Securities Litigation

In a January 21, 2016 Report of Investigation, the Inspector General for the Securities Exchange Commission found no evidence to substantiate allegations of pro-agency bias among SEC administrative law judges. The allegations of bias by a retired SEC ALJ appeared in a May 2015 Wall St. Journal article; the article's statistical analysis also revealed the SEC won 90% of contested cases brought in its "home court" administrative forum. The SEC's administrative forum has been under fire ever since Dodd-Frank expanded its jurisdiction to include non-registered persons. Then federal Judge Jed Rakoff joined the chorus of complaints in November 2014. Growing criticism led to a raft of judicial challenges to the constitutionality of the SEC forum, several of which enjoined SEC administrative prosecutions pending resolution of court challenges: Ironridge, Hill, and Gray in the Northern District of Georgia - all now on appeal before the Eleventh Circuit; and Duka in the Southern District of NY - set for argument before the Second Circuit on March 7. So far, though, the SEC has prevailed, with the D.C. Circuit (in Jarkesy) and Seventh Circuit (in Bebo) rejecting preemptive challenges and holding the issue must be raised first through the administrative process. The Commission itself upheld the constitutionality of its administrative forum in its Timbervest decision last fall; it is pending appeal. The full Commission will consider additional challenges this Spring when it decides an appeal in the Bebo case. Laurie Bebo and John Buono, CPA, Initial Decision Rel. No. 893 (Oct. 2, 2015), 112 SEC Docket 10, 2015 WL 5769700. The SEC OIG Report is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).