SEC Explains How It Chooses Between Administrative Hearings and Courts
If you ever wanted to know the criteria the SEC’s Division of Enforcement uses in deciding to try a case in an administrative hearing or in federal court, your wait may be over.
The SEC staff on May 8 issued guidance on how it decides the venue in which to try a case – although the document reads more like an explanation of how the Division makes its choices, rather than guidelines it wants prosecutors and other Division officials to follow.
"The guidance outlines a number of factors the Enforcement Division considers in recommending to the Commission a forum for litigated enforcement actions," said Division director Andrew Ceresney. "In every matter, the Enforcement Division makes its assessment based on the facts and circumstances of the particular case and recommends a forum that protects investors and the integrity of the markets through strong, effective and fair enforcement of the federal securities laws."
The administrative hearings vs. federal court battle has been gaining traction in recent months, as some defense attorneys, a federal judge, and even an SEC commissioner have raised concerns about due process protections for defendants in administrative hearings.
"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," said commissioner Michael Piwowar in a February 20 speech (ACA Insight, 3/9/15). He also noted that the SEC "has an extremely high success rate when litigating through administrative proceedings," citing a November 2014 speech, "Is the SEC Becoming a Law Unto Itself?" by U.S. District Court Judge Jed Rakoff, in which Rakoff said that the SEC was successful in 100 percent of its administrative proceedings compared to just 61 percent of federal court trials.
Ceresney defended the SEC’s forum choices further in a May 12 speech in New York City. While acknowledging that the Commission is indeed bringing more litigated cases in administrative proceedings than it did in the past, he said that the SEC "has not turned away from federal court and is still bringing more litigated cases in federal district court than in administrative proceedings." In fiscal year 2014, he said, the Commission filed more litigated cases in federal district court than in administrative proceedings, and so far in FY 2015, the SEC filed more than 60% of its cases in federal district court. "Indeed, out of our current overall caseload, about 75% of our pending litigated actions are in federal district court."
"Let me be clear: The Enforcement staff does not shy away from litigating in district court, where we have had great success … and we will continue to take tough cases to trial in both forums," Ceresney said.
Piwowar called on the agency to develop guidelines as to when each forum might be chosen. 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," he said.
Whether the guidance issued Friday meets that call is a question for Piwowar and other stakeholders in SEC litigation to consider.
Defense lawyers react
"Essentially, the Commission is repeating what some of the senior enforcement people have said before; they will decide on a case-by-case basis and will chose whatever forum suits them best," said Brown Rudnick partner Alex Lipman. "But what’s really going on here is that the SEC needs to show results. The easiest way to show results is to go to a friendly forum with a track record of ruling in your favor."
He also challenged the SEC position that administrative law judges have the knowledge and experience to hear such cases. "They maintain this fiction and they like everybody to believe that the ALJs are independent securities law geeks," he said, but "ALJs are SEC
employees, some of whom were not securities lawyers before becoming SEC ALJs, and they are human. After the Commission, composed entirely of securities law experts, looks at evidence and decides that a violation has occurred, the ALJs’ unenviable job is to look at the same evidence and tell their bosses at the Commission whether they had made a mistake."
"Although the Division of Enforcement talks about being fair and efficient, the fundamental problem with administrative proceedings is the lack of fair discovery," said Rogers & Hardin partner Stephen Councill. "The Division can spend years investigating, compelling production of documents, and taking testimony before initiating a proceeding. The respondent has no such opportunity, even after the proceeding is commenced. Today’s cases typically involve issues spanning many years, millions of pages of documents, and can involve very technical matters requiring experts. Courts have recognized for many decades that litigants cannot receive a fair trial without deposing witnesses in advance because this gives both parties a chance to test what witnesses say they recall against other witness statements and the millions of pages of documents. The Division has simply lost sight of what’s fair in today’s world."
A somewhat different point of view was offered by Stern Tannenbaum partner Aegis Frumento. Statistics relating to SEC success in administrative proceedings are questionable, he said, "because it is difficult to know what a ‘win’ is, especially since so many of the cases end in settlements. Are the settlements a win for the SEC or for the respondents?"
As for whether those charged by the SEC are better off in district court, he said it "all depends on the case. A district court is an extremely expensive avenue to go down. Dragging a party with few resources into federal court is not necessarily doing them a favor. When you abbreviate procedural safeguards, you pay the price of not getting a perfect solution, but what you get is a quick resolution."
The new guidance
"When recommending a contested enforcement action to the Commission, the Division recommends the forum that will best utilize the Commission’s limited resources to carry out its mission," the guidance states, adding that "there is no rigid formula dictating the choice of forum." The guidance several times mentions the SEC’s limited resources as a rationale for where it decides to try a case – but whether cost effectiveness will be an
argument that persuades those who believe due process protections are being lost remains to be seen.
A number of factors are considered in making the choice between an administrative hearing and federal district court, the guidance says , noting that the Division weighs them in the context of the specific facts and circumstances of the case. "Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case."
The factors listed in the guidance include:
Availability of desired claims, legal theories and forms of relief. Some of these are more available in one forum than another. "For example, charges of failure to supervise or causing another person’s violation can only be pursued in an administrative forum; liability as a controlling person or as a relief defendant can only be pursued in district court actions," the guidance says. Emergency relief to protect investors, such as a temporary restraining order or an asset freeze, can be pursued only in federal district court.
SEC registration. "Registered entities and associated persons have long been subject to the Commission’s regulatory oversight, which has long included Commission administrative proceedings," the Division said. "Certain charges and forms of relief applicable to registered entities and associated individuals are available only in the administrative forum." As examples, it said that associational bars and suspensions can be imposed in an administrative hearing. "When seeking such remedies it is often a more efficient and effective use of limited agency resources to seek those remedies directly in an administrative proceeding rather than first commencing a district court action, seeking and obtaining a district court injunction, and instituting a separate administrative proceeding seeking the remedies based on the injunction."
Costs, resources and time-effectiveness. Speed is a consideration, as the guidance says that "in general, hearings are held more quickly in contested administrative actions than in contested federal court actions. This may allow the Division to use the Commission’s limited resources more effectively." Resources are also used more efficiently when the SEC can seek and obtain relief in a single proceeding, something that may be possible in certain cases heard in district court, as well as in certain cases heard in an administrative forum. There are also "efficiencies" in either forum in other aspects of a case, such as a motion for summary judgment in federal court or a motion for summary disposition in an administrative proceeding, according to the guidance. Finally, the Division noted that the "time and types of pre-trial discovery available in federal court may entail both costs and benefits, which should be weighed on the facts and circumstances of a case."
Fair, consistent and effective resolutions. The guidance takes the position that administrative law judges and the SEC know their subject matter. They "develop extensive knowledge and experience concerning the federal securities laws and complex or technical securities industry practices or products." The guidance suggests that "if a contested matter is likely to raises unsettled and complex legal issues under the federal securities laws, or interpretation of the Commission’s rules, consideration should be given to whether, in light of the Commission’s expertise concerning those matters, obtaining a Commission decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law." When state laws or specialized areas of federal law are critical, "district court may be more appropriate," it says.