01 Oct SEC Yields To Due Process Pressure, But Tries To Play It Cool

Posted at 21:52h in Securities Litigation & Regulation by

After more than a year of legal challenges and public criticism about the inadequacy and fairness of rules governing proceedings held in its administrative court, the SEC finally caved. But it doesn’t want it to appear that way.  The recent announcement of its proposal to amend a number of substantive and procedural rules governing administrative proceedings opens casually: “[a]s it has done from time to time, the Commission proposes to amend its Rules of Practice.” This attempt to portray the amendments as part of its self-initiated daily routine belies the highly charged atmosphere and incessant challenges that drove the amendments.

The SEC defense bar has mounted a relentless assault on both the Commission’s decision to file more enforcement actions as administrative proceedings and on its antiquated Rules of Practice. That assault began after Division of Enforcement chief, Andrew Ceresney, announced that the Division would file more insider trading cases as administrative proceedings. He made that announcement after a week in which the SEC lost two insider trading cases in federal court, and a few months after having lost a high profile case against Mark Cuban, owner of the Dallas Mavericks.

As controversial as this announcement was, in light of the Commission’s 90%+ success rate in administrative cases compared with a less than 70% success rate in federal court, it became even more controversial as the staff began instituting more administrative cases in areas other than insider trading. The torrent of challenges that followed, which even included criticism from a prominent federal judge, resulted in at least three federal court injunctions halting administrative proceedings on the facially persuasive claim that the SEC’s appointment of administrative judges is constitutionally flawed. The SEC appealed all three injunctions and has already prevailed on appeal in one case. But the Commission apparently determined that the better part of valor would be to declare victory, propose amendments in line with what defense lawyers – including this one – have been advocating, and characterize it all as just another day at the office.

But the number and type of proposed amendments reveals the arbitrary and lopsided nature of the current administrative process. Among the changes the Commission proposes are several concerning scheduling and discovery rights for respondents. For example, the proposed amendments would extend the hearing commencement date from its current 120 days from service of the order instituting proceedings (“OIP”) to as much as 240 days (eight months) from the service date. This would double the amount of time respondents would have to develop their defense, a welcome development.

Another proposed amendment would extend the date by which the administrative law judge’s initial decision must be rendered. Currently, the ALJ’s decision must be rendered within 300 days of service of the OIP, compressing the entire proceeding and, with it, the procedural and substantive rights of respondents. Under the proposed amendment, the initial decision would be due on a schedule triggered by the conclusion of post-hearing briefing or briefing of dispositive motions. This would open up the proceeding to permit a full airing of issues and defenses, rather than imposing an artificial rush to conclude the entire proceeding, from service to decision, in just 300 days.

The proposed amendments would also permit pre-hearing discovery not currently allowed, including up to three six-hour depositions per side in a single respondent case, or up to five depositions per side in a multiple respondent case. Parties may also subpoena documents for production at the depositions. The remaining proposed amendments concern such issues as expert witnesses and their reports, depositions on written questions, affirmative defenses, use of declarations and sworn statements, and service of OIPs abroad. Hearsay evidence would remain admissible, but the proposed amendments add “indicia of reliability” as a new prerequisite, which allows grounds for meaningful challenge that don’t currently exist.

The SEC gets kudos for responding to the concerns of the defense bar and judiciary by making the playing field in its administrative forum a bit more level. But it’s too bad the SEC hasn’t acknowledged that its proposed amendments were the result of legitimate concerns expressed by experienced counsel. Instead, the SEC has attempted to portray the changes as something that it coincidentally self-initiated. Openness about the legitimacy of criticism could have shown the SEC to be more committed to fundamental fairness, rather than being forced to begrudgingly accept that, even in its administrative forum, every respondent still maintains a right to due process.

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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