Many Key Issues Still Left Unaddressed In the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice

Notre Dame Law Review, Jun 2016

This Note analyzes and explains the current issues and criticism regarding the SEC’s use of ALJs. In particular, this Note recommends that the SEC ratify its ALJs in accordance with constitutional requirements, create a rigid formula for its forum selection, and amend its Rules of Practice to align more closely to the procedural due process rights in federal district courts. As many of these topics are currently being discussed in federal courts of appeals and within the SEC—through its proposed amendments to the Rules of Practice—this Note intends to add to the discussion on a topic with very little scholarly research. In the SEC’s defense, the SEC’s mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” is a necessary and important mission. Regardless of the mission, individuals are still guaranteed constitutional rights to procedural due process of law when there is a possibility of being “deprived of life, liberty or property .” The first Part of this Note will discuss the historical expansion of the SEC’s enforcement powers. Part II will discuss the current enforcement procedures and the SEC’s recently proposed amendments to its Rules of Practice. Part III will discuss the recent constitutional challenges that defendants have brought against the SEC and the issues regarding subject matter jurisdiction in federal district courts. Part IV will propose three recommendations that the SEC should follow to avoid future criticism of its administrative proceedings.

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Many Key Issues Still Left Unaddressed In the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice

Notre Dame Law Review Volume 91 | Issue 4 Article 13 6-2016 Many Key Issues Still Left Unaddressed In the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice Joseph Quincy Patterson University of Notre Dame Law School Follow this and additional works at: http://scholarship.law.nd.edu/ndlr Part of the Administrative Law Commons, and the Securities Law Commons Recommended Citation 91 Notre Dame L. Rev. 1675 (2016) This Note is brought to you for free and open access by the Notre Dame Law Review at NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by an authorized administrator of NDLScholarship. For more information, please contact . \\jciprod01\productn\N\NDL\91-4\NDL413.txt unknown Seq: 1 22-APR-16 14:56 MANY KEY ISSUES STILL LEFT UNADDRESSED IN THE SECURITIES AND EXCHANGE COMMISSION’S ATTEMPT TO MODERNIZE ITS RULES OF PRACTICE Joseph Quincy Patterson* “By bringing more cases in its own backyard, the agency is not only increasing its chances of winning but giving itself greater control over the future evolution of legal doctrine.” —Joseph Grundfest, former SEC Commissioner1 INTRODUCTION Towards the end of 2013, the Securities and Exchange Commission (SEC) lost three high-profile insider-trading cases in federal district court.2 Shortly after, the SEC instituted a new policy in which it “signaled its intention to bring as administrative actions certain kinds of enforcement actions that historically it has more often brought in the federal courts.”3 This policy * Candidate for Juris Doctor, Notre Dame Law School 2017; Candidate for Masters in Business Administration, University of Notre Dame, Mendoza College of Business, 2016; Bachelor of Arts in Economics, Elon University. I thank Professor A.J. Bellia for advising this Note. 1 Jean Eaglesham, SEC Wins with In-House Judges: Agency Prevails Against Around 90% of Defendants When It Sends Cases to Its Administrative Law Judges, WALL ST. J. (May 6, 2015), http://www.wsj.com/articles/sec-wins-with-in-house-judges-1430965803. 2 See SEC v. Jensen, No. CV11-5316-R, 2013 WL 6499699, at *31 (C.D. Cal. Dec. 10, 2013) (holding that “[t]he SEC has not carried its burden of proof with respect to any of the causes of action in the Complaint”); Verdict Form, SEC v. Kovzan, No. 11-2017-JWL (D. Kan. Dec. 2, 2013) (Doc. 408); SEC v. Cuban, No. 3:08-CV-2050-D (N.D. Tex. Oct. 16, 2013); see also Hon. Jed S. Rakoff, U.S. Dist. Judge, S. Dist. of N.Y., PLI Securities Regulation Institute Keynote Address: Is the S.E.C. Becoming a Law unto Itself? 9–10 (Nov. 5, 2014), https://securitiesdiary.files.wordpress.com/2014/11/rakoff-pli-speech.pdf (“[T]his past year, the S.E.C. suffered stinging defeats in two such cases . . . . In both these cases, novel and difficult legal issues were presented that led initially to both cases being dismissed[,] . . . but the issues were ultimately resolved by appellate decisions favorable to the S.E.C.’s theories. Nonetheless[,] when . . . the cases were ultimately tried to juries, the S.E.C. lost.”). 3 Rakoff, supra note 2, at 2; see also Jean Eaglesham, SEC Is Steering More Trials to Judges It Appoints, WALL ST. J. (Oct. 21, 2014), http://www.wsj.com/articles/sec-is-steering-moretrials-to-judges-it-appoints-1413849590 (quoting Kara Brockmeyer, the head of the SEC’s 1675 \\jciprod01\productn\N\NDL\91-4\NDL413.txt 1676 unknown Seq: 2 notre dame law review 22-APR-16 14:56 [vol. 91:4 included bringing complicated insider-trading cases before Administrative Law Judges (ALJs)4 rather than before a district court.5 The SEC claims that the change was due to “recent statutory changes,”6 resulting from the DoddFrank Wall Street Reform and Consumer Protection Act.7 By adding section 929P(a) to the previously enacted statutes, Congress authorized the SEC to seek civil monetary penalties against “any persons or entities” regardless of whether they are regulated by the SEC.8 The timing has caused some legal experts to question whether the reason had more to do with giving the SEC a home-court advantage.9 For instance, on May 7, 2015, the Wall Street Journal published an article, in which it criticized the SEC for its ninety-percent success rate before an ALJ as compared to a sixty-nine-percent success rate before a federal district court.10 By bringing cases in administrative proceedanti-foreign-corruption enforcement unit, as saying, “It’s fair to say it’s the new normal. . . . Just like the rest of the enforcement division, we’re moving towards using administrative proceedings more frequently.”); Gretchen Morgenson, At the S.E.C., a Question of HomeCourt Edge, N.Y. TIMES (Oct. 5, 2013), http://www.nytimes.com/2013/10/06/business/atthe-sec-a-question-of-home-court-edge.html?_r=0 (quoting Andrew Ceresney, Director of the Division of Enforcement, SEC, as saying, “Our expectation is that we will be bringing more administrative proceedings given the recent statutory changes.”). 4 ALJs receive their authority “[u]nder the Administrative Procedure Act and the Commission’s Rules of Practice.” Office of Administrative Law Judges, U.S. SEC. & EXCHANGE COMMISSION, http://www.sec.gov/alj (last visited Mar. 18, 2016). When the SEC’s Division of Enforcement brings an “Order Instituting Proceeding” before an ALJ, the duties of the ALJ consist of “taking evidence, determining whether the allegations are true, and issuing an initial decision within a specified time period.” Id. 5 Sarah N. Lynch, U.S. SEC to File Some Insider-Trading Cases in Its In-House Court, REUTERS (June 11, 2014), http://www.reuters.com/article/2014/06/11/sec-insidertrading-idUSL2N0OS1AT20140611 (quoting Andrew Ceresney, Director of the Division of Enforcement, SEC, as saying, “I do think we will bring insider-trading cases as administrative proceedings in appropriate cases . . . .”); cf. id. (quoting Stephen Crimmins, partner at K&L Gates and former SEC trial attorney as saying, “Prosecuting insider trading cases in administrative proceedings would be a significant change.”). 6 Morgenson, supra note 3. 7 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010); see also infra notes 79–93 and accompanying text. 8 Dodd-Frank Wall Street Reform and Consumer Protection Act § 929P(a), 124 Stat. at 1862; see also Rakoff, supra note 2, at 5 (“Section 929P(a) [of the Dodd-Frank Act] gives the S.E.C. the power through internal administrative proceedings to impose substantial monetary penalties against any person or entity whatsoever if that person or entity has violated the federal securities laws, even if the violation was unintentional.” (emphasis added) (citing Dodd-Frank Wall Street Reform and Consumer Protection Act § 929P(a))). Historically, the SEC could not seek civil monetary penalties against non-regulated persons or entities unless they brought the proceeding in a federal district court. Id. at 4–5. 9 See William McLucas & Matthew Martens, Opinio (...truncated)


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Joseph Quincy Patterson. Many Key Issues Still Left Unaddressed In the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice, Notre Dame Law Review, 2016, Volume 91, Issue 4,