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SCOTUS Unlikely to Curb SEC Remedy & Judge Rebukes RFK Jr · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law, with June Grossel from Bloomberg Radio.
0:09
Speaker 1: Disgorgement is one of the SEC's most powerful tools. The
0:13
Speaker 1: agency used it to secure orders for almost eleven billion
0:17
Speaker 1: dollars last year and more than six billion in twenty
0:21
Speaker 1: twenty four. That tool is at risk in a case
0:24
Speaker 1: before the Supreme Court where the justices are weighing whether
0:28
Speaker 1: the SEC has to show that victims suffered economic harm
0:33
Speaker 1: before it can force a wrongdoer to turn over the
0:36
Speaker 1: profits made from illegal activities. Justice Sonya Sotomayor pointed out
0:41
Speaker 1: how cumbersome that would be for the SEC.
0:45
Speaker 2: So basically what you're saying is the government has to
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Speaker 2: call every victim proof every dollar of loss.
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Speaker 3: Why bother?
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Speaker 2: Well your why bother? Asking for disgorgement if they have
0:56
Speaker 2: to prove lass to that amount. I thought discorgment was
1:01
Speaker 2: to make it easier as an alternative, but.
1:03
Speaker 1: The lawyer representing a man accused of taking part in
1:07
Speaker 1: fraudulent schemes tied to twenty penny stock companies argued that
1:11
Speaker 1: disgorgement is different from civil penalties, which the agency can
1:16
Speaker 1: use as punishment if it meets the legal requirements, but
1:20
Speaker 1: neither Liberal Justice Katanji Brown Jackson nor Conservative Justice Amy
1:25
Speaker 1: Cony Barrett seemed to buy that argument.
1:29
Speaker 4: Why is it a punishment if we're not taking anything
1:32
Speaker 4: more from the defendant than he unlawfully gained.
1:37
Speaker 5: Why does that look like a penalty if all you're
1:39
Speaker 5: taking away is the ill gotten gains, So they're the
1:43
Speaker 5: proceeds that the wrongdoer isn't entitled to in the first place,
1:47
Speaker 5: as opposed to being entirely punitive. Because it's going above
1:50
Speaker 5: and beyond, why would that necessarily be a penalty.
1:54
Speaker 1: Most of the justices showed little enthusiasm for curbing the
1:58
Speaker 1: SEC's discorde powers. My guest is securities law expert James Park,
2:04
Speaker 1: a professor at UCLA Law School. Jim, disgorgement is different
2:08
Speaker 1: from civil penalties. Will you explain the difference and how
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Speaker 1: the sec uses it?
2:14
Speaker 6: Yeah, disgorge man simply means that the defendant has to
2:19
Speaker 6: give back the net profits from their wrongdoing. And that's
2:22
Speaker 6: something that you can measure by, you know, looking at
2:26
Speaker 6: their revenue, their expenses. And it's based on the principle
2:30
Speaker 6: that a wrongdoer should not be able to keep the
2:33
Speaker 6: proceeds from their wrongdoing. That's basically what disgorge min is
2:37
Speaker 6: Penalties can be imposed for a broader range of reasons,
2:42
Speaker 6: and one of them may be to punish to deter someone.
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Speaker 6: And so the thinking of a penalty is that if
2:49
Speaker 6: I just have to give back the profits from my wrongdoing,
2:52
Speaker 6: then you know, my incentive is to break the law
2:56
Speaker 6: because all I have to do is give back the
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Speaker 6: proceeds from the fraud. Whereas with a penalty, I may
3:03
Speaker 6: have to pay much more than the amount that I gained,
3:07
Speaker 6: and so I may end up a significant loser if
3:11
Speaker 6: a penalty is imposed. And another interesting thing is the
3:14
Speaker 6: SEC only got the general powered imposed civil penalties in
3:19
Speaker 6: nineteen ninety and prior to that it primarily used disgorgement,
3:24
Speaker 6: which was a power that the courts gave the SEC
3:27
Speaker 6: starting in the nineteen seventies or so.
3:30
Speaker 1: What happened in this case? Who is the defendant here?
