After Dodd-Frank, SEC relying more on own judges

Regulator claims practice is more efficient, but lawyers say it puts defendants at a disadvantage

Dec 10, 2014 @ 2:26 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission is increasingly using its own judges to try enforcement cases rather than federal judges.

In the last fiscal year, the SEC filed 57% of its cases in district court and 43% in administrative forums that are overseen by five administrative law judges whom the SEC hires.

In a Nov. 21 speech, Andrew Ceresney, director of the SEC Division of Enforcement, said going the administrative route is more efficient because the outcome must be decided in 300 days from the time the action is filed. He also noted that administrative proceedings use “specialized factfinders.”

But lawyers who defend people targeted in SEC investigations say their clients face an atmosphere in administrative proceedings where discovery is limited and opportunities to get the case thrown out are circumscribed compared with district court.

“It's the SEC's home court, and you are at a disadvantage,” said Thomas Gorman, a partner at Dorsey & Whitney and a former SEC counsel. “It's a simpler format for them. It gives them maximum control of how the cases proceed.”

Richard Marshall, a partner at Ropes & Gray, is trying a case before an administrative law judge in February. He also has had clients appear in administrative forums in 2013 and 2014. Many of them wish they had their day in court instead.

“Clients generally prefer to have their cases litigated in federal court because they perceive the process as being fairer,” said Mr. Marshall, a former SEC regional enforcement official.

The SEC began using administrative forums more often as a result of the Dodd-Frank financial reform law. Under Dodd-Frank, the SEC is allowed bring unregistered individuals and firms into administrative proceedings. Previously, the agency could only obtain penalties in these cases if they were tried in district court.

Since September, the SEC has sent seven insider-trading cases into the administrative process after rarely doing so before, according to Mr. Gorman.

“This is a significant trend,” Mr. Gorman said.

Former SEC Chairman Christopher Cox finds the development troubling.

In an appearance at the Market Counsel Summit in Las Vegas this week, Mr. Cox questioned the possible conflicts of interest in having judges report to SEC management and have lunch with the same people who could be prosecuting a case.

“It has been expanded without, I think, critical thought,” Mr. Cox said. “If the process is not fair, then I think people are going to wonder whether or not [it works].”

Mr. Ceresney defended the administrative forums.

“The bottom line is that there are extensive procedural protections in our proceedings and defendants have transparency into the nature of our case and proof well before the hearing commences,” Mr. Ceresney said.

The SEC has long used administrative law judges to try enforcement cases involving investment advisers and brokers.

In fiscal 2013, the SEC brought seven civil actions and 114 administrative proceedings against brokers and 21 civil actions and 119 administrative proceedings against investment advisers. Those numbers were roughly the same in the two previous fiscal years.

The SEC tends to win in the administrative arena. From September 2013 through September 2014, the SEC won all six administrative hearings that actually came to a verdict but only 11 out of 18 federal-court trials, according to data compiled by the Wall St. Journal. The win rates were similar in previous years, the publication said.

“You can't win in front of an ALJ,” said Todd Cipperman, managing principal of Cipperman Compliance Services. “They batted 100% last year.”

Mr. Ceresney said the agency wins 80% of its trials. He denied that the SEC is running away from district courts.

“We make a case-by-case determination of which forum is appropriate based on the particular facts of the case,” Mr. Ceresney said. “While we are using administrative proceedings more, we are still bringing significant numbers of contested cases in district courts. And our use of the administrative forum is eminently proper, appropriate and fair to respondents.”

Mason Braswell contributed reporting to this story.


Do you disagree or agree with the SEC's move to use more of its own judges?

View comments

Recommended next

Upcoming event

Nov 13


Top Advisory Firm Summit

Formerly known as the Best Practices Workshop, this new one-day conference will also include content from the Best Places to Work event!The Top Advisory Firm Summit will provide CEOs, COOs, CTOs, CMOs, and Managing Partners from the... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print