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Wherefore art thou due process? SEC administrative hearings under attack


The SEC has of late come under attack in the courts and congressional hearings for the “Kafkaesque” nature of its administrative hearings. Specifically, critics argue that the administrative hearings deprive defendants of the due process protections afforded by the U.S. Constitution. The most recent legal challenge was filed in U.S. District Court on April 1, 2015 by New York financier Lynn Tilton in response to SEC proceedings initiated against her the day before. But Tilton and the other challengers could face an uphill battle in light of a recent federal court ruling dismissing a similar challenge on jurisdictional grounds, citing the plaintiff’s failure to exhaust administrative remedies in the very proceedings they are challenging.

You won every case. How about with regard to the cases you brought in federal court? One hundred percent there? No? You won 11 out of 18 [cases]? . . . You think there could be any correlation when you actually hire the judges, and you set the rules, that you win all the cases? . . . And you might say ‘You know what, I want to bring more cases in front of the judges that I hire and abide by the rules that I set as opposed to letting these cases go to federal court . . . and, lo and behold, I win them all. – Rep Sean Duffy (R -Wis)

On March 30, 2015, the SEC announced that it was charging self-described “Diva of Distressed” Lynn Tilton (Tilton) and her investment firms Patriarch Partners LLC and related Patriarch limited liability companies (collectively, Patriarch) with fraud and breach of fiduciary duty for, among other things, hiding from investors the poor performance of loan assets in three collateralized loan obligation funds they manage in violation of the federal securities laws. The SEC chose to bring these charges in its own administrative forum instead of in a United States District Court, having that day filed an Order Scheduling Hearing and Designating Presiding Judge (OIP). The OIP directed that (1) a public hearing be held within 60 days before a designated administrative law judge (ALJ) and (2) an initial decision be issued within 300 days addressing the veracity of the allegations contained in the OIP and determining what remedial action, if any, should be taken, including injunctive relief and/or the payment of monetary penalties and disgorgement. In its press release, the SEC stated that “[t]he matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.”

In the meantime, Congress recently held hearings regarding the due process fairness of the SEC’s administrative hearings. On March 19, 2015 (just in time for Tilton to reference it in paragraph 30 of her complaint), Director of Enforcement Andrew Ceresney had an uncomfortable interlude attempting to justify the SEC’s administrative proceedings in the Q&A following his testimony before the House Financial Services Subcommittee (the topic of which was “Oversight of the SEC’s Division of Enforcement”).

During the course of the Q&A in response to different questioners, Ceresney gave the following 2014 statistics: The SEC brought a majority of its cases, or 57%, in federal court and 43% as administrative proceedings. The SEC was successful in 11 out of the 18 federal court cases (13 of which were jury trials), and it had a success rate of nearly 100% in its administrative proceedings. In response to these statistics, specifically the nearly 100% success rate in the administrative proceedings, Rep. Sean Duffy (R-Wis.) questioned sharply: “You won every case. How about with regard to the cases you brought in federal court? One hundred percent there? No? You won 11 out of 18 [cases]? . . . You think there could be any correlation when you actually hire the judges, and you set the rules, that you win all the cases? . . . And you might say ‘You know what, I want to bring more cases in front of the judges that I hire and abide by the rules that I set as opposed to letting these cases go to federal court . . . and, lo and behold, I win them all. And I believe in due process. That’s a great way to administer justice when you work at the SEC.” To this Ceresney replied, “We are not afraid to try cases in federal court. In fact, we won 11 of our last 13 jury trials in federal court . . . . And we still bring a majority of our cases in district court, so we are not shying away from using district court.”

 

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