The chairman of the House Financial Services subcommittee on capital markets, Rep. Scott Garrett, (R., N.J.), introduced a bill last Thursday that would give defendants in SEC administrative proceedings the right to choose trial in a federal court, rather than proceeding before an SEC administrative law judge, and pursuant to the administrative rules which restrict discovery and expedite the hearing process greatly.
The SEC’s increased use of its in-house courts has created a wave of judicial challenges to the constitutionality of that forum, and now another branch of government is seeking to weigh in on the matter.
Rep. Garrett echoed the concerns that have been raised about the fairness of the SEC’s administrative forum, citing the far higher success rate the SEC has in cases before its administrative law judges when compared to its success in the federal courts. A Wall Street Journal article in May of this year showed the SEC was victorious in 90% of its cases in the administrative forum, as opposed to succeeding in 69% of its cases in federal court.
The bill’s introduction comes just weeks after the SEC introduced proposals to address fairness concerns over its use of in-house courts, including allowing a greater scope of discovery and additional time to prepare for hearing. We will monitor this bill’s progress and keep you posted.
Jeffrey T. Petersen, Esq. is an attorney with Shustak & Partners, P.C. Shustak & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500.
Respondents challenging the constitutionality of SEC administrative proceedings imposing civil penalties on unregulated individuals have had a measure of success so far in the Northern District of Georgia. One such respondent, Gray Financial Group, Inc., was able to obtain a preliminary injunction prohibiting the administrative proceeding from going forward.
The SEC appealed that decision, and in its reply brief filed earlier this week, argued that enjoining the proceeding was erroneous on two grounds, one procedural and one substantive. First, the SEC contended that the federal courts do not have jurisdiction to hear a constitutional challenge to the SEC administrative proceedings at this time, citing the recent 7th Circuit opinion in Bebo and the D.C. Circuit opinion in Jarkesy, which itself relied on Bebo. In those opinions, the appellate courts held that the statutory review scheme providing for an administrative proceeding with subsequent appellate court review was sufficient to deem that a respondent had to follow that statutory procedure rather than proceeding immediately to a federal court challenge.
On the substantive ground, the SEC contended that the Northern District of Georgia court erred in holding that the ALJ’s were “inferior officers” rather than employees. The distinction matters in this context because if ALJ’s are inferior officers, they are not constitutionally accountable to the president because they can only be dismissed by the Commissioners, and are unconstitutionally appointed because they are named through a bureaucratic process. The SEC pointed to recent determinations by all five of its Commissioners that ALJ’s are employees rather than inferior officers, and relied on prior D.C. Circuit precedent it contends is directly applicable.
With a request for rehearing en banc pending in the 7th Circuit in Bebo, a forthcoming ruling in the Eleventh Circuit in Gray Financial and another related case where the district court has held in respondents’ favor, similar appellate proceedings in the 2nd Circuit, and substantive and procedural changes to the SEC’s administrative proceedings recently proposed by the SEC itself, the next few months will have quite an impact in shaping this hotly-contested area of law.
Jeffrey Petersen, Shustak & Partners, P.C. Shustak & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500.
Laurie Bebo, the former chief executive of Assisted Living Concepts, Inc. was hit with a $4.2 million civil penalty today after the SEC administrative law judge ruled that she had engaged in a fraudulent scheme by falsifying occupants at some of the company’s senior citizen residences to avoid defaulting under certain facility leases the company had.
The SEC administrative law judge found Bebo’s testimony in her defense to be, among other things, a “fairy tale” and an “elaborate fiction”.
We have been following the Bebo case due to her challenge to the constitutionality of SEC in-house court proceedings. She recently lost her appeal on that issue in the 7th Circuit, and has subsequently sought reconsideration of the appellate decision, such request which is still pending.
The imposition of such an enormous civil penalty highlights the concerns defense counsel, and individual respondents, have with the SEC’s internal court system, which places respondents on trial within months before an in-house SEC judge with limited discovery in hand. The prospect of facing significant financial consequences on such an expedited basis has led to the great number of challenges to the SEC’s system this year.
Jeffrey Petersen, Shustak & Partners, P.C. Shustak & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500.
We have been regularly updating the wave of lawsuits that have been filed against the SEC this year, charging that the Commission’s use of in-house courts to try civil actions against individuals is unconstitutional.
In the wake of these lawsuits, the SEC indicated that it may revise how its internal court system functions for the first time in 20 years. The SEC commissioners voted yesterday to seek public comment over the next 60 days on certain reforms it is proposing, which include: (1) letting the people being sued in the SEC’s internal courts depose witnesses; and (2) providing the defendants more time to prepare for the trial hearings against them.
