“Given that administrative law judges are employees of the S.E.C., defendants wonder if they can be fair. And is it right for defendants to be investigated, prosecuted and judged by officials of the same agency?…
…“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,” Jed S. Rakoff, a United States District Court judge, said in a speech last November…..“What’s getting lost in all this discussion is that our foremost mission must be to protect investors and hold wrongdoers accountable,” Mr. Ceresney said in a statement on Thursday”, Gretchen Morgenson, “Crying Foul on Plans to Expand the S.E.C.’s In-House Court System”, The New York Times
“Why do these article never have quotes from current and former officials (CEOs, CFOs, etc. who have to sign and certify SOX) of publicly-traded firms and only from lawyers and judges who have worked for or work with the S.E.C. or investor advocates (like public pension funds) who are hostile to public company officials? Is this right? Of course its not right. Its un-American. You notice that Mr. Ceresney doesn’t talk about the rights and liberties of the individuals his agency pursues, despite the fact that those rights, under the Constitution, are superior to the S.E.C.’s mission. When are we going to start holding government officials, especially ones who are lawyers, accountable for respecting and enforcing the Constitutional rights of individual Americans, as they pursue their various “missions”?”, Mike Perry, former Chairman and CEO, IndyMac Bank
Crying Foul on Plans to Expand the S.E.C.’s In-House Court System
As the top cop on Wall Street, the Securities and Exchange Commission usually enjoys broad support for its work fighting fraud in the nation’s financial markets. But a recent agency stance has generated such criticism that even some of the S.E.C.’s high-powered alumni are calling for a do-over.
The initiative emerged almost two years ago when Andrew J. Ceresney, the S.E.C.’s enforcement director, outlined the agency’s plans to bring more regulatory lawsuits to its in-house judges. While the agency still brings a majority of its cases in federal courts — 63 percent so far this fiscal year, up from 57 percent the previous year — the S.E.C.’s promise to expand the use of its internal tribunals has generated intense opposition. Perhaps even more crucially, so has its filing of highly complex cases there.
“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,” Jed S. Rakoff, a United States District Court judge, said in a speech last November. The agency says its in-house courts, overseen by administrative law judges, are not only fair but also more efficient. Their judges are more knowledgeable about securities laws, and cases heard in these venues are resolved much more quickly than in district courts. An evidentiary hearing must occur within four months and may happen as little as one month after a proceeding begins.
But this court system’s efficiencies may put defendants at a disadvantage that undermines the case for streamlining administration. They are allowed limited discovery — no depositions, for example — and cannot make counterclaims. And if someone wants to appeal a decision by an administrative law judge, that person must go back to the commission. Failing that, a defendant can go to a circuit court of appeals, but judges there are wary of overturning rulings by those who are considered experts.
Given that administrative law judges are employees of the S.E.C., defendants wonder if they can be fair. And is it right for defendants to be investigated, prosecuted and judged by officials of the same agency?
“What’s getting lost in all this discussion is that our foremost mission must be to protect investors and hold wrongdoers accountable,” Mr. Ceresney said in a statement on Thursday.
But the questions of fairness are real and seem to be bolstered by the S.E.C.’s win/loss record in its home court versus its performance in district courts.
So far this year, the S.E.C. has a better record in federal court. It won all four of its cases there while prevailing in four out of five proceedings administratively, an 80 percent success rate.
But that’s a small sample, and over the longer term the S.E.C. wins more often in its home courts. From 2012 through June 25, 2015, it succeeded on average in 92.7 percent of matters heard by its internal judges, versus a 77 percent success rate in federal courts. Against individuals, its success rate over the period is 84.7 percent in cases heard administratively, 76 percent in district courts.
The agency stresses that when it wins a case before an administrative law judge, it may not get everything it wants. In three recent cases, for example, administrative law judges denied the S.E.C.’s requests to bar an individual from the securities industry. In-house judges have also denied requests for penalties and monetary relief.
Responsibility for the S.E.C.’s expanding internal court system lies with Congress. When the agency was founded, its administrative law judges presided only over suspensions or expulsions of members or officers of national securities exchanges because that was the extent of the agency’s enforcement work.
But Congress has added to the S.E.C.’s enforcement powers over the years — generally in response to financial debacles, like the accounting frauds of 2001 and the mortgage debacle of 2008. Oversight of these new kinds of cases has gone to the agency’s internal court system, expanding its purview.
Recently, the S.E.C. has raised hackles by bringing to its speedy internal courts highly complex cases that took the agency years to investigate.
In court filings, lawyers for Patriarch Partners, an investment firm specializing in distressed companies, detailed the problem. They said the S.E.C.’s investigation of Patriarch and its owner, Lynn Tilton, went on for five years, during which it collected 2.4 million pages of documents and took sworn testimony from 19 witnesses.
Now it’s Patriarch’s turn to respond. But it has only a few months to prepare its defense.
The S.E.C. is also facing lawsuits from a handful of defendants, including Patriarch, who contend that its administrative court system violates Article II of the United States Constitution. Lawyers making these arguments say the Constitution requires the head of a federal agency — in this case, the S.E.C.’s commissioners — to appoint individuals to adjudicate disputes. But the S.E.C. commissioners do not appoint administrative law judges, making the system improper, they say.
This month, a federal judge in Georgia agreed that the process for appointing internal judges at the S.E.C. was most likely unconstitutional and stopped an insider trading case brought by the S.E.C. before an administrative law judge. The S.E.C. is fighting these challenges, which also raises questions. “Taxpayers’ money should be spent to improve the system, not wasted attempting to defend it,” said Lewis D. Lowenfels, a securities law expert in New York.
The S.E.C. could change its policy on internal judges. And Stanley Sporkin, a former enforcement director at the S.E.C. who was also a federal judge in Washington, said he thinks it should. “I don’t want to see the S.E.C. limited in what it can do,” Judge Sporkin, now a partner at Weil, Gotshal & Manges, said in an interview last week. But problems with the administrative law judges should be remedied, he said.
Among his suggestions: When the S.E.C. is pursuing a defendant for damages, which could be hefty, it should offer the option of a jury trial in federal court.
Marvin Jacob, a former S.E.C. official and retired Weil, Gotshal & Manges partner who served on the New York State Commission on Judicial Conduct, has another idea: Keep the S.E.C.’s administrative law judges independent from the commission, sidestepping the constitutional issue raised by Patriarch and others.
The S.E.C. could do what New York’s judicial conduct commission does, Mr. Jacob said. Overseeing the conduct of 3,400 judges across New York, it uses internal adjudicators who have been selected from a roster of retired judges, judicial hearing officers and lawyers. They are not commission employees.
Advocates for the people and firms targeted by the S.E.C. will always fight back, of course. But in this matter, the agency’s foes seem to be gaining traction.
“The S.E.C. is a great agency, and it’s got to have the power to deal with these matters as they come up,” Judge Sporkin said. “But it’s got to be careful in the way it’s used.”
Correction: June 27, 2015
An earlier version of this column described incorrectly the defense mechanisms allowed to respondents. While they cannot take depositions or make counterclaims, they can conduct limited discovery; it is not the case that they cannot conduct discovery at all.
A version of this article appears in print on June 28, 2015, on page BU1 of the New York edition with the headline: Crying Foul on In-House S.E.C. Courts.