Securities Litigation

The SEC's administrative forum has been under increasing scrutiny over the past year. Now the SEC has removed an ALJ from a high-profile case, after he refused the Commission's "invitation" to provide a no-bias affidavit in similar case. In a May 6 article, "SEC Wins With In-House Judges," the Wall Street Journal reported that former ALJ Lillian McEwen felt pressured by the SEC's Chief Administrative Law Judge over her failure to rule more often in the Commission's favor. Respondents appealing an administrative case to the full Commission have alleged the process is unfair and sought to depose ALJ Cameron Elliot. In the Matter of Timbervest, LLC et al., File No. 3-15519 (SEC). The Commission's June 4 Order in Timbervest "invited" Elliot to file "an affidavit addressing whether he has had any communication or experienced any pressure similar to that alleged [in the WSJ article] … and whether he is aware of any specific instances [of it]." But within days, Elliot tersely declined to provide an affidavit. The Journal's report is here. Now, a July 28 Order confirms that Chief ALJ Murray removed Elliot from another high-profile challenge to the administrative forum and reassigned the case to ALJ James Grimes. See Barbara Duka, AP-2983 (July 28, 2015)(reflecting July 24 reassignment). The Commission instituted administrative proceedings against former Standard & Poors managing director Barbara Duka last January, when it announced a $58 million settlement with S&P over its ratings of commercial mortgage-backed securities ("CMBS"). That settlement also included a one-year time-out from rating conduit fusion CMBS, plus another $19 million to settle parallel investigations by the Massachusetts and New York Attorneys General. The release is here. Duka has been challenging the SEC's use of the administrative forum to prosecute her. Dodd-Frank amendments expanded administrative jurisdiction to include persons, like Duka, not registered with the SEC. Asking a federal court to enjoin the SEC proceedings, Duka overcame the jurisdictional hurdle that stymied the Bebo and Chau challenges, but fell short of demonstrating likely success on the merits. Duka v. SEC, No. 15 Civ. 357 (Apr. 15, 2015)(rejecting preliminary injunctive relief). In the July 28 Order, newly-assigned ALJ Grimes indicated the prior scheduling order would remain unchanged. Duka's AP trial is scheduled to begin in mid-September. I've been discussing the issue:

• The Timbervest "invitation," here
• When the SEC decides to sue in-house, here
• Judge Rakoff's Criticisms, here

Thomas K. Potter, III (tpotter@burr.com ) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Resident in the Nashville office, 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).