These proposed changes go to the heart of the practical criticisms against the SEC’s internal courts, namely that a defendant’s discovery rights are seriously curtailed in such a setting, while at the same time the pace of the proceedings is significantly expedited. This often leaves the defendant headed to trial in a few months with very little discovery in hand for his or her defense. It’s likely that the recent crush of litigation – which the SEC probably has gotten the better of, but which has still resulted in defeats at the district court level and a federal appellate stay of one in-house court proceeding in New York – led to this apparent compromise proposal from the SEC.
Note, however, that after the public comment period, the commissioners would have to hold a second vote for the proposed changes to become binding. It would be surprising, though, for the commissioners to change course after taking this rare step of proposing change. We’ll circle back to this issue after that second vote occurs.
Jeffrey Petersen, Esq. Shustak, Reynolds & Partners, P.C. Shustak, Reynolds & Partners, with offices in California and New York, represent clients across a broad spectrum of SEC investigations and enforcement actions. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, Esq., a partner with the firm and former attorney with the SEC Enforcement Division, has extensive experience in SEC investigations and enforcement actions and can be reached in Irvine at 949.451.6800.
We previously reported here on what is currently the only case where an SEC administrative proceeding has been enjoined by a district court on constitutional grounds, Hill v. SEC. That case was heard by Judge Leigh Martin May, who on Wednesday had a similar case brought to her, Ironridge v. SEC. The plaintiffs in Ironridge had an SEC proceeding filed against them alleging they are unregistered broker-dealers. The plaintiffs then filed a complaint and preliminary injunction motion seeking to enjoin the administrative proceedings on the grounds such proceedings are unconstitutional.
The Ironridge plaintiffs are represented by the same law firm in Georgia that represented the plaintiffs in Hill, and the grounds for challenging constitutionality are similar, namely that: (1) the Administrative Law Judge for the proceeding lacks the power to hear the matter, as s/he will always be an inferior officer, and the Constitution requires such officers to be appointed by the President, the SEC or the courts; (2) the ALJ cannot be removed from the post by the President, as required by the Constitution; and (3) the proceeding deprives a defendant of the right to a jury trial.
One would suspect the same arguments to the same judge would result in a similar ruling enjoining the SEC administrative proceeding. The SEC has already appealed that ruling in the Hill case, and apparently there will be several cases up on appeal before too long. With appeals already in process from cases in the district court for New York, it will be intriguing to see how the various appellate-level federal courts determine this issue.
One thing for certain, however, is that the SEC shows no signs of slowing down in its use of administrative proceedings, which do carry with it significant challenges to respondents, namely the significant limitations on discovery and the short timeframe to prepare for hearing in such proceedings.
Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, a partner with the firm who specializes in representing clients in SEC and FINRA enforcement proceedings, can be reached in Irvine at 949.451.6800.
We previously reported here on the SEC administrative proceeding against New York financier Lynn Tilton and her private equity firm, Patriarch Partners, alleging they defrauded investors by concealing poor performance of fund assets. Tilton and her company brought a federal lawsuit claiming the SEC’s administrative proceeding was unconstitutional.
The district court in New York recently dismissed that lawsuit, concluding that the district court had no jurisdiction to hear the complaint, and that the exclusive method of reviewing the administrative proceeding was to proceed with the SEC, with subsequent review in a federal appellate court. Another district court judge reached the same conclusion that there was no jurisdiction over a similar challenge to SEC administrative proceedings in the case Spring Hill Capital Partners LLC v. SEC.
Tilton’s company has already stated that it will seek immediate appellate review of the court’s decision.
On the other side of the fence is the case of Hill v. SEC in the Georgia district court, the defendants’ lone victory in challenging the propriety of these SEC administrative proceedings thus far. We previously reported on the case here. Last week, the SEC filed its appeal of the Georgia court’s decision enjoining the SEC’s administrative proceeding against Hill on the grounds that such proceeding was unconstitutional.
We will keep you updated on developments in these cases, but so far it appears the decision in Hill is not persuading other courts that the SEC’s exercise of administrative power is improper. It remains to be seen whether there will be a split of opinions in the constitutionality of these administrative proceedings once the appellate courts rule.
Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500. His partner, Dennis A. Stubblefield, who specializes in representing clients in SEC and FINRA enforcement proceedings, can be reached in Irvine at 949.451.6800 Contact our firm today for a confidential analysis of your situation.
