Securities Litigation

For over a year, critics have questioned the fundamental fairness of the SEC's administrative forum, including whether the Agency should act as prosecutor, judge and jury. Even as criticisms mount, the Commission Staff steadfastly declaims there's no issue here - and if there is, they should be the ones to decide it (through two layers of administrative proceeding, with judicial Chevron deference to their expertise, if ever judicially reviewed). Commissioner Piwowar and former SEC Staff have suggested that more transparency might be in order; but the Staff's response included the red flag that it preferred to take novel, "unsettled and complex" securities-law issues to its advantaged home-court. Most Courts continue to rule that Respondents can't challenge the procedure in Court due to the extremely high bar required to enjoin agency proceedings. See, e.g., Duka v. SEC, No. 15-Civ.-357 (USDC SDNY Apr. 5, 2015). But in a recent Catch-22, an SEC ALJ said he didn't have the authority to decide the very Constitutional issues that the SEC had argued in Court must be decided first in the administrative forum. The poor Respondent had to argue against his own position just to preserve his arguments for the day when he might get to an Article III court. See, e.g., Charles L. Hill, Jr., AP File No. 3-16383 (SEC May 14, 2015)(denying motion). Last month a Wall Street Journal article reported allegations by a former SEC administrative judge that she was pressured to favor the Commission and approach cases as though the Respondents in the dock bore the burden of exonerating themselves - not the other way around as usually required when the Government comes to punish you. See Jean Eaglesham, SEC Wins With In-House Judges, The Wall Street Journal (May 6, 2015); accord Whitman v. United States, 574 U.S. ___ (2014)(No. 14-29, Nov. 10, 2014)(Scalia, J. concurring; expressing concern about SEC turning the Rule of Lenity on its head). The controversy has been fueled in large measure by a Dodd-Frank "reform" expanding the SEC's ability to haul anyone into its administrative trials. The Commission's recent response was to order an ALJ, in effect, "Tell us if we've pressured you" in a secret affidavit filed under seal. See In re Timbervest, LLC, IA Rel. No. 4103, AP File No. 3-15519 (SEC June 4, 2015). That's a start, I suppose. It's well-intentioned, no doubt. It makes the affidavit available to the parties and has some precedent among judicial recusal authority. That SEC order entered the same day that the U.S. Seventh Circuit heard oral arguments on another Constitutional challenge to the SEC administrative forum. See Bebo v. SEC, No. 15-1511 (7^th Cir, argued June 4, 2015). But on the larger issue, the order is tone deaf. When practitioners, judges, Supreme Court Justices, and the press express doubt that the process is fair in structure and practice, it won't do to say "We'll be the judge of that" and in secret, too. I worry that the focus on pretty legal arguments over arcane procedural and administrative questions is disguising our slide down the rabbit hole, and away from the basic covenant that our Government both appear and actually be fundamentally fair when it asserts against us the powers we gave it. Update 6/15: The ALJ declined the Commission's "invitation," and refused to say whether he'd been pressured or not, Law 360 reported June 12. Whether avoiding self-incrimination, the better exercise of discretion or just following the "Thumper Rule" (if you can't say something nice, don't say anything"), the silence is curious and loud in the midst of the current debate. 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).