued that since the language in the Code contains the word “may,” it was merely permitted but not required to adopt rules of procedure. The Court of Appeals, however, disagreed, stating that the Commissioner’s failure to adopt rules regarding procedure deprived McIntyre and Silver Oak Land Management of an opportunity for a fair hearing. The Court of Appeals also cited an amendment to the South Carolina Constitution which provides that an administrative agency, such as the Securities Commission, cannot issue decisions affecting private rights without providing due notice and an opportunity to be heard. This provision, as previously interpreted by the Court in similar contexts, required the Securities Commissioner to adopt procedures for any admissible proceeding, notwithstanding the use of the word “may” in the statute.
The Commissioner also argued that while McIntyre and Silver Oak Land Management may have had inadequate due process, any violations were a result of “harmless error.” The Court of Appeals, however, concluded that because the proceeding in question had a significant “structural defect,” any due process violations could not be harmless.
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