By Jeffrey T. Petersen, Esq.  of Shustak Reynolds & Partners, P.C. posted on Friday, June 19, 2015.

James J. Reynolds

Partner

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.  

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