“I can’t get those years back,” Mr. Hopkins said after being cleared of allegedly misleading investors ahead of the financial crisis. “But there seems to be no consequences for the SEC.”…

…For Messrs. Hopkins and Flannery, their rare victory has come at a price. Both denied wrongdoing from the moment the SEC alleged in 2010 that they misled investors in a bond fund during the run-up to the financial crisis in 2007. The SEC’s chief administrative law judge, Brenda Murray, tossed the case against them, only for the commissioners to find them liable on appeal after a 37-month wait. The federal court ruling this month on the men’s appeal said the SEC’s finding against them was “not supported by substantial evidence.” Mr. Hopkins, 64 years old, left State Street as a managing director after the firm offered him retirement as a result of the case, and he hasn’t worked in financial services since. On two occasions, he said, firms indicated they might offer him a job but needed to check with their legal departments first. “I never heard anything back,” said the Wellesley, Mass., resident. Mr. Flannery, 57, was a senior executive at State Street, managing hundreds of people and earning total compensation of more than $4 million in 2007, the year he left the firm, according to court filings. Since the SEC filed its case, the Scituate, Mass., resident has been effectively locked out of the investment industry, though he has done some work in renewable-energy finance, according to his lawyer.”, Jean Eaglesham, “SEC Appeals Process on the Slow Track”, The Wall Street Journal, December 22, 2015

Markets

SEC Appeals Process on the Slow Track

Regulator’s use of its own tribunal has coincided with longer delays in the handling of appeals

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Since Mary Jo White became SEC chairman, the median time for the agency to decide appeals has increased to 19 months, nearly double the time of predecessors. PHOTO: ANDREW HARRER/BLOOMBERG NEWS

By Jean Eaglesham

After five years, four judges, three rulings, two appeals and the loss of their careers, John Flannery and James Hopkins this month won their legal battle against the Securities and Exchange Commission.

The former State Street Corp. executives’ long legal fight took place almost entirely in the SEC’s in-house court system, which agency officials have lauded as offering a fast-track alternative to federal court. In fact, the SEC’s use of its own tribunal, more frequent in recent years, has coincided with longer delays in the agency’s handling of appeals, according to a Wall Street Journal analysis of rulings stretching back a decade.

Since Mary Jo White became SEC chairman in April 2013, the median time for the agency to decide appeals of its in-house judges’ decisions has increased to 19 months, the analysis found. That is almost double the median times under her two main predecessors, Christopher Cox and Mary Schapiro. (The SEC didn’t decide any appeals while it was led by  Elisse Walter for four months before Ms. White took over.)

Critics—including former SEC officials, business groups and defense lawyers—said the SEC’s approach means defendants often lose both ways. The trial portion of the civil case moves much more quickly than such matters typically would in federal court, giving limited time to prepare for trial, and defendants then can wait years for the SEC to decide appeals.

“I can’t get those years back,” Mr. Hopkins said after being cleared of allegedly misleading investors ahead of the financial crisis. “But there seems to be no consequences for the SEC.”

An SEC spokeswoman declined to comment on the case, but said the agency has managed to cut the delays in the last couple of years by changing how it handles appeals.

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The frustrations with the wait time on appeal are among several criticisms of the agency’s use of its own judges to try cases.

Using enhanced powers granted under the Dodd-Frank financial-overhaul law in 2010, the SEC under Ms. White has stepped up its use of its in-house court, including for serious matters. Themove has been controversial, in part because the agency’s five administrative law judges generally rule more often for the SEC than federal judges or juries, as documented in a series of articles in the Journal this year.

A key part of the agency’s argument has been that the internal tribunal is more efficient.

“I think we can all agree that it is better to have rulings earlier rather than later,”  Andrew Ceresney, SEC enforcement chief, told a legal conference last year.

Yet the agency’s briskness in deciding cases isn’t often matched when it comes to hearing appeals. Since Ms. White took over, the agency has regularly missed its own target—between seven and 11 months—to decide appeals after a filing, a goal that is elastic depending on the complexity of the case. The SEC has met the longer 11-month target in only about one in five of the decisions under Ms. White’s leadership, the Journal’s analysis found.

The target, which is nonbinding, was set in 2003.

The process works like this: If SEC commissioners agree to bring charges through the in-house court, the case is assigned to one of the agency’s judges. After the judge issues a ruling, both sides have the option to appeal. That appeal is heard by the commissioners, the same group that opted to bring charges in the first place. Defendants can seek to appeal that ruling in federal court.

Critics have accused the SEC of unfairness for using commissioners to hear appeals.

“The root of the problem [is]…you have the commission in the role of prosecutor and judge,” said  George Canellos, a co-director of enforcement at the SEC until last year, at a legal conference in Washington, D.C., last month.

Since the start of 2006, only three of 107 defendants appealing a finding of liability by an SEC judge have persuaded the agency to dismiss the case, the Journal’s analysis found.

It isn’t clear what is causing the delays, but critics said the push to send more cases to the in-house court likely worsened a logjam of appeals before commissioners.

“The wait for a ruling on appeal can be interminable and can also disadvantage defendants,” said Joseph Grundfest, a former SEC commissioner who is a law professor at Stanford University.

The SEC has taken steps, including streamlined procedures and additional staff training, to address the delays in the appeals process, according to people close to the agency. As a result, the median time for SEC commissioners to rule on in-house cases on appeal has fallen from 24.5 months last year to 15.5 months this year to date, according to the Journal’s analysis. “Under Chair White’s leadership, the time for resolution of cases before the commission has dropped substantially from the beginning of her tenure,” said an SEC spokeswoman.

The SEC in September also proposed a new target for deciding on appeals, giving the agency between eight and 10 months, as part of a wider overhaul of its in-house court. The proposal starts the clock when the briefs on the appeal are completed, rather than counting from when the appeal is filed, as happens now. The Journal’s analysis suggests that the change would give the SEC on average an extra five months than under the previous target.

Commissioners can only decide on an appeal after the briefs are completed, so the new benchmark is a better measure of how long the SEC is taking, according to people close to the agency. They added that some delays can be caused by defendants, such as requests for extra time.

James Cox, a law professor at Duke University in Durham, N.C., said most defendants are “blowing smoke” about delays and often want the process to drag on to avoid the coming punishment.

For Messrs. Hopkins and Flannery, their rare victory has come at a price.

Both denied wrongdoing from the moment the SEC alleged in 2010 that they misled investors in a bond fund during the run-up to the financial crisis in 2007. The SEC’s chief administrative law judge, Brenda Murray, tossed the case against them, only for the commissioners to find them liable on appeal after a 37-month wait. The federal court ruling this month on the men’s appeal said the SEC’s finding against them was “not supported by substantial evidence.”

Mr. Hopkins, 64 years old, left State Street as a managing director after the firm offered him retirement as a result of the case, and he hasn’t worked in financial services since. On two occasions, he said, firms indicated they might offer him a job but needed to check with their legal departments first.

“I never heard anything back,” said the Wellesley, Mass., resident.

Mr. Flannery, 57, was a senior executive at State Street, managing hundreds of people and earning total compensation of more than $4 million in 2007, the year he left the firm, according to court filings.

Since the SEC filed its case, the Scituate, Mass., resident has been effectively locked out of the investment industry, though he has done some work in renewable-energy finance, according to his lawyer.

Posted on December 23, 2015, in Postings. Bookmark the permalink. Leave a comment.

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