In this episode of Unwritten Law, Mark Chenoweth and John Vecchione are joined by Peggy Little, Senior Litigation Counsel at NCLA, to discuss one of the most consequential cases in the organization’s docket: Davidson, et al. v. Atkins, a constitutional challenge to the SEC’s Consolidated Audit Trail (CAT).

The CAT is a massive nationwide database that collects and stores every stock trade made by every American investor, without suspicion, clear statutory authorization, or congressional appropriation. Peggy explains why this dragnet surveillance raises serious Fourth and Fifth Amendment concerns, threatens the security of Americans’ financial data, and unlawfully shifts billions of dollars in costs onto investors.

The discussion covers:

• Why the SEC lacks statutory authority to create and operate the CAT
• How mass financial data collection implicates constitutional privacy protections
• The dangers of delaying judicial review while unconstitutional conduct continues
• Why agencies cannot be allowed to “think about fixing” violations while rights are being infringed

This episode explains why Davidson, et al. v. Atkins is not just about securities regulation, but about the constitutional limits of agency power — and why courts must intervene.

Mark Chenoweth: Welcome to Unwritten Law with Mark Chenoweth and John Vecchione. We are delighted to have with us today Senior Litigation Counsel Peggy Little to update on a case she’s been working hard on for a couple of years. But for the last seven months or so the case has been held in abeyance at the orders of the Western District of Texas. And so, the case is Davidson v. Adkins. This is NCLA’s case against the Consolidated Audit Trail. This is one of the most important cases NCLA has from my perspective because you're talking about a massive, nationwide database of every single person’s stock transactions that the SEC and FINRA cooked up without any statutory authority from Congress, without any appropriations from Congress.

And they're continuing to operate this thing all through the seven-month abeyance and the Court says what? Why did the Court allow the abeyance and what is the government saying now? And what did we just file to sort of push back on that?

Peggy Little: Sure. Well, I first want to alert our listeners that the Consolidated Audit Trail, otherwise known as the CAT, is just gigantic; probably the largest data collection we know of in the United States, and it is very dangerous database. It can be easily breached, and it also is a Fourth Amendment, Fifth Amendment violation of the citizens’ rights to have their financial affairs be considered private. They grab this data without any suspicion of wrongdoing.

Peggy Little: I think it’s something like six billion a day or something like that.

Mark Chenoweth: It’s unbelievable.

John Vecchione: And it’s all your trades?

Peggy Little: Every single trade you make on the stock market is stored in a database that the SEC can search, and it can also release its bots in to search for what they think are suspicious transactions. There is simply no authority for this at all.

Mark Chenoweth: It’s a dragnet –

Peggy Little: Right.

Mark Chenoweth: – which we don’t typically allow dragnets under –

John Vecchione: No.

Mark Chenoweth: – the Fourth Amendment in this country. And that's what this is.

Peggy Little: The day before we filed our suit, former Attorney General Bill Barr published an op-ed in the Wall Street Journal saying it was the largest Fourth Amendment violation he was aware of in his entire career twice as Attorney General. So, we have some great support. Several states have also filed amicus briefs. One of the things that lets people know that this is a hugely important case, we had, and I have lost count, but it was over a dozen amicus briefs filed in the district court when the SEC first moved to dismiss our claim. So, we have a lot of nationwide support. We probably need to get this more on people’s radar. I didn’t answer your question.

You asked me, why did I think the judge allowed the abeyance. I don’t know. I don’t know what was in the judge’s head when he granted that. We objected strenuously because there is nothing…

Mark Chenoweth: Well, you know what happens when you strenuously object…

Peggy Little: That's right. But there's nothing that the SEC can do to cure this problem. It can’t provide itself with Congressional authorization. It cannot provide itself with lawful appropriations.

Mark Chenoweth: Right. It can’t change the facts of what it’s done here.

Peggy Little: Precisely, and even if Congress were to do so, it would still violate the Fourth and Fifth Amendment. Not even Congress can do this. So, why there is any delay in deciding this case is a mystery to me. But the most recent development is, on the day that the first abeyance expired the SEC filed a motion for continued abeyance of another six months, essentially trying to stop the progress of the case for over a year in a suit we brought two years ago in which there's been no meaningful progress. And that is deeply disturbing.

Mark Chenoweth: And unusual.

Peggy Little: Very unusual. And I think, again, our objections are very well taken, and I’m hoping that the judge will understand that the SEC hasn’t done anything that cures this and cannot do anything.

Mark Chenoweth: Well, that was my first question to you, Peggy, when I heard that the government had asked for another six-month extension or continuance off the abeyance, however they style it. I said, “Okay, so what have they done in this last six or seven months to fix the problem and make it better?” And not much.

The stated reason in their motion was they wanted to engage in a “comprehensive rethink of the program.” One of our amicus supporters filed an amicus brief. And by the way, they called me up and wanted to do it. I didn't approach them about this. The title of the one and only roman numeral in that brief is “The government should not be able to avoid judicial review by simply claiming it is still thinking about whether it might at some point cease its constitutional violations.” And I think that says it very well.

