The SEC has faced mounting criticism recently for its increasing use of administrative proceedings in enforcement matters. Numerous lawsuits have been filed against the agency, challenging its forum selection. Judge Jed Rakoff of the U.S. District for the Southern District of New York has made it very clear he has serious fairness and constitutionality concerns and, just recently, SEC Chairperson Mary Jo White testified before a Senate Subcommittee, responding to questions on the agency’s forum-selection procedures.

The SEC has long justified its use of administrative proceedings as quicker, more efficient, and less costly for respondents. Following Ms. White’s testimony, the SEC issued a memo titled: “Division of Enforcement Approach to Forum Selection in Contested Actions” which listed the factors considered assigning enforcement actions.

The memo contains a list of “not exhaustive,” “potentially relevant considerations.” Which include:

  • “[A]vailability of desired claims”
    • Basically, whether the claims or relief sought can be prosecuted in only one, or in either, forum;
  •  “[E]efficient use of the Commission’s limited resources”
    • Time and cost considerations (for the SEC, not the respondents);
  •  “[F]air, consistent and effective resolution of securities law issues”;
    • Theorizing that the ALJs have specialized knowledge of securities and securities law, making them better equipped to determine complex issues involving securities.

This guidance is not terribly insightful, especially since the SEC has long defended administrative proceedings as generally being more efficient and cost effective than federal litigation. Further, while the memo states that the SEC is committed to “fair enforcement of the securities laws,” it fails to address “fairness” concerns at all.

And whether the administrative proceedings are fair is, perhaps, a far greater concern than how a particular respondent ends up in that proceeding. And fairness questions are mounting.

Consider a recent article published by the Wall Street Journal analyzing the SEC’s historic use of (and success in) administrative proceedings in enforcement matters. The Journal conducted a study of SEC proceedings over the last five years, tracking their chosen forum and the SEC’s ultimate success. It found that, since 2010 (when the Dodd-Frank Act expanded the scope of administrative proceedings), the SEC has won 90% of the cases brought before ALJs, compared to 67% of those brought before a federal court. In 2014, the SEC won every single case it filed with an ALJ – a 100% win rate.

And where respondents sought to appeal a loss, success rates were even worse, with the SEC winning 95% of all appeals. (Keep in mind that the appeal of an ALJ decision is made to the Commission itself; whereas the appeal of a federal court decision is made to a federal appellate court). As if those statistics weren’t daunting enough, the Journal further found that not only was the SEC statistically sure to win on appeal, but chances were the Commission would increase the sanctions awarded by the ALJ. (That, again, was compared to an average appellate win rate in federal court of 84%).

Assuming these statistics are accurate, it is hardly surprising that the SEC has increased the percentage of cases it sends to ALJs – a trend that appears likely to continue. Back in June, the SEC announced it had hired two new Judges and three new attorneys, essentially doubling the size of its office (which, by the way, is located within the SEC Headquarters in Washington, D.C.).

But while the statistics were concerning, perhaps the most troubling part of the Journal’s article was its interview with a former SEC judge, the Honorable Lillian McEwen. Judge McEwen told the Journal that during her twelve years with the SEC, she was criticized by the Chief Administrative Law Judge for “finding too often in favor of defendants.” She further reported that she had been instructed to approach her cases with the assumption that the Department of Enforcement’s charges were accurate, and that she simply needed to determine whether the respondent offered any evidence to disprove the charges. This instruction, of course, flips the law on its head and reverses the true burden of proof imposed by law. (The SEC, as the prosecuting entity, carries the burden of proving its charges, while the respondent, on the other hand, carries no burden at all).

Judge McEwen says that she ultimately resigned as a result of this pressure.

So, while the SEC’s quick release of the guidance memo answered some questions as to its process, it leaves many more questions unanswered and unaddressed. Perhaps those questions will be answered in another memo, at some future date.


UPDATE: 5/26/15

While the SEC has remained  mum in response to the allegations of bias raised by Judge McEwen in the Wall Street Journal article, one of its Judges has made clear that, in his courtroom, allegations of bias will not be taken lightly, or swept under the proverbial rug.

In a pending SEC case, In the Matter of Charles L. Hill, Jr., (AP No. 3-16383), the respondent, Mr. Hill, issued a subpoena to the SEC requesting the production of  all documents that “support, reflect, or are related to” the allegations made by Judge McEwen “as reported by the Wall Street Journal” (i.e.,  that she was criticized for finding in favor of defendants too frequently and the reversal of legal burdens of proof, discussed above).   The SEC’s Office of General Counsel objected to the request, arguing that the information was not relevant and that other judges in other proceedings routinely denied document requests like this.

Judge James E. Grimes, an in-house ALJ with the Commission, summarily disagreed with the SEC’s objections and issued an order directing the SEC to produce the documents.

The documents will likely not be made public.  Simply by ordering their production, however, Judge Grimes (who was just  appointed by the SEC last June) has seemingly sent a message to the Commission, its attorneys, and the public: in his courtroom, at least, allegations of bias will be addressed.


UPDATE:  6/3/15

This one just keeps getting more interesting.  As reported above, in the 5/26 update, Judge Grimes issued an Order granting Mr. Hill’s request to issue a subpoena to the SEC — over the SEC’s objection that the documents sought were irrelevent — directed to allegations that a former SEC ALJ left after being criticized by the SEC for being too “respondent friendly.”  In response to the Order granting the subpoena, the SEC requested that Judge Grimes certify his decision so it could be immediately reviewed.  In support of that request, the SEC raised certain concerns about the subpoena, however, that it had not raised in its initial objection.  That is not permitted, so Judge Grimes issued a new Order denying the request to certify his initial order.  He did, however, give the SEC’s General Counsel three days, i.e., until 5 pm today, either to respond to the subpoena, or to seek interlocutory review despite the absence of certification.  According to Judge Grimes, “On one hand, Mr. Hill has a due process right to an unbiased adjudicator and the media article to which he refers raises concerns about that right.  On the other hand, the Office of General Counsel is correct that administrative law judges are presumed to be unbiased. Additionally, the conversation that is alleged in the media article must have occurred at least ten years ago — if it ever occurred at all. Mr. Hill has done little to tie that alleged conversation to his proceeding.”  I can’t wait to see what happens next.