3:34
Speaker 6: The defendant was a three patch and he basically was
3:39
Speaker 6: involved with a number of penny stock companies, companies that
3:43
Speaker 6: are you know, startup companies with very little track record,
3:48
Speaker 6: and you know the valuation of these stocks is very
3:52
Speaker 6: very low, you know, maybe pennies, and you know there's
3:56
Speaker 6: a market for these stocks, and because they don't train
3:59
Speaker 6: on say the New York Stock Exchange, the prices can
4:03
Speaker 6: fluctuate fairly widely. They're more susceptible to manipulation. And allegedly,
4:09
Speaker 6: what the SEC says is that three Patch basically manipulated
4:14
Speaker 6: the price of these penny stocks and he would promote
4:17
Speaker 6: them on his website inflate the price. He allegedly manipulated
4:22
Speaker 6: the price by engaging in what are called wash trades,
4:26
Speaker 6: basically training with himself or a friend to create the
4:29
Speaker 6: appearance that the price of these stocks is going up.
4:32
Speaker 6: Once the price was inflated, he may have sold his
4:36
Speaker 6: stake in the penny company. So this is a pretty
4:39
Speaker 6: standard type of violation of securities laws. The SEC alleges
4:44
Speaker 6: that this was a fraudulent scheme, and so the SEC
4:49
Speaker 6: brought a case against three Patch alleging all these violations.
4:53
Speaker 6: But it didn't specify the precise victims of the fraudulent scheme.
4:59
Speaker 6: And I can only exactly as to why they didn't
5:01
Speaker 6: specify the precise victims. But one reason may be that
5:05
Speaker 6: in a penny stock market, it may be hard to
5:07
Speaker 6: identify particular individuals who are buying and selling. Also, you know,
5:13
Speaker 6: if I'm alleging that the wrongdoing was that you manipulated
5:17
Speaker 6: the market at a particular point in time, you have
5:21
Speaker 6: to figure out, well, who you know who bought at
5:24
Speaker 6: that inflated price, did they lose money? And that can
5:28
Speaker 6: be a complicated endeavor to track down these particular individuals
5:33
Speaker 6: and you know, identify exactly when they bought and sold
5:37
Speaker 6: in whether they lost money or not. So they didn't
5:39
Speaker 6: identify the individuals who suffered losses from the fraudulent scheme.
5:45
Speaker 1: And so is the issue just whether or not the
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Speaker 1: SEC has to show the victims suffered economic harm before
5:54
Speaker 1: they can get a wrongdoer to disgorge profits.
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Speaker 6: That is the issue. There was a decision by the
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Speaker 6: Second Circuit Sec versus Gobol, and the Second Circuit had
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Speaker 6: concluded that the SEC must show pecuniary injury in order
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Speaker 6: to get disgorgement, and they based their reasoning on a
6:17
Speaker 6: decision by the Supreme Court lou versus Sec. Where the
6:20
Speaker 6: Court basically how that the SEC is permitted to seek
6:24
Speaker 6: disgorgement if it is awarded for a victim. That's the
6:28
Speaker 6: language that was used, and so the Second Circuit basically
6:32
Speaker 6: extrapolated from that and said that well, if it must
6:35
Speaker 6: be awarded to victims, then there must be some injury
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Speaker 6: to those victims that can be recoverable, and stripits was
6:41
Speaker 6: in the ninth circuit, not the Second circuit. The Ninth
6:44
Speaker 6: Circuit came to the opposite conclusion and said the sec
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Speaker 6: can obtain disgorgement without showing a pecuniary injury to a
6:51
Speaker 6: victim so long as they showed some interference with a
6:55
Speaker 6: victim's legally protected interests.
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Speaker 1: It would be difficult, would knit in most cases to
7:01
Speaker 1: show all the victims in some of these schemes who
7:04
Speaker 1: suffered losses.
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Speaker 6: It is it's difficult to identify victims, and sometimes there's
7:11
Speaker 6: not a clear pecuniary loss. For example, think about insider training.
7:15
Speaker 6: Insider training in a stock that is training in a
7:19
Speaker 6: liquid market. It's very difficult to precisely identify who is
7:24
Speaker 6: harmed by that insider training. But you know, insider training,
7:28
Speaker 6: as we know, is a clear violation of securities law,
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Speaker 6: and there's a clear benefit to the defendant. They make
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Speaker 6: a lot of money by misusing inside information. And so
7:41
Speaker 6: under the Second circuits reasoning their interpretation of lou there's
7:47
Speaker 6: a good chance that in an insider training case that
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Speaker 6: there would not be any disgorgement. And you know, this
7:53
Speaker 6: is something that the SEC does all the time. It
7:55
Speaker 6: seeks disgorgement in insider training cases. And there are other,
8:00
Speaker 6: you know examples where you have, you know, wrongdoing. But
8:04
Speaker 6: it's very difficult to assess who is damaged and suffered
8:08
Speaker 6: losses from that securities law violation.