Mark Chenoweth: That's right. So, “SEC, when are you gonna stop beating your wife?” I don’t understand how the agency thinks that it can continue to do this and just have the Court be on the sideline. These are serious Fourth Amendment concerns, serious First Amendment concerns, serious structural concerns about the agency going well beyond its statutory authority, and it’s just gonna continue to whistle past the graveyard? I don’t understand. I’m mixing too many metaphors here.

John Vecchione: Well, the other thing, there's been no stay, right? So, they're collecting this right now.

Peggy Little: Right.

John Vecchione: And you just wait until the data breach comes. I think our listeners will see, every now and then you see the government has some huge breach. Sometimes it’s in healthcare…

Mark Chenoweth: OPM.

John Vecchione: All you need is that data breach…

Mark Chenoweth: Opposite Personal Management for people who don’t…

John Vecchione: Exactly, who aren’t here in D.C. And so, that’s the other thing. The harm and the danger continues on that. Put the constitutional issues aside. The practical problem that they have not addressed continued unabated all this time.

Peggy Little: Our understanding is that hackers can not only get your information but actually get in there and get your assets, your retirement savings, your college fund savings. So, this is a grave risk to the security of the American people, and that the SEC is acting so cavalierly about it is deeply disturbing. We were about to file a few motions to get this case moving forward. Ad one of the things the SEC told me was they object to my filing anything now that the stay has lifted at all until their new motion gets ruled on. And that kind of arrogance…

Mark Chenoweth: “Well, that's lovely that you feel that way but you're not the judge…”

Peggy Little: Well, what they're trying to do is control the Court docket.

Mark Chenoweth: Sounds like it.

Peggy Little: Our hands have been tied for seven months. I give them prior notice that we would be making filings, as you're required to do. And their objection is “We wanna see if we can stop the wheels first, and you shouldn't be filing anything.” And I think that really is a great Exhibit A of the arrogance the government has and its assumption that it can go into court and expect a judge to rule for the government, which is very troubling.

Mark Chenoweth: Well, and I think if the SEC had the courage of its convictions on the substance of this, they wouldn't be playing these games.

Peggy Little: Exactly.

Mark Chenoweth: But they know they're gonna lose. And look, maybe they don’t lose in front of the district court. Maybe they're able to pull the wool over one judge’s eyes, but by the time this thing gets to the Fifth Circuit, and you get a random draw of three judges at the Fifth Circuit, I think that the probability of this surviving is approximately zero. There are too many constitutional problems with what the SEC’s doing, how it’s behaving. I was describing this to a constitutional law professor yesterday who had never heard of the case before, and he said, “So, this sounds like Consumers’ Research except without any statutory authority.” I said, “Hmm…that's not a bad sort or shorthand.”

Peggy Little: Absolutely, and the Fifth Circuit had ruled already in Consumers’ Research that even Congress could not set up a universal service plan that was self-appropriating and self-funding. Now, the Supreme Court decided because Congress had authorized such a program it could withstand that kind of scrutiny. There is no Congressional –

Mark Chenoweth: No authorization.

Peggy Little: – authorization here and there is no appropriation here. And I think what makes this very different from Consumers’ Research is there is a grave, grave risk to our constitutional liberties, to our property, to our financial security…

Mark Chenoweth: Can I just say, not just a risk? Your property and my property, the property of every single American who has stock is already being taken by the SEC without authority because the broker-dealers who are being charged by the agency for this are passing those costs down to everybody who is engaging in stock transactions.

Peggy Little: Exactly.

Mark Chenoweth: We’re already having our rights violated.

Peggy Little: It is a multi-billion deadweight cost on investing in this country that the SEC has absolutely no authority to impose upon us.

Mark Chenoweth: So, what happens now?

Peggy Little: Well, we’re filing a motion to certify the class. We are going to renew our motion for a preliminary injunction to stop the collection of this data and to stop the searching of the data as well in violation of the Fourth Amendment. And the judge can rule as he wish. He did deny our first preliminary injunction, but we’re talking, as John pointed out, about something that's more than a year later where the data is still being collected, still being searched. By the way, the SEC admits it searches this data so we have a fully ripe Fourth Amendment claim here, and I think it is one that will prevail at the Fifth Circuit and at the Supreme Court.

Mark Chenoweth: Well, I absolutely agree with you. Peggy, I appreciate your coming on to update our audience. We’ll certainly have you back when those other things get filed to learn more about what's in them and the significance of those. Meanwhile, again the case in the Western District of Texas is Davidson v. Adkins. And folks should tune into this one and figure out what’s going on here because I think that the SEC is, what's the term, sort of –

John Vecchione: Over its skis?

Mark Chenoweth: – over its skis on this.

John Vecchione: Exactly. It’s certainly aggrandizing way more power than it has.

Peggy Little: …or as one SEC Commissioner said, “This cat is a dangerous dog.”

Mark Chenoweth: Well, we’ll leave it there. You’ve been listening to Unwritten Law.

[End of Audio]

Duration: 13 minutes