In the wake of recent losses in jury trials in federal court, Andrew Ceresney, the new Director of the SEC’s Division of Enforcement, just announced that the SEC plans to bring more of its insider trading cases in an SEC administrative court, where defendants have considerably fewer due process protections. In an address to a D.C. Bar group on June 11, 2014, he was unconcerned about the public policy implications of this maneuver. In fact, he plainly viewed the prospect of a hospitable forum, with limited discovery rights and judges institutionally tied to the SEC, to be just fine. I doubt he would have had the same view a few months ago from the standpoint of his previous position as a partner in a prestigious New York law firm.
See these articles describing Cereseny’s speech: SEC Could Bring More Insider Trading Cases In-House; SEC to file some insider-trading cases in its in-house court.
In one of its many overzealous provisions, the Dodd Frank Act accorded much more power to these courts to grant harsh relief against defendants. So much so that the SEC may have little to gain by using Article III courts with jury trials, in which defendants have recently cleaned the SEC’s clock. This is yet another example of the recent trend in SEC enforcement to elevate getting what the enforcement lawyers want for their own self-aggrandizement above doing things the right way to achieve a just and fair result.
The advantages to the SEC in using the administrative in-house forum are manifold:
- The entire process is truncated. The SEC has years to prepare to bring its case, but the defendants are subjected to a “rocket docket.” Ceresney views this as positive, but it hardly is conducive to fair process when a person’s reputation and future career hangs in the balance.
- Serious review of the adequacy of allegations in the complaint is not available.
- Discovery of evidence in advance of trial is highly limited. Document discovery outside of what the SEC declares to be in its “case file” is very difficult. Other relevant information in the hands of the SEC that could be discovered in court as readily available from the administrative law judge (ALJ). Third-party subpoenas are often rejected by the ALJ at the SEC’s request.
- The defendants have no right to depose potential witnesses to find out what their testimony might be. The same is true of the SEC, but the SEC has the advantage of (i) having previously interrogated witnesses in the course of its investigation both informally and under oath; (ii) typically sharing only the formal investigative testimony while holding for itself under claim of privilege all of the informal interviews it conducted; (iii) eliminating any reasonable ability to gather information from potentially hostile witnesses because they need not get formal investigative testimony from those persons; and (iv) almost always having unfettered ongoing informal access to potential witnesses because they are a powerful regulator, while the defendants typically have no such access.
- There is no ability to pursue “summary judgment,” a mechanism that allows a defendant to show the judge in advance of trial that the evidence is simply insufficient to support the charges, in whole or in part.
- The ALJs do not apply the kind of scrutiny to purported expert testimony that occurs in federal court, and thus allow unreliable experts to give opinions that would not be permitted in an Article III court.
- The rules of evidence do not strictly apply in these proceedings. ALJ’s routinely allow into evidence material that would never be permitted in the record of a court trial on the theory that they have ability to pick and choose what is convincing and what is not. Hearsay evidence, evidence with insufficient foundation, and the line are rife in these proceedings.
- The SEC lawyers have the advantage of knowing the judges from regular appearances before them.
- Once the case is decided by the ALJ, the right of appeal is to … the SEC itself! That’s right. The same people responsible for bringing the case and approving the complaint sit in ultimate judgment of the defendant! Can you spell S-T-A-R C-H-A-M-B-E-R? An appeal to someone outside of the SEC (a federal court of appeals) actually can occur only after the SEC rules on the appeal from the ALJ, and that court cannot review the evidence for itself, it can overturn the decision only for plainly unsupported decisions by the SEC. As a result, no truly neutral arbiter reviews the evidence to determine whether it is sufficient to support a finding of liability.
The SEC knows that defendants are wary of the fairness of enforcement actions in the administrative forum. Indeed, Ceresney acknowledged in his speech that this fear often can be used to extort settlements from defendants: “I will tell you that there have been a number of cases in recent months where we have threatened administrative proceedings, it was something we told the other side we were going to do and they settled.” Ceresney speculated that SEC jury trial losses occurred because juries were applying a higher standard of proof to the SEC than required (he seemed unwilling to consider the possibility that the SEC brought some bad cases). He apparently is more confident that the SEC’s ALJs will apply a suitable burden of proof to SEC prosecutions.
Administrative courts of this nature were originally intended to be used to hear proceedings involving the compliance of securities industry participants like broker dealers or registered representatives with technical requirements under the SEC’s regulations. The expansion of their jurisdiction to replace jury trials in federal courts in serious prosecutions like insider trading is a black mark on the due process of these enforcement prosecutions. The notion that insider trading cases should now be shifted to the administrative forum is truly unconscionable. Instead of gleefully shifting from the judicial forum to the administrative forum, the Enforcement Division and SEC litigators should be committed to providing full due process to the accused defendants in these cases. The defendants’ reputations and professional futures are on the line, as is the future of their families. They are entitled to no less.
June 12, 2014
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