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Speaker 1: So let's talk about some of the questioning by the justices.
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Speaker 1: To justices, Liberal Justice Katanji brown Jackson in Conservative Amy
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Speaker 1: Coney Barrett questioned the argument that discoorgement would amount to
8:24
Speaker 1: impermissible punishment by the SEC if it failed to prove
8:28
Speaker 1: that the victims had experienced economic harm. So Justice Katanji
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Speaker 1: Brown Jackson said, if they're just disgorging his ill gotten gains,
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Speaker 1: I guess I'm not sure I understand why there's a punishment.
8:39
Speaker 1: And Amy Cony Barrett said, why does that look like
8:42
Speaker 1: a penalty if all you're taking away is the ill
8:45
Speaker 1: gotten gains? So they're the proceeds that the wrongdoer isn't
8:48
Speaker 1: entitled to in the first place. I mean, that seems
8:50
Speaker 1: to make logical sense to me. He's not entitled to This.
8:54
Speaker 6: Does yeah, it does and I think, you know, in
8:57
Speaker 6: defense of the defendant, they were relying upon a number
9:02
Speaker 6: of prior cases decided by the Supreme Court. For example,
9:06
Speaker 6: the Koquesh decision was one where the court said that
9:11
Speaker 6: cases where the set is seeking disgorgement are subject to
9:17
Speaker 6: the statute of limitations that applies to penalties, and in
9:21
Speaker 6: the course of deciding that case, they suggested that sometimes
9:26
Speaker 6: disgorgement can actually punish an individual and therefore can be
9:30
Speaker 6: seen as a penalty, at least in terms of whether
9:34
Speaker 6: or not it fits within the statute limitations for penalties.
9:36
Speaker 6: Prior to Coquesh, the position was that the SEC's disgorgement
9:41
Speaker 6: cases were not subject to a statute of limitations, and
9:45
Speaker 6: lou as well suggests that disgorgement is most likely not
9:50
Speaker 6: a penalty when the money goes to the victims of
9:53
Speaker 6: the violation, and so it sort of built on cokesh
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Speaker 6: And so in the defendant's defense, I think that that,
10:00
Speaker 6: you know, the defendant and second Circuit was extrapolating from
10:04
Speaker 6: some of the language in these prior cases, which I
10:07
Speaker 6: think some of the justices are now backing away from
10:10
Speaker 6: a little bit and trying to kind of go back
10:13
Speaker 6: to the more common sense idea that you know, there's
10:16
Speaker 6: this concept of disgorgement and unjustin Richmond that's been around
10:20
Speaker 6: for a long time, and you know, the basic principle
10:24
Speaker 6: is a simple one that you just have to give
10:26
Speaker 6: back your gains from wrongdoing, which doesn't really seem like
10:32
Speaker 6: a penalty more generally. In addition, Congress passed a law
10:37
Speaker 6: statute after Lou in twenty twenty one that basically says
10:41
Speaker 6: the sec is permitted to seek disgorgement, and that statute
10:45
Speaker 6: doesn't put any conditions on disgorgement and doesn't say, well,
10:50
Speaker 6: you have to establish somebody was harmed and suffered pecuniary injury,
10:56
Speaker 6: and that's an argument for the PLANEFF. Now, what the
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Speaker 6: defendant would say is that, well, the Congress in passing
11:02
Speaker 6: the statute, they knew about the language in Lou which
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Speaker 6: implied that disgorgement often goes to victims or the money
11:11
Speaker 6: should go to victims for it not to be a penalty.
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Speaker 6: And therefore maybe the statute incorporates the Supreme Court's definition
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Speaker 6: as the defendant understands it, So his case to some
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Speaker 6: extent could be decided as a statutory interpretation issue. Congress
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Speaker 6: mean when it's said after Lou that the SEC has
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Speaker 6: the power to seek disgorgement.
