The SEC’s Home-Court Advantage

As noted in a series of reports over the last year or so, the Securities and Exchange Commission has steadily been sending more of its cases, including contested cases, to be heard before its own, administrative judges rather than litigating them in federal court. The trend follows passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which amplified the agency’s ability to exact civil penalties in administrative hearings without having to sue in federal court.

According to the Wall Street Journal, the Commission won 90% of contested cases before its own judges from October 2010 through March 2015, compared to 69% of such cases in federal court. The agency did even better from September 2011 through September 2014, winning 22 of 23 cases before its judges, compared to 67% of such cases in federal court.

According to another, competing analysis, the agency won just 70% of the time before its own judges, but only if winning were defined as the agency’s running the table and getting everything it wanted. Otherwise, it did a lot better than that, and as far as actually losing, that happened in just six out of 359 cases, or less than 2% of the time.

Finally, on administrative appeals from these decisions, the Commission agreed with its own judges in 90% of cases from January 2010 through March 2015.

In response to all this, some defendants have filed constitutional challenges in federal court, some of which have gained traction. Other critics include business lobbies, federal judges, and even former agency officials, including one former SEC judge who says she retired under pressure from peers who questioned “her loyalty to the SEC” based on her decisions.

In rebuttal, the Commission has explained the spread in part by noting that many administrative cases are routine cases in which the outcome is not in doubt. These include defaults in which the defendant doesn’t bother to show up as well as cases limited to imposing administrative penalties after the defendant has already lost in court.

The criticism, however, may have struck a nerve.

Last month, the Commission proposed amendments to its procedures to align them more with the rules in federal court. These amendments, which the agency is soliciting public comment on through December 4, propose to do the following things among others:

  1. afford defendants up to eight months to prepare for a hearing in complex cases instead of the current four months;
  2. afford defendants the right to subpoena documents as well as depose up to three witnesses in complex, single-defendant cases or up to five witnesses in complex, multi-defendant cases;
  3. require the exchange of expert reports and disclosures before the hearing;
  4. introduce limits on the use of hearsay evidence; and
  5. set deadlines of eight to ten months for the agency to rule on appeals, which have dragged on in some cases.

Some argue these amendments don’t go far enough. They don’t give the defense enough time or discovery to work with; they don’t eliminate hearsay evidence altogether; and they don’t stop the Commission from hearing appeals on cases decided by its own judges.

Still, the criticism has struck a nerve. On Monday, the Wall Street Journal reported that the Commission has begun to curb its use of administrative judges in contested cases, and lately, it’s begun to lose more cases before those judges.

Even so, the words of one SEC official ring true: “Whatever forum we’re talking about, we win … the vast majority of the time.”

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