June 18, 2021

The SEC’s on a long winning streak

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ceresney-andrew-08By Jenna Greene, From The National Law Journal

Criticism rises over the agency’s in-house forum.

As criticism mounts that its in-house forum is unfair, the U.S. Securities and Exchange Commission won every administrative case last year, according to an analysis by The National Law Journal.

The winning streak, which began in October 2013 and continues today, spans 219 decisions by the agency’s administrative law judges, although three-quarters of the victories were by default.

Other cases, however, were vigorously contested, including 14 that went to trial and more than a dozen decided on summary judgment. SEC lawyers came out on top in them all, winning millions of dollars in penalties and broadening the docket to include violations such as insider trading.

Securities-and-Exchange-Commission-SECDuring the same period, the SEC lost a series of insider-trading cases in federal district court, including one against celebrity billionaire Mark Cuban, another against retired Cisco Systems Inc. employee Larry Schvacho, a third against hedge-fund manager Nelson Obus and yet another Manouchehr Moshayedi, founder of storage-device maker sTec Inc.

SEC Enforcement Division Director Andrew Ceresney (left) in an interview defen­ded the agency’s increased use of administrative litigation, which he said made up 43 percent of the caseload in 2013. “This is a fair process,” he said. Just because the SEC wins, it “doesn’t mean it’s an unjust result.”

He added, “I am not aware of any case in recent memory in which the administrative law judge ruled for us, and where the commission upheld the decision, where the evidence wasn’t there.”

SEC-admin-cases_chartbuilderThe forum is virtually identical to those of other independent regulatory agencies, such as the Federal Trade Commission. Cases are heard by an administrative law judge, or ALJ, who issues an initial decision that is reviewed by the agency’s five politically appointed commissioners. The final commission decision can then be appealed to a federal court of appeals.

A key factor in the SEC’s newfound enthusiasm for the forum stems from the Dodd-Frank Act. Before the 2010 law, the SEC in administrative cases could only win civil penalties against registered entities like broker-dealers. Now, agency lawyers can win penalties against everyone — and they are.

In fiscal year 2014, the SEC instituted 235 administrative cases — twice as many as in 2009, when there were 118. The agency has nearly doubled the size of the ALJ office, adding two new judges and three clerks in 2014.



Ceresney said many factors come into play in deciding where to file a case. These include: What is the nature of the subject matter? Does the case involve complex securities industry issues? What charges are being brought and what relief is sought? Is there a need for prompt resolution to protect investors or return funds to injured victims? Has there been a waiver of privilege? Would there be other public benefits from quick results?

Defense lawyers see another factor: Where is SEC likely to win? They say the administrative forum favors the SEC procedurally, complaining that the tight timing, more flexible rules of evidence, limited discovery and inability to go before a jury give the agency an edge.

“There’s no question it puts the defense at a disadvantage,” said McKen­na Long & Aldridge partner Treazure Johnson, a former senior assistant chief litigation counsel at the SEC. She called the increase in administrative cases “a huge departure from what’s happened in the past,” and said “the perception in the defense bar is that this is in part a response by the SEC to losing a number of high-profile trials.”

White & Case partner G. William Currier, a former SEC assistant director, agreed. “When a regulatory or law enforcement agency finds a tool that works well, they use it,” he said, noting the agency is run by savvy ex-prosecutors who “know how to try a case, and they know where the danger is.” SEC chairwoman Mary Jo White was formerly the U.S. attorney for the Southern District of New York and Ceresney was a prosecutor in the office.

One procedural sore spot is timing. “The SEC can investigate a case at its leisure — sometimes for five years or more — and file a case when it’s ready,” said Ross Albert, a partner at Morris, Manning & Martin who beat the SEC in Atlanta federal district court last year in the Schvacho insider-trading case.

The ALJs have 120, 210 or 300 days from when a matter is instituted to issue an initial decision and defendants must scramble to mount a defense. “In virtually all cases, moving quickly is a benefit to the SEC only,” Albert said.

Baker & Hostetler partner and former SEC lawyer John Carney also notes that discovery is limited, but said that’s not always a bad thing. “Limited discovery for us means limited discovery for them,” he said.

Some defendants are pushing back. At least three suits are pending in U.S. district courts that challenge the legitimacy of SEC administrative proceedings. The most recent was filed earlier this month in the Eastern District of Wisconsin by Laurie Bebo, the former chief executive officer of Assisted Living Concepts Inc., who was accused of making false disclosures.

Before Dodd-Frank, Bebo’s case would have been brought in a federal trial court. Her lawyers from Milwau­kee’s Reinhart Boerner Van Deuren argue her constitutional rights are being violated by trying her administratively. They say the short time frame — four months until trial — will preclude Bebo from “adequately defending against the charges against her, given the massive investigative file amassed during the two-year investigation.”

Also, key witnesses for the defense are Canadian, but the ALJ’s subpoena powers are limited to the United States. The SEC “is well aware that Ms. Bebo will not be able to compel testimony at the hearing or in a deposition from the members of the board that are citizens of Canada,” Bebo’s lawyers wrote, arguing that this violates her right to due process.

Two cases pending in the Southern District of New York also claim constitutional violations — one by hedge-fund manager Joseph Stilwell, the other by Jordan Peixoto, who was charged with insider trading. However, U.S. District Judge Lewis Kaplan in December firmly rebuffed another such challenge to the SEC’s administrative forum.

“Congress has provided the SEC with two tracks on which it may litigate certain cases. Which of those paths to choose is a matter of enforcement policy squarely within the SEC’s province,” Kaplan (left) wrote in refusing to grant a preliminary injunction to Wing Chau, who faced SEC administrative charges for misleading investors.

Kaplan recognized that the growth of administrative adjudication, “perhaps particularly in the field of securities regulation, troubles some.” But in what he called a “time-honored” approach, he wrote that litigants “usually want a particular forum, and deride alternatives, for no reason more exalted than self-interest.”

Photo by Diego Radzinschi

For more on this story go to: http://www.nationallawjournal.com/id=1202715464297/The-SECs-On-a-Long-Winning-Streak#ixzz3PMmBTUwb


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