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Speaker 1: Coming up next on the Bloomberg Law Show, I'll continue
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Speaker 1: this conversation with UCLA law professor James Park just as
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Speaker 1: Gorsuch suggests that if the SEC is keeping the disgorgement
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Speaker 1: awards rather than returning the money to the victims, perhaps
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Speaker 1: the defendants entitled to a jury trial. I'm June Grosso
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Speaker 1: and this is Bloomberg. During oral arguments, the Supreme Court
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Speaker 1: justices expressed little enthusiasm for curbing one of the SEC's
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Speaker 1: most important enforcement tools, as the justices considered whether the
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Speaker 1: SEC must show investor harm in order to win disgorgement,
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Speaker 1: a legal remedy designed to recoup illicit profits and return
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Speaker 1: them to the victims. But even Justice Clarence Thomas, who
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Speaker 1: had voted to bar the use of disgorgement altogether in
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Speaker 1: twenty twenty, indicated he wasn't a sure bet this time
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Speaker 1: around because of a statute Congress passed after that twenty
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Speaker 1: twenty Lou ruling.
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Speaker 3: The world has changed in this area since Lou, and
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Speaker 3: disgorgement is now in what section seven?
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Speaker 7: That's correct?
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Speaker 3: And it has a different statute of limitations.
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Speaker 1: But Justice Neil Gorsuch suggested that defendants might at least
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Speaker 1: be entitled to a jury trial under the Constitution's seventh
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Speaker 1: Amendment if the Commission is keeping disgorgement awards rather than
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Speaker 1: returning the money to the victims. Here is his exchange
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Speaker 1: with the Junctice Department attorney representing the SEC Malcolm Stewart.
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Speaker 7: Luis you think you can get a disgorgement that without
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Speaker 7: any effort to get it back to the investors and
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Speaker 7: keep that in equity in front of a judge rather
13:20
Speaker 7: than trigger a jury trial right as a penalty.
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Speaker 3: Well, that's a yes or no. It's a two part question.
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Speaker 7: Now it's a one part question. We would say yes,
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Speaker 7: but there are I think it's a yes. You can
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Speaker 7: keep it in equity before a judge, without a jury
13:35
Speaker 7: and make no effort to send the money back to investors.
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Speaker 3: That would be our position.
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Speaker 7: Okay, let's say that's wrong.
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Speaker 3: Okay.
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Speaker 1: The Supreme Court said in twenty twenty four that defendants
13:45
Speaker 1: have a constitutional right to a jury trial in federal
13:49
Speaker 1: court when the SEC asks for civil penalties. I've been
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Speaker 1: talking to Professor James Park of UCLA Law School. In reality,
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Speaker 1: when there is a discouragement, does the SEC often return
14:02
Speaker 1: it to the victims or does it usually go into
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Speaker 1: the treasury?
14:06
Speaker 6: It varies, And that's something that's controversial is sometimes the
14:10
Speaker 6: SEC is not able to identify victims, it's not able
14:14
Speaker 6: to get the money back to the victims, and so
14:16
Speaker 6: then it goes back to the treasury, and so, you know,
14:19
Speaker 6: there is some criticism of that practice. On the other hand,
14:23
Speaker 6: you might say, well, you know, Congress might understand this
14:27
Speaker 6: and recognize this and say, well, maybe that's a good result.
14:31
Speaker 6: That money could go to funding the SEC and other
14:34
Speaker 6: investor protection programs, and so they may be the proper
14:39
Speaker 6: person to get the payment rather than the victims themselves.
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Speaker 1: In the past, the Supreme Court has limited the SEC's
14:47
Speaker 1: disgorgement powers. The last time in twenty twenty. Did you
14:52
Speaker 1: get a sense of which way the Court was going
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Speaker 1: from these oral arguments?
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Speaker 6: Well, I think the justices may be signaling, at least
15:00
Speaker 6: in the oral argument. Their questions seem to indicate that
15:03
Speaker 6: they may not want to go much further. And I
15:05
Speaker 6: think there are a couple of reasons for this. I
15:07
Speaker 6: think most importantly, you know, they're wary of Congress. Right,
15:11
Speaker 6: Congress said the SEC has the power toward disgorgement, and
15:14
Speaker 6: if the Court basically cuts it back too much, Congress
15:19
Speaker 6: may come back and effectively overrule that by passing a
15:22
Speaker 6: new statue. And so I think they're wary about Congress
15:25
Speaker 6: in this space. Secondly, I think they might be wary
15:30
Speaker 6: about handicapping the SEC too much and drastically reducing its
15:36
Speaker 6: enforcement power in a way that's arguably not consistent with
15:41
Speaker 6: you know, a certain view of disgorgement and case law.
15:45
Speaker 6: You know, there are a number of cases cited by
15:47
Speaker 6: the SEC and amicus briefs where you know, courts have
15:50
Speaker 6: awarded disgorgement without a clear pecuniary harm to plants and
15:56
Speaker 6: so kind of you know, going against that that tradition
16:01
Speaker 6: is something I think some of the justices may be
16:03
Speaker 6: wary of as well.
