Stacking the Deck: SEC’s Use of Administrative Proceedings

by Michael Volkov
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stackingThe SEC has a real perception problem. They cannot win in court. Whether this is fair or not, the SEC needs to move beyond this fear of losing since it only undermines the integrity of its enforcement program.

As a former prosecutor, I can assure you that prosecutors, just like trial lawyers, will lose a case. There is no shame in that since you cannot win every case. The mark of a good trial lawyer is the ability to recognize this fact and never let it interfere with your objective assessment of a case.

The SEC is now perceived as avoiding judicial scrutiny and trials. As part of the Dodd-Frank Act, the SEC secured modifications to its statutes to permit them to bring cases through administrative proceedings and avoid judicial scrutiny at the trial level. Of course, a party still has the right to appeal an SEC administrative action eventually to an appellate court.

An administrative hearing is conducted by an administrative law judge, guided by liberal rules of evidence, and expanded authority to impose civil penalties and order disgorgement. In effect, the authority of the federal courts has been moved to an administrative proceeding.

As a practitioner who has tried cases in both venues – federal court and administrative hearings, — I can assure you that they are not equivalent. A federal trial judge imposes real rules and limitations on the litigants. It is apples and oranges.stacking2

The SEC has quickly taken advantage of the administrative proceedings in response to judicial frustrations they experienced in securing approval of various FCPA settlements (e.g. Judge Leon in the District of Columbia). The SEC’s “new” use of administrative proceedings for FCPA cases demonstrates its unwillingness to face judicial scrutiny and undermines the effectiveness of its enforcement program. The SEC likes to play on its home turf and for some reason feels that going to court is not as important.

Frankly, I think the SEC is a little thin-skinned and should embrace the fact that going to court results in enforcement ups and downs. You cannot win every time.

The Justice Department prosecutors responded to the Shot Show debacle in a very effective way – they brought strong criminal cases against individuals and sent a very important message – we will aggressively prosecute individuals using a variety of tactics and assemble strong evidence against them. DOