SEC Is Steering More Trials to Judges It Appoints
Unpublished Figures Show ‘Win’ Rate for Cases Heard by Administrative Law Judges
By JEAN EAGLESHAM
Oct. 20, 2014 7:59 p.m. ET
Hedge-fund manager Steven A. Cohen is the target of an SEC administrative hearing. Bloomberg News
The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges, who found in its favor in every verdict for the 12 months through September, rather than taking them to federal court.
The winning streak comes amid a marked shift at the agency toward trying cases that are more complex before its administrative law judges. Historically, the SEC had more often turned to these judges for relatively straightforward legal actions, such as barring stockbrokers who had been convicted of criminal fraud. Thanks in part to enhanced powers granted in the 2010 Dodd-Frank financial-reform bill, the SEC lately has been using the administrative judges for complicated cases, including several involving insider trading.
“It’s fair to say it’s the new normal,” Kara Brockmeyer, head of the SEC’s anti-foreign-corruption enforcement unit, told a legal conference in Washington last week. “Just like the rest of the enforcement division, we’re moving towards using administrative proceedings more frequently.”
The move is creating a backlash among lawyers and defendants, who say in federal court they have more extensive rights to take witness testimony and collect evidence ahead of a trial.
When contested, the cases are decided by one of five SEC judges, who are appointed by the agency. The penalties in administrative hearings are broadly comparable to those faced in federal court for most types of cases.
The agency’s win rate in recent years is considerably higher in front of its administrative law judges than it is in jury trials. In the 12 months through September, the SEC won all six contested administrative hearings where verdicts were issued, but only 61%—11 out of 18—federal-court trials, according to previously unpublished figures.
There has been a similar winning rate in previous years. The agency won nine of 10 contested administrative proceedings in the 12-month period through September 2013 and seven out of seven in the 12 months through September 2012, according to SEC data. The SEC won 75% and 67%, respectively, of its trials in federal court in those years.
Andrew Ceresney, the SEC enforcement chief, says the agency isn’t trying to sidestep the federal court system for difficult cases. The agency has won eight of its last 10 jury trials, Mr. Ceresney said in an interview.
“We’re using administrative proceedings more extensively because they offer a streamlined process with sophisticated fact finders,” he said.
One key attraction of the administrative system, SEC officials say: It is relatively fast, with rulings usually handed down within 300 days of the case being filed, as opposed to years for the typical federal-court case.
A clear sign of the SEC’s new approach came when it last month brought two contested insider-trading cases as administrative proceedings. “Until very recently, the SEC seldom used administrative proceedings for insider-trading cases. With isolated exceptions, they were always heard before a federal judge or jury,” said Stephen Crimmins, a former SEC enforcement lawyer who is now a partner at law firm K&L Gates LLP.
Arguably the SEC’s most high-profile pending case, the civil action against SAC Capital Advisors LP founder Steven A. Cohen for allegedly failing to supervise two employees later found guilty of insider trading, is slated to be heard in front of an administrative law judge. Mr. Cohen has denied the accusations, and the SEC case has been postponed pending appeals of those convictions.
“It’s fair to say it’s the new normal.”
—Kara Brockmeyer, head of an SEC enforcement unit
In addition to drawing fire from defense lawyers, the SEC’s switch to bringing higher-profile, more-complicated cases administratively has elicited a rising tally of legal challenges.
Jordan Peixoto appealed Monday the SEC’s use of an administrative proceeding to bring civil insider-trading charges against him last month. He denies the agency’s allegations that he illegally traded options in nutritional-supplement maker Herbalife Ltd.HLF +3.70% , after being tipped by a friend that hedge-fund Pershing Square Capital Management LP was about to announce a bet against the company. The friend settled the SEC’s case without admitting to or denying the allegations
In a filing in Manhattan court, Mr. Peixoto alleged the SEC is violating his constitutional rights to due process and equal protection under the law. His complaint said he has been unfairly “singled out” by the SEC by being forced to fight his case in the administrative forum rather than federal court.
“The administrative process is a star chamber where only the Commission emerges as the victor and the defendant is defenseless,” Mr. Peixoto’s filing said.
A spokeswoman for the SEC declined to comment on the legal challenge.
Other defendants have also recently appealed the SEC’s decision to try a case before an administrative law judge. At least one such appeal has been turned down and several other cases are pending.
Mr. Ceresney, the SEC enforcement chief, rejects criticism of the agency’s system of in-house judges.
“The administrative proceeding forum is a very fair forum…There are extensive procedural protections,” he told last week’s legal conference in Washington. “It’s not like we’re always victorious.”
Mr. Ceresney said the SEC has “won some significant” trials in federal court in recent months, including the verdict by a Manhattan jury in May finding Texas billionaire Samuel Wyly and the estate of his late brother Charles liable on civil fraud charges.
A string of recent wins in federal and administrative court has helped take the SEC’s overall courtroom win rate to 71% for the 12 months through September, with six verdicts from administrative proceedings still to come.
But the agency has also suffered some high-profile courtroom setbacks in the past year. Mark Cuban, the billionaire owner of the Dallas Mavericks, has become a vocal critic of the SEC since a federal jury in Dallas, Texas, last year rejected the agency’s insider-trading allegations against him.
Most of the agency’s losses are from insider-trading cases, Mr. Ceresney said, where the SEC typically has to rely on circumstantial evidence to prove its case rather than the wiretaps or cooperating witnesses often featured in criminal prosecutions. Jurors tend to hold the SEC to the high legal standard of proving their case beyond a reasonable doubt rather than the lower standard of deciding on the preponderance of the evidence that should apply to their civil cases, he said.
Mr. Cuban dismisses any suggestion that the SEC is being held to too high a burden of proof as “a horrible excuse,” saying in an interview that judges give juries clear instructions about the legal standard they should apply.
Write to Jean Eaglesham at [email protected]
http://online.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590?mod=WSJ_hp_LEFTWhatsNewsCollection
By JEAN EAGLESHAM
Oct. 20, 2014 7:59 p.m. ET
Hedge-fund manager Steven A. Cohen is the target of an SEC administrative hearing. Bloomberg News
The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges, who found in its favor in every verdict for the 12 months through September, rather than taking them to federal court.
The winning streak comes amid a marked shift at the agency toward trying cases that are more complex before its administrative law judges. Historically, the SEC had more often turned to these judges for relatively straightforward legal actions, such as barring stockbrokers who had been convicted of criminal fraud. Thanks in part to enhanced powers granted in the 2010 Dodd-Frank financial-reform bill, the SEC lately has been using the administrative judges for complicated cases, including several involving insider trading.
“It’s fair to say it’s the new normal,” Kara Brockmeyer, head of the SEC’s anti-foreign-corruption enforcement unit, told a legal conference in Washington last week. “Just like the rest of the enforcement division, we’re moving towards using administrative proceedings more frequently.”
The move is creating a backlash among lawyers and defendants, who say in federal court they have more extensive rights to take witness testimony and collect evidence ahead of a trial.
When contested, the cases are decided by one of five SEC judges, who are appointed by the agency. The penalties in administrative hearings are broadly comparable to those faced in federal court for most types of cases.
The agency’s win rate in recent years is considerably higher in front of its administrative law judges than it is in jury trials. In the 12 months through September, the SEC won all six contested administrative hearings where verdicts were issued, but only 61%—11 out of 18—federal-court trials, according to previously unpublished figures.
There has been a similar winning rate in previous years. The agency won nine of 10 contested administrative proceedings in the 12-month period through September 2013 and seven out of seven in the 12 months through September 2012, according to SEC data. The SEC won 75% and 67%, respectively, of its trials in federal court in those years.
Andrew Ceresney, the SEC enforcement chief, says the agency isn’t trying to sidestep the federal court system for difficult cases. The agency has won eight of its last 10 jury trials, Mr. Ceresney said in an interview.
“We’re using administrative proceedings more extensively because they offer a streamlined process with sophisticated fact finders,” he said.
One key attraction of the administrative system, SEC officials say: It is relatively fast, with rulings usually handed down within 300 days of the case being filed, as opposed to years for the typical federal-court case.
A clear sign of the SEC’s new approach came when it last month brought two contested insider-trading cases as administrative proceedings. “Until very recently, the SEC seldom used administrative proceedings for insider-trading cases. With isolated exceptions, they were always heard before a federal judge or jury,” said Stephen Crimmins, a former SEC enforcement lawyer who is now a partner at law firm K&L Gates LLP.
Arguably the SEC’s most high-profile pending case, the civil action against SAC Capital Advisors LP founder Steven A. Cohen for allegedly failing to supervise two employees later found guilty of insider trading, is slated to be heard in front of an administrative law judge. Mr. Cohen has denied the accusations, and the SEC case has been postponed pending appeals of those convictions.
“It’s fair to say it’s the new normal.”
—Kara Brockmeyer, head of an SEC enforcement unit
In addition to drawing fire from defense lawyers, the SEC’s switch to bringing higher-profile, more-complicated cases administratively has elicited a rising tally of legal challenges.
Jordan Peixoto appealed Monday the SEC’s use of an administrative proceeding to bring civil insider-trading charges against him last month. He denies the agency’s allegations that he illegally traded options in nutritional-supplement maker Herbalife Ltd.HLF +3.70% , after being tipped by a friend that hedge-fund Pershing Square Capital Management LP was about to announce a bet against the company. The friend settled the SEC’s case without admitting to or denying the allegations
In a filing in Manhattan court, Mr. Peixoto alleged the SEC is violating his constitutional rights to due process and equal protection under the law. His complaint said he has been unfairly “singled out” by the SEC by being forced to fight his case in the administrative forum rather than federal court.
“The administrative process is a star chamber where only the Commission emerges as the victor and the defendant is defenseless,” Mr. Peixoto’s filing said.
A spokeswoman for the SEC declined to comment on the legal challenge.
Other defendants have also recently appealed the SEC’s decision to try a case before an administrative law judge. At least one such appeal has been turned down and several other cases are pending.
Mr. Ceresney, the SEC enforcement chief, rejects criticism of the agency’s system of in-house judges.
“The administrative proceeding forum is a very fair forum…There are extensive procedural protections,” he told last week’s legal conference in Washington. “It’s not like we’re always victorious.”
Mr. Ceresney said the SEC has “won some significant” trials in federal court in recent months, including the verdict by a Manhattan jury in May finding Texas billionaire Samuel Wyly and the estate of his late brother Charles liable on civil fraud charges.
A string of recent wins in federal and administrative court has helped take the SEC’s overall courtroom win rate to 71% for the 12 months through September, with six verdicts from administrative proceedings still to come.
But the agency has also suffered some high-profile courtroom setbacks in the past year. Mark Cuban, the billionaire owner of the Dallas Mavericks, has become a vocal critic of the SEC since a federal jury in Dallas, Texas, last year rejected the agency’s insider-trading allegations against him.
Most of the agency’s losses are from insider-trading cases, Mr. Ceresney said, where the SEC typically has to rely on circumstantial evidence to prove its case rather than the wiretaps or cooperating witnesses often featured in criminal prosecutions. Jurors tend to hold the SEC to the high legal standard of proving their case beyond a reasonable doubt rather than the lower standard of deciding on the preponderance of the evidence that should apply to their civil cases, he said.
Mr. Cuban dismisses any suggestion that the SEC is being held to too high a burden of proof as “a horrible excuse,” saying in an interview that judges give juries clear instructions about the legal standard they should apply.
Write to Jean Eaglesham at [email protected]
http://online.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590?mod=WSJ_hp_LEFTWhatsNewsCollection