16:05
Speaker 1: Yeah. So, I mean, if you go by just the
16:07
Speaker 1: timing of it, they spent less than half an hour
16:10
Speaker 1: questioning the SEC's lawyer, and I can't remember the last
16:13
Speaker 1: time that's happened. Did any of the justices seem to
16:17
Speaker 1: you to be against the SEC's position, you know, I.
16:21
Speaker 6: Think Gorsuch was the one who asked a few questions
16:25
Speaker 6: that could be interpreted as indicating he may be leaning
16:29
Speaker 6: against the sec He asked a question about, well, you know,
16:33
Speaker 6: when Congress passes a statute, don't we assume they incorporate our,
16:38
Speaker 6: you know, prior definitions from case law. Right, If it's
16:41
Speaker 6: true that lou says disgorgement requires some sort of an
16:46
Speaker 6: award for victims, Congress at the time it passed the
16:49
Speaker 6: new statute knew this, and if they disagreed with it,
16:52
Speaker 6: they could have specifically defined it in some other way.
16:55
Speaker 6: So he asked that question, and that might be an
16:58
Speaker 6: indication he's leaning in that direction. That was the one
17:01
Speaker 6: who seemed most open minded to the defendant's argument street
17:05
Speaker 6: patches argument in the case, but it did seem like
17:08
Speaker 6: the other justices were most likely leading the other way.
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Speaker 1: Gorsich also suggested that the defendant might have a right
17:14
Speaker 1: to a jury trial if the Commission is keeping the
17:18
Speaker 1: awards and not returning the money to victims, and in
17:21
Speaker 1: twenty twenty four, the Supreme Court did say defendants have
17:25
Speaker 1: a constitutional right to a jury trial when the commission
17:28
Speaker 1: is asking for civil penalties. Of course, it said, I
17:31
Speaker 1: don't see how it would not trigger the Seventh Amendment
17:33
Speaker 1: if the government just decided to keep all the money.
17:36
Speaker 1: So how does that play in here?
17:38
Speaker 6: It's a great question, and the decision is Darksey, which
17:42
Speaker 6: basically said that when the SEC is seeking civil penalties
17:47
Speaker 6: for fraud, that there is a right to a jury
17:50
Speaker 6: trial in those circumstances. And so could there be situations
17:55
Speaker 6: where disgorgement effectively is awarded in a fraud case. If
18:01
Speaker 6: that's the case, could there be an argument that the
18:05
Speaker 6: Seventh Amendment could apply? And I think that's certainly possible.
18:10
Speaker 6: I don't know though, if that necessarily means that in
18:13
Speaker 6: every disgorgeman case you have to show some injury, and
18:17
Speaker 6: so I don't think that's an insurmountable barrier to the
18:21
Speaker 6: SEC's position. But the broader point that I've firt made
18:26
Speaker 6: with respect to Strippage's position here is that, well, you know,
18:30
Speaker 6: if you say that you can get disgorgement without these limitations,
18:33
Speaker 6: then you know you can do that since it's an
18:36
Speaker 6: equitable remedy, you can do that without a jury, right.
18:39
Speaker 6: One of the implications of a case inequity is you're
18:42
Speaker 6: not entitled to a jury trial, and so the SEC
18:45
Speaker 6: could in theory just seek disgorgement against defendants and avoid
18:50
Speaker 6: jury trials if it wanted to. I'm not sure if
18:53
Speaker 6: the SEC would normally do that, because they often charge both.
18:58
Speaker 6: They often charge both penalty and disgorge men. And so
19:01
Speaker 6: if you had a jury trial with respect to the
19:03
Speaker 6: civil penalties, I think you'd still have it, assuming the
19:06
Speaker 6: SEC didn't try to game the system and just seek disgorgement.
19:10
Speaker 6: And you know, the other point to make is that
19:13
Speaker 6: you know, Darcasey didn't say you're always entitled the jury trial.
19:16
Speaker 6: If there's civil penalties, it has to be a fraud case,
19:19
Speaker 6: a case where you're alleging some sort of fraud that's
19:22
Speaker 6: a common law action that the right to jury trial
19:26
Speaker 6: would be preserved for. So there's some some interesting kind
19:31
Speaker 6: of questions at the boundary here, but I'm not sure
19:35
Speaker 6: that they are a reason to adopt the particular definition
19:39
Speaker 6: for disgorge man.
19:40
Speaker 1: What kinds of cases does the SEC normally seek disgorgement in?
19:45
Speaker 1: I mean, are there certain categories where they would seek
19:48
Speaker 1: disgorgement in others where they wouldn't.
19:50
Speaker 6: You know, are there cases where it's not clear that
19:53
Speaker 6: somebody profited from their wrongdoing? Right. I could imagine a
19:58
Speaker 6: situation where, you know, suppose I sell a bunch of
20:01
Speaker 6: securities without registering them, and you know, I actually don't
20:06
Speaker 6: make any money because you know, nobody buys the securities.
20:11
Speaker 6: I spend a bunch of money marketing them. Nobody believes me,
20:15
Speaker 6: and therefore I, you know, actually lose money on the
20:18
Speaker 6: on the scheme. But I clearly violated securities law, and
20:21
Speaker 6: so disgorgement wouldn't be available. But I still might want
20:24
Speaker 6: to penalize you in that case, because I want to
20:26
Speaker 6: make sure you follow securities law in in the future.
20:30
Speaker 6: And I think this is an argument that's coming up
20:32
Speaker 6: more after the lou decision, which is that I think
20:35
Speaker 6: defendants have this argument now that you know, I didn't
20:38
Speaker 6: have any net profits from my scheme, and so there's
20:42
Speaker 6: no disgorge man available because I lost money. I spent
20:46
Speaker 6: all this money investing in this fraud, but it didn't
20:48
Speaker 6: pay off, right, And so in those situations, you're gonna
20:52
Speaker 6: want to want to seek a penalty. But it is
20:55
Speaker 6: true in most cases they're only going to go after
20:58
Speaker 6: you if if you've made a lot of money off
21:00
Speaker 6: of innocent investors. That's typically that the type of case
21:03
Speaker 6: the SEC is.
21:04
Speaker 7: Going to seek.
21:05
Speaker 1: How important is this case?
21:08
Speaker 6: This is seen as a very important case for the SEC.
21:11
Speaker 6: I was at a conference with a number of SEC
21:14
Speaker 6: attorneys a few months ago, and I got the sense
21:17
Speaker 6: they're very worried about this particular case. I think they
21:21
Speaker 6: see it as potentially having very significant implications with respect
21:25
Speaker 6: to their enforcement program. In addition, some of the prior
21:28
Speaker 6: cases the Court has decided, you know, put some real
21:31
Speaker 6: limitations on the SEC's power to seek disgorgement, and it
21:35
Speaker 6: does complicate their enforcement efforts to some extent, and it
21:40
Speaker 6: gives defendants, you know, a few more tools in their
21:44
Speaker 6: toolbox to resist the SEC and maybe negotiate a better settlement.
21:49
Speaker 8: So I think, you know, to the extent, if you
21:51
Speaker 8: think that the SEC needed to be sort of reined
21:54
Speaker 8: in a little bit, I think the decisions like Koquash
21:57
Speaker 8: and Low and Jarcasey may have done a good amount already.
22:00
Speaker 6: And so I think there's an argument, and I think
22:03
Speaker 6: the Justices seem to understand this that well, you know,
22:06
Speaker 6: the position that Strippage is advocating for may go a
22:09
Speaker 6: bit too far, and you know, Congress would probably come
22:13
Speaker 6: in and overrule what the Supreme Court did. If it
22:16
Speaker 6: were to go with strippage.
22:18
Speaker 1: From the oral arguments, it did seem like the sec
22:21
Speaker 1: would win this one, but you never can tell. Thanks
22:24
Speaker 1: so much for joining me, Jim. That's Professor James Park
22:27
Speaker 1: of UCLA Law School. A federal judge rebuked US Health
22:34
Speaker 1: Secretary Robert F. Kennedy, Junior for causing quote chaos and
22:38
Speaker 1: terror by attempting to withhold federal funding for hospitals that
22:43
Speaker 1: provide gender affirming care for minors. Here's what Kennedy testified
22:48
Speaker 1: to on April seventeenth before the House Education and Workforce Committee,
22:53
Speaker 1: when presented with Republicans' concerns about gender affirming surgeries.
22:59
Speaker 9: We have and it all federal funding for those kind
23:02
Speaker 9: of for puberty blockers and gender mutilation surgeries. And we
23:09
Speaker 9: have instructed hospitals and medical centers around the country that
23:14
Speaker 9: if they do host those kind of interventions that they
23:19
Speaker 9: will lose all their Medicaid and Medicare funding.