We wrote last week about a recent ruling by a Northern District of Georgia Judge in the case Hill v. SEC that granted a preliminary injunction halting the use of an Administrative Proceeding in an enforcement action against Hill. The Hill court’s reasoning was that the SEC’s Administrative Law Judge was not properly appointed, as such ALJ’s must be appointed by a department head, the President or the courts rather than lower-level SEC personnel. This is the first win in the slew of challenges this year to the constitutionality of these Administrative Proceedings. See our post from June 19, 2015.
And, as expected, it did not take long for the lawyers in the other cases challenging these Proceedings to notice. On June 10, 2015, the plaintiff in Duka v. SEC submitted the court’s opinion in Hill to the judge in its case, arguing that the invalid appointment of the SEC’s Administrative Law Judge is grounds for granting a temporary restraining order against use of the Proceeding. Duka has requested that the court issue such an order at the parties’ next conference on June 17th. We will update this post if any conclusive ruling comes at that time.
Jeffrey T. Petersen, Esq. of Shustak Reynolds & Partners, P.C., with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, a partner with the firm who specializes in representing clients in SEC and FINRA enforcement proceedings, can be reached in Irvine at 949.451.6800. Contact our firm today for a confidential analysis of your situation.
We have previously written about the SEC’s increased use of Administrative Proceedings in its enforcement actions against individuals, and its predisposition to bring these cases in its home court. See our posts from March 13th and February 12th of this year.
There have been a wave of challenges to these Proceedings by respondents this year, claiming the Proceedings are unconstitutional. There is a significant incentive to challenge the use of such Proceedings because their pace is furious and they provide only limited discovery rights.
A federal court in Georgia recently provided the first win to a respondent this year, granting a preliminary injunction against the SEC’s use of an Administrative Proceeding in Hill v. SEC. The court there used a two-part analysis in ruling against the SEC: (1) the court found that the administrative forum was not the exclusive forum to challenge the constitutionality of the Proceeding, and that the federal court could rule on the matter (other courts have ruled to the contrary, saying a respondent must challenge constitutionality in the administrative forum only, with the right to eventually go to the court of appeals); and (2) the court ruled that the SEC’s Administrative Law Judge had been improperly appointed by lower-level SEC employees rather than the Commissioners themselves or other appropriate entities.
The court in Hill noted that the appointment issue “could easily be cured” by having the ALJ appointed by the Commissioners. This is seemingly an easy fix in pending cases, but it is a sure bet respondents who faced adverse decisions in prior Administrative Proceedings will be seeking to overturn those rulings on the grounds the ALJ’s appointment was improper.
Also, as expected, respondents in other Administrative Proceedings who have challenged the constitutionality of same have already seized upon the ruling in Hill to seek injunctions of the Proceedings against them. The legal volleys in these actions should be coming fast and furious over the next several months.
Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, a partner with the firm who specializes in representing clients in SEC and FINRA enforcement proceedings, can be reached in Irvine at 949.451.6800. Contact our firm today for a confidential analysis of your situation.
Our blog post on February 12, 2015 detailed the SEC’s recent increase in use of administrative proceedings to seek civil monetary penalties against all individuals, even those who are not registered or associated with a registered entity. That post also highlighted the problems an individual can face in such proceedings, i.e., the speed at which one goes to hearing, and the limited discovery rights provided.
Under these circumstances, it is no surprise that challenges to the legality of these administrative proceedings have been coming at a furious pace from respondents and potential respondents to such proceedings.
For example, Laurie Bebo, the former CEO of Assisted Living Concepts, Inc., filed for a preliminary injunction in federal court to halt an SEC administrative proceeding against her on the grounds that the proceeding violated her equal protection and due process rights. In addition, at least three putative respondents to SEC action have filed preemptive lawsuits to prevent administrative proceedings from being initiated by the SEC.
Just last week, however, the court in the Bebo matter ruled that it had no jurisdiction to prevent the administrative proceeding from taking place, even though it found Bebo’s claims “compelling and meritorious”. The court reasoned that because the securities laws provide for judicial review of any SEC administrative decision, Bebo would have to go through that process in order to obtain relief rather than seeking preliminary relief with the district court.
The Bebo opinion also highlights the challenges these proceedings can impose on the individual litigant. The proceeding was instituted on December 3, 2014, and has already been scheduled for hearing on April 20, 2015, with witness lists and expert reports ordered exchanged by March 13, 2015.
With the increased use of administrative proceedings by the SEC, and the unique complications they bring, one can be certain there will be many more challenges to the legality of these proceedings in the future.
Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C. Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisors, registered representatives and high net worth investors. Jeff can be reached at 619.696.9500.
