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News March 9, 2015 Issue

Administrative Hearings or Federal Court: Piwowar Calls for Guidelines

What determines whether SEC charges against an adviser get heard in an administrative hearing or in federal court? SEC commissioner Michael Piwowar would like to know, and on February 20 called on the Commission to develop guidelines to determine which path is taken.

"Commission staff has recently indicated that they will recommend instituting more enforcement matters, including insider trading cases, through administrative proceedings rather than going through the federal district courts," he said, referring to comments made by Division of Enforcement director Andrew Ceresney before the District of Columbia Bar in June 2014.

"Announcement of this plan to increase the use of administrative proceedings in insider trading cases followed the Commissionís loss in two insider trading cases in federal district courts," Piwowar noted. "Regardless of whether these circumstances are linked, this change has the appearance of the Commission looking to improve its chances of success by moving cases to its in-house administrative system."

But itís not just insider trading cases that are seeing more administrative proceedings. Piwowar noted that, even before the staff announcement, more cases were being brought using administrative proceedings because of the Dodd-Frank Act, which allows the Commission to seek monetary penalties in administrative proceedings against non-regulated entities. Prior to Dodd-Frank, they could seek such penalties only against regulated entities, and would have had to go to federal court to obtain a monetary penalty against any entity that was not regulated.

The case against administrative proceedings

Whatís the problem with administrative proceedings? According to Piwowar, in such proceedings, "there is no jury and cases are presented to administrative law judges that are employees of the Commission. In addition, discovery available to defendants is more limited."

The results are also more to the SECís liking. "The Commission has an extremely high success rate when litigating through administrative proceedings," Piwowar said. He noted a November 2014 speech, "Is the SEC Becoming a Law unto Itself?" by U.S. District Court Judge

Jed Rakoff, where Rakoff said that the SEC won 61 percent of federal court trials but was successful in 100 percent of its administrative proceedings" and that he saw "no good reason to displace that constitutional alternative with administrative fiat."

"According to the U.S. Supreme Court, due process requires fairness and the appearance of fairness," said

Brown Rudnick partner Alex Lipman. "At the moment, given the way the administrative procedure hearings are conducted in complex cases, you get neither."

The main reason the SEC is bringing more cases to a hearing, said

Sidley Austin partner Nader Salehi, "is because it is asking for more onerous things in settlements." The agency is seeking higher civil money penalties in many cases and now sometimes pursues factual admissions. "You need a greater commitment of time and resources" to reach a verdict in federal district court, he said, whereas the agency can now get much the same remedies through an administrative action.

"It is no surprise that the SEC wants to send more cases to the administrative forum," said

Rogers & Hardin partner Stephen Councill. "It provides a tremendous tactical advantage to the SEC, and a corresponding disadvantage to the respondents. The SEC can spend as much time as it wants investigating, gathering documents, and taking testimony with subpoena power before filing its case. The respondent has no subpoena power during a pending investigation."

"Once an administrative case begins," he said, "the respondent is on a fast track to a hearing, usually within six months, and there are no depositions of witnesses. If the case were filed in federal court, the defendant could take depositions, learn what the witnesses would say, and properly prepare for trial. Often, witnesses will not speak with respondents or their counsel, so the respondent can only guess what will come out at the hearing, and it becomes impossible to effectively cross examine them."

"There may be trade-offs that some think are worth it and make the administrative process more practical, less expensive and more expedient," said Wilmer Hale partner Douglas Davison. "These potential benefits, however, come at a price (e. g., the absence of a jury, an initial appeal to the body that authorized the case in the first instance) and most parties are likely to see those trade-offs as not worth it."

In order to avoid the perception "that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts," Piwowar said.

The other side

It should come as no surprise that Ceresney takes a different point of view on the subject, as he did when he offered a spirited defense of the use of administrative proceedings in a November 2014 speech

before the American Bar Associationís Business Law Section (ACA Insight, 12/8/14).

"My bottom line is that, while we are using administrative proceedings more, we are still bringing significant numbers of contested cases in district courts," Ceresney said. "And our use of the administrative forum is eminently proper, appropriate and fair to respondents."

Litigation is nonetheless still pursued in cases, he said, noting that in 2013, 57 percent of SEC cases were filed in district court, and 43 percent as administrative actions.

In addition, he said there are other benefits to administrative proceedings, including:

Prompt decisions. ALJs typically have 300 days to issue an initial decision, whereas in district court, "we can often go 300 days and still be just at the motion to dismiss stage or part of the way through discovery, with any trial still far down the road," Ceresney said.

  • ALJ expertise. "The ALJs are focused on hearing and deciding securities cases, year after year," he said. "They develop expert knowledge of the securities laws, and the types of entities, instruments and practices that frequently appear in our cases."
  • ALJs have to consider only relevant evidence. They are not bound by the federal rules of evidence, so they are free to "give each piece of evidence the weight that they deem appropriate," Ceresney said. In addition, he noted, charges like "failure to supervise" or "causing" violations can be brought only in administrative actions.

As for the lack of a jury, "the Supreme Court has considered and rejected the argument that there is a Constitutional right to a jury trial for government claims based on statutes like the federal securities laws," Ceresney said. He also said that administrative procedural rules, including time frames for hearings and few depositions, are not unfair to defendants. "The rules for administrative proceedings provide extensive procedural protections."