23:22
Speaker 1: Oregon federal judge Mustapha Kasobi wrote an a scathing opinion
23:28
Speaker 1: that unseerious leaders are unsafe. He said that Kennedy lacked
23:33
Speaker 1: legal authority to unilaterally and categorically supersede statewide standards of
23:39
Speaker 1: care governing gender affirming care, blocking the HHS Secretary from
23:44
Speaker 1: attempting to do so again. Quote. This case illustrates that
23:49
Speaker 1: when a leader acts without authority and in the absence
23:52
Speaker 1: of the rule of law, he acts with cruelty. Joining
23:56
Speaker 1: me is Ian Lopez, a senior reporter at Bloomberg Law
24:00
Speaker 1: about this December announcement from AJHS.
24:05
Speaker 4: Sure So, back in December, the AHS announced this kind
24:11
Speaker 4: of package of actions, if you will, that were aimed
24:15
Speaker 4: at scaling back access to gender affirming care, particularly for minors.
24:19
Speaker 4: One big component of that was a declaration from Secretary
24:24
Speaker 4: Kennedy which basically said that providing gender refirming care for
24:29
Speaker 4: minors does not meet normal medical standards. The implication being
24:33
Speaker 4: that hospitals that receive federal funding would be in danger
24:36
Speaker 4: of losing that funding and that support should they continue
24:39
Speaker 4: providing those services. Now, this declaration, like I said, it
24:43
Speaker 4: was one of a few different actions unveiled at the
24:46
Speaker 4: same time. It also went along with a few proposed
24:49
Speaker 4: rules from the centers from Medicare and Medicaid services that
24:53
Speaker 4: kind of have the same effect. But the issue with
24:55
Speaker 4: the declaration, according to the States at least that brought
24:58
Speaker 4: the lawsuit was that Secretary Kennedy should have gone through
25:02
Speaker 4: a more formal rulemaking process, that being, he should have
25:07
Speaker 4: actually proposed this idea of his and sent it out
25:11
Speaker 4: for the public to comment on. Did not do that.
25:14
Speaker 4: So nearly twenty states in the District of Columbia sued
25:19
Speaker 4: the HHS along with Kennedy and said that he violated
25:22
Speaker 4: these rulemaking norms.
25:24
Speaker 1: What was ajs's response to the state's complaint.
25:28
Speaker 4: Well, the h just tried to have the lawsuit dismissed.
25:31
Speaker 4: They believed they were well within their authority to do so.
25:34
Speaker 4: They even actually note in this declaration that we're discussing
25:37
Speaker 4: that Kennedy's views his position here actually supersedes a state
25:42
Speaker 4: authority of how they're regulating this practice. The states, of
25:45
Speaker 4: course disagreed, and the judge side with the states on this.
25:49
Speaker 1: And the judge had initially issued this ruling from the
25:51
Speaker 1: bench and then he issued a formal ruling first of all,
25:54
Speaker 1: tell us about the ruling.
25:56
Speaker 4: So he decided that basically the actions that Kennedy sicure
26:01
Speaker 4: with the declaration were unlawful required the rule making process,
26:04
Speaker 4: and in doing so, he basically blocked the declaration from
26:09
Speaker 4: being effective.
26:10
Speaker 6: Now.
26:11
Speaker 4: What makes us a little bit more critical, though, is
26:14
Speaker 4: that in doing so. The judge noted that, Hey, you
26:17
Speaker 4: know what, I would not be surprised if the AHHS
26:20
Speaker 4: tried to find a way to circumvent this ruling. So
26:22
Speaker 4: I'm going to vacate the declaration and then the process,
26:26
Speaker 4: I'm also going to block the AHHS from carrying out
26:29
Speaker 4: similar actions to this, And what constitutiones is similar here
26:33
Speaker 4: is fairly broad. From what I'm hearing from legal experts,
26:37
Speaker 4: is that that could be used to kind of essentially
26:39
Speaker 4: cut off the Trump administration from taking all sorts of
26:42
Speaker 4: actions that has been trying to undertake around gender care.
26:45
Speaker 1: It was a scathing ruling. He said that unseerious leaders
26:49
Speaker 1: are unsafe. This case illustrates that when a leader acts
26:52
Speaker 1: without authority and the absence of the rule of law,
26:55
Speaker 1: he acts with cruelty. Was there any specific evidence from
27:00
Speaker 1: the States about Kennedy's actions here?
