If you haven’t read Jean Eaglesham’s article in the May 7, 2015 Wall Street Journal about the SEC’s administrative enforcement prosecutions, you should. SEC Wins With In-House Judges: Agency prevails against around 90% of defendants when it sends cases to its administrative law judge sheds new light on what is increasingly being recognized as an abusive use of the SEC’s captive administrative law courts to prosecute complex securities enforcement cases and impose debilitating life-changing penalties without giving respondents a fair shake. Ms. Eaglesham centers her piece around the ongoing SEC administrative action against Timbervest LLC and its officers, which happens to be the case discussed just yesterday in the Securities Diary Straight Arrow blog: Briefing of ALJ Constitutionality Before SEC Leaves Resolution in Doubt.
The article points out that the SEC has not so mysteriously increased its use of the administrative courts in apparent response to losing more cases in its federal court enforcement actions. (The SEC’s Director of the Division of Enforcement admitted that they chose a forum based on the desire to win and to pressure their targets into settlement.) The federal court actions allow the accused to present a defense to real folks, not administrative judges, who happen to be chosen by, work within, and report to, the SEC itself. (Ms. Eaglesham quotes Judge Jed Rakoff: “The SEC appoints the judges, the SEC pays the judges, they are subject to appeal to the SEC. That can create an appearance issue, even if the judges are excellent, as I have every reason to believe they are.”) There are no standards that cabin SEC discretion to choose when it can deprive an accused of a jury trial simply by choosing to use the administrative court. This presents obvious Seventh Amendment issues, as well as arbitrariness issues under the Administrative Procedure Act, that no court has yet addressed. Indeed, the SEC is actively trying to prevent federal courts from addressing these issues, and so far has been successful.
Ms. Eaglesham also reports, to my knowledge for the first time, about internal pressures on SEC administrative law judges to side with the SEC or be accused of a lack of “loyalty”:
One former SEC judge said she thought the system was slanted against defendants at times. Lillian McEwen, who was an SEC judge from 1995 to 2007, said she came under fire from Ms. Murray for finding too often in favor of defendants.
“She questioned my loyalty to the SEC,” Ms. McEwen said in an interview, adding that she retired as a result of the criticism.
Ms. McEwen said the SEC in-house judges were expected to work on the assumption that “the burden was on the people who were accused to show that they didn’t do what the agency said they did.”
This is a grave charge that needs independent investigation. If true, it would raise serious due process issues. It certainly provides sufficient grounds for the SEC to be subjected to discovery in a federal court action seeking to prevent the SEC from imposing sanctions in a court infected with inherent bias, if the SEC’s efforts to prevent such an action from going forward can be overcome.
Ms. Eaglesham has done us a service by exposing the SEC’s festering sore to the open air. We can only hope that a little sunlight will penetrate the SEC’s defensive shell and allow a full and fair consideration of the serious issues being raised.
May 7, 2015
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