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New Criticism Over the SEC’s use of In-House Judges

Andrew Ceresney, head of enforcement for the Securities & Exchange Commission, speaks during an interview in New York, U.S., on Friday, July 17, 2015. Photographer: Michael Nagle/Bloomberg  ***Local Caption*** Andrew Ceresney

Andrew Ceresney, head of enforcement for the Securities & Exchange Commission, speaks during an interview in New York, U.S., on Friday, July 17, 2015. Photographer: Michael Nagle/Bloomberg ***Local Caption*** Andrew Ceresney

New challenges are being made about whether the Securities and Exchange
Commission has too much of a “home court” advantage when it pursues
cases before its cr,vn in-house judges rather than in federal court.
It was the Dodd-Frank Act — passed by Congress five years ago in the wake
of the financial crisis — that gave the S.E.C. the option to file cases in which
it sought monetary penalties in its own internal administrative proceeding
rather than going to a Federal District Court. More cases that would have
been filed in a Federal District Court, like insider trading and investor
fraud charges, are now being pursued in administrative proceedings.
On the public relations front, however, the S.E.C. may not be faring as well
over its use of administrative hearings. Last November, Judge Jed S.
Rakoff of the United States District Court for the Southern District of New
York said in a speech that “while a claim to greater efficiency by any federal
bureaucracy suggests a certain chutzpah, it is hard to find a better example
of what is sometimes disparagingly called ‘administrative creep’ than this
expansion of the S.E.C. ‘s internal enforcement power. ”
The latest criticism comes from the United States Chamber of Commerce
which issued a report last week that included calling for a number of
changes to how administrative cases are pursued. The main
recommendation is to provide so-called discovery rights — which allow a
defendant to obtain documents and compel witnesses to give pretrial
testimony — in administrative proceedings to more closely resemble those
provided in a federal-court case. In addition, the chamber called for giving
defendants the right to move a case to a federal court if they wanted to have
a july decide their fate.
The response from the S.E.C., as you might expect, was hostile. Andrew J.
Ceresney, the director of the enforcement division, who has been the most
vocal proponent of using administrative proceedings for a wide range of
cases, responded that the Chamber of Commerce’s suggestions “would
significantly weaken the commission’s ability to protect investors through
strong and effective enforcement of the federal securities laws. ”

Adding to the furor is that the S.E. C. does quite well in its administrative
proceedings, winning almost all contested cases over the last few years. The
Wall Street Journal reported that the S.E. C. won more than 90 percent of
its administrative cases over a five-year period, compared with a 69
percent success rate in federal district courts.
Do those statistics prove the deck is stacked against defendants accused of
violations? The answer is maybe not, because the S.E. C. began a shift to
filing complex administrative cases in just the past three years for matters
taking place after the enactment of the Dodd-Frank Act. Thus, the numbers
may not reflect more recent win-loss trends.
But this battle is more about the perception that the administrative process
is flawed, not whether there is actually a significant home court advantage.
The administrative process is quite different from federal court cases
because there are no broad discovery rights. In addition, the initial decision
is made by a judge hired by the S.E.C., not by a july. Any appeal is initially
heard by the five commissioners who authorized the case before it can go to
a federal appeals court, which is required to defer to the S.E.C.’s expertise
in reviewing the matter. The structure has fueled the perception that this is
a closed system in which the agency acts as both prosecutor and judge over
the case.
Administrative cases rely largely on the information gathered by the S.E. C.
during its investigation, with little opportunity for a defendant to require
witnesses to give depositions or to compel the production of records. The
time frame for a case is quite limited, usually requiring an initial decision
in less than a year from when it was filed.
William E. Gladstone, the onetime British prime minister, once observed
that “justice delayed is justice denied, ” but the accelerated pace of an
administrative proceeding seems to be closer to a rush to judgment for a
defendant. So far, the S.E. C. has won a number of legal challenges to its
authority to pursue administrative cases. However, one Federal District
Court judge in Atlanta recently ruled that the process for appointing the in-
house judges violated the Constitution. As a result of that decision, more
defendants are trying claim that their constitutional rights are being
violated in an attempt to stop in-house cases that would have been filed in a federal court before the Dodd Frank Act.
So far, though, the prospects for any judicial overhaul of the process look to
be fairly low. Still, the S.E.C. may want to look at its procedures for
administrative cases if it wants to respond to some of the criticism.
The Chamber of Commerce’s suggestion that defendants be allowed to take
a case to federal court is unlikely to gain any support from the S.E.C.
Virtually evely defendant facing potential administrative charges would
threaten to use that option as a lever to gain a more favorable settlement.
Cases filed in federal court are much more complicated because of the
extensive rights afforded to the parties to obtain evidence. That means that
there is a greater strain on the S.E. C.’s resources when it has to pursue
cases in that forum.
Even the Chamber of Commerce has been critical of the broad discovely
afforded in federal courts, with its Institute for Legal Reform once arguing
that they allow for “open-ended fishing expeditions in search of a quick
A modest expansion of discovery rights in administrative cases looks like a
much more attractive option for blunting claims of unfairness. Defense
lawyers are naturally suspicious when the only evidence they can use in a
case is what their opponent provided. The notion that the S.E.C. has
gathered all the relevant information, and that a defendant cannot question
witnesses in advance of a trial, goes against the view that the each side
should have the same opportunity to put on its case.
The S.E. C. controls the procedures for administrative cases through its
rules of practice. so changes could be put in place fairly easily. Most of the
prominent defense lawyers for securities cases worked at the agency at one
time, so obtaining their input on how to broaden discovery rights is
certainly a possibility.
If the S.E. C. is unwilling to compromise by altering how an administrative
case will unfold, the danger is that the steady drumbeat of criticism will
lead Congress to rethink the agency/ s authority in this regard.
There is already growing pressure from Republicans on Capitol Hill to roll
back parts of the Dodd-Frank Act. So what Congress giveth, it can easily
taketh away — if the perception grows that the S.E.C. is unfairly using its
authority to pick a favorable legal forum for its proceedings.

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