A trial judge on Thursday rejected as premature investment adviser Philip Rousseaux’s constitutional challenge to the Maryland securities commissioner’s administrative proceeding that seeks to revoke the “Money Guys” infomercial star’s license for having allegedly misled clients and falsified forms.
Montgomery County Circuit Judge Richard E. Jordan told Rousseaux’s attorneys they must let the administrative process run its course before arguing, on judicial review, that the conduct of the proceedings has violated the adviser’s constitutional right to due process.
In his decision, Jordan rejected Rousseaux’s argument that a ruling prior to the proceeding’s completion was necessary to protect Rousseaux’s right to have the accusations reviewed and decided by a circuit court judge rather than by Securities Commissioner Melanie Senter Lubin, the same person who is leveling the accusations that the investment adviser denies.
Jordan said he was bound by Court of Appeals’ decisions that make “crystal clear” administrative proceedings must be completed, or “exhausted,” before they can be challenged in court. Any changes in that completion requirement would have to be made by the Court of Appeals or the General Assembly, he said.
“Maybe a higher authority than this [circuit] court will like your idea,” Jordan told Rousseaux’s attorney, Jacob S. Frenkel, in granting the state’s motion to dismiss.
Frenkel said following the hearing “no decision has been made” regarding whether he and Rousseaux will seek review of Jordan’s decision by the intermediate Court of Special Appeals or let the administrative process run its course first.
“We certainly heard exactly what Judge Jordan communicated from the bench,” said Frenkel, of Shulman, Rogers, Gandal, Pordy & Ecker P.A. in Potomac. “We are confident that we have presented a very real issue of constitutional law that has not been resolved with finality.”
Jordan’s decision followed Frenkel’s spirited argument Thursday morning in which the lawyer acknowledged “challenging the constitutionality of the entire adjudicative process” that follows the Securities Divison’s investigation.
Frenkel called it “folly” that the same commissioner who has leveled the accusations would be sitting in judgment of the accused.
“This is the way a proceeding is conducted in a totalitarian regime,” Frenkel said, adding due process requires “a fair adjudicative forum.”
But Jordan, in foreshadowing his decision, told Frenkel that he could still raise those arguments in court after the administrative process is completed and the Securities Division’s decision is made.
“You are seeking to throw out the whole Administrative Procedure Act,” Jordan said. “What happens to the whole administrative process? It goes away. If you were to prevail it would be a radical change.”
Jordan ultimately agreed with Steven M. Sullivan, the Maryland attorney general’s chief of litigation, who argued that the administrative process must be completed before its constitutionality could be challenged.
Rousseaux leveled the constitutional challenge following Lubin’s issuance in June of a show-cause order alleging that the adviser and his firm Everest Investment Advisors “falsely represented to investors” that the company’s “wrap fee” investment program enabled them to invest in certain products without being charged brokerage commissions or transaction fees. The securities division said it found in March 2014 that clients were being charged transaction fees of about $8,000.
Advertisements for the wrap-fee investments also included “false and misleading” information by using outdated data of investment returns and failing to depict how clients fared relative to their initial and subsequent investments, the order claims.
“EIA’s performance advertising was especially misleading because many of the persons solicited to invest in EIA’s wrap program were not sophisticated investors,” the order states. “EIA knew or should have known that the disclosures relating to its performance were misleading.”
The show-cause order also alleges Rousseaux, prior to opening the Everest properties in 2011, improperly used a Medallion stamp in 2006 and 2007 to pre-stamp documents in which clients authorize their funds to be transferred from one investment to another. The stamp, which belonged to Rousseaux’s prior employer, MetLife, is used to verify the client’s signature after the document is signed, not before.
Rousseaux stamped “approximately 100 blank [authorization to transfer assets] forms that were subsequently used to transfer client assets from one institution to another,” the filing states. “Rousseaux did so to benefit himself financially by reducing the risk of clients changing their minds and keeping their assets with another broker.”
In all, the show-cause order contains 13 administrative counts against Rousseaux and his firms under the Maryland Securities Act, including fraud in connection with the offer, sale or purchase of securities; fraud in connection with the offer and sale of investment advice; dishonest and unethical practices; employment of an unregistered investment adviser; and failure to maintain and timely produce books and records.
Rousseaux has responded that “the order contains many spurious accusations, unsupported by the facts and not reflective of the close and productive relationships that EIA … and Mr. Rousseaux have forged with their clients over the years. The order also fails to acknowledge EIA’s substantial efforts to make their compliance programs more robust, in the best interests of their clients.”
The Montgomery County Circuit Court case is Philip Rousseaux et al. v Maryland Securities Division, et al., No. 407544V.