27:04
Speaker 4: Well, if you look at the fat pattern around the case,
27:06
Speaker 4: the declaration is like one of many actions that have
27:09
Speaker 4: been carried out across the Trump administration for since twenty
27:13
Speaker 4: twenty five. Really right, like the President Trump, I believe
27:16
Speaker 4: on his first day in office actually issued at an
27:18
Speaker 4: executive order going against not so much gender affirming care,
27:22
Speaker 4: but the recognition of anything beyond male and female as genders.
27:26
Speaker 4: And then from there he issued another order for the
27:29
Speaker 4: government to scale back on gender care. And since then
27:31
Speaker 4: we've seen investigations in the hospitals, threats of the Inspector
27:36
Speaker 4: generals taking action, and really this kind of fits part
27:38
Speaker 4: and parcel with all of that. And part of the
27:41
Speaker 4: challenge here that the judges had to grapple with was
27:45
Speaker 4: the legality behind essentially Kennedy making this proclamation in the
27:49
Speaker 4: face of not only other more normal standards of care
27:53
Speaker 4: by medical groups, but also how states themselves have the
27:57
Speaker 4: authority to regulate.
27:58
Speaker 1: This prest As you mentioned, the judge said that the
28:02
Speaker 1: public statements and social media posts leave no room for
28:05
Speaker 1: doubt that defendants will attempt to circumvent this court's vacator
28:09
Speaker 1: of the Kennedy declaration. Did he do anything that would
28:12
Speaker 1: stop ajhs from continuing this, Well.
28:17
Speaker 4: The AHHS can still go ahead and try to take
28:19
Speaker 4: other steps around this order, but the scope of the order,
28:22
Speaker 4: but at least what I'm hearing from legal experts is
28:25
Speaker 4: that it should also be applied to blocking those other
28:27
Speaker 4: efforts as well, the idea being that the States had
28:31
Speaker 4: requested not only relief against the declaration, but any similar
28:35
Speaker 4: actions along those lines and what counts of similars can
28:39
Speaker 4: be fairly broadly interpreted, and this is something that will
28:41
Speaker 4: probably play out again should the AHHS appeal. So what
28:45
Speaker 4: that scope might be.
28:46
Speaker 1: AHHS said they'll continue to fight to protect our nation's
28:50
Speaker 1: children and blamed it on the judge being a Biden
28:53
Speaker 1: appoint de with radical ideology. Are they going to appeal
28:57
Speaker 1: his decision?
28:58
Speaker 4: They haven't said, at least to US yas whether they're
29:01
Speaker 4: going to, but presumably they will. Now the catch to that, though, is,
29:04
Speaker 4: of course they do at times let things just drop
29:07
Speaker 4: because they have so many lawsuits out there and some
29:08
Speaker 4: of them just aren't going to work out here obviously.
29:11
Speaker 8: But in this.
29:11
Speaker 4: Particular case, it's hard to say, because, like we were saying,
29:15
Speaker 4: the applicability of this ruling, given how broad it is,
29:18
Speaker 4: I mean, it does really threaten to kind of scale
29:21
Speaker 4: back a lot of the actions that the administration has
29:23
Speaker 4: been doing since early twenty twenty five.
29:25
Speaker 1: Well, I've heard that in New York some hospitals have
29:29
Speaker 1: stopped you know, the gender affirming care because of fear
29:33
Speaker 1: of the Trump administration pulling federal funding. I don't know,
29:37
Speaker 1: they might still be afraid of that even with this ruling.
29:40
Speaker 4: Right right, And you know, of course the Advocate camp
29:43
Speaker 4: here in reading this ruling is suggesting that hospitals should
29:48
Speaker 4: feel free to kind of go ahead and pursue this
29:51
Speaker 4: care again. They could kind of the chilling effects should
29:54
Speaker 4: be over. But as you've noted, you know, who knows
29:56
Speaker 4: what the next step might be from the Trump administration.
29:58
Speaker 4: Should they try something out, should the appeal, shouldn't this
30:02
Speaker 4: get halted? While the appeal, it's really just a wait
30:04
Speaker 4: and see as to what the hospitals.
30:06
Speaker 3: Do as well.
30:07
Speaker 1: Thanks so much. Ian. That's Ian Lopez, Bloomberg Law Senior reporter,
30:13
Speaker 1: and that's it for this edition of The Bloomberg Law Show.
30:16
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