Judge: SEC Can't Block Hedge Fund from Paying for Appeal
The Securities and Exchange Commission can't prevent lawyers at Pepper Hamilton from getting paid to pursue further appeals in defense of client Pentagon Capital Management, a federal judge in Manhattan concluded Monday.
U.S. District Judge Robert Sweet ruled last year that Pentagon and one of its executives committed securities fraud by engaging in late trading of mutual funds. The U.S. Court of Appeals for the Second Circuit largely affirmed that ruling in August, leaving the defendants on the hook to pay more than $60 million.
Pentagon Capital is now mired in bankruptcy in the United Kingdom, and it's also subject to an SEC asset freeze that restricts the company's ability to transfer funds. According to the SEC, Pentagon can pay its lawyers at Pepper to comply with the agency's postjudgment discovery requests in the district court case, but not to pursue further appeals, including a bid for a Second Circuit rehearing.
In a Sept. 13 motion, Pepper Hamilton blasted the SEC's position, arguing that it would turn Pentagon's own counsel into nothing more than "collection agents" for the government. The firm asked Judge Sweet to either allow it to withdraw from the case, or to modify the SEC's asset restrictions "to allow Pepper Hamilton to be paid to represent its clients zealously."
"The SEC now takes the absurd position that its restraining notice bars Pepper Hamilton from receiving payment for any further representation beyond simply 'assisting' the SEC without objection," the firm asserted, adding that the SEC's position left it "torn between its ethical obligation to provide zealous representation to its clients and the SEC's explicit threat that it would treat any action beyond mere acquiescence as a violation of the restraining notice."
The SEC countered that Pentagon had already received its day in court, and that any funds available should be used to track down the company's assets to pay the judgment. "Permitting further fees and costs to be expended to file petitions for rehearing and certiorari would be a waste of PCM's remaining resources and in derogation of the rights of PCM's creditors, in particular the SEC," the agency's lawyers wrote.
Judge Sweet sided squarely with Pepper Hamilton in Monday's decision, ruling that it would "result in injustice if PCM were precluded from pursuing appellate relief and adequately responding to the SEC's postjudgment discovery requests."
"Although the SEC has contended that it would be a 'waste' or 'needless' for PCM to pursue continued litigation, it is not the arbiter [of] what is in the best interest of the PCM estate, which is the responsibility of PCM's administrators and counsel," Sweet wrote. The judge ordered the restraining notice in the case modified to allow Pepper Hamilton to be paid to represent Pentagon in seeking an en banc rehearing and possible U.S. Supreme Court redress. He also ruled that Pepper can object to the SEC's postjudgment discovery demands without running afoul of the SEC's restrictions.
Pepper Hamiltion's Frank Razzono declined to comment. SEC lawyer Paul Gizzi didn't immediately respond to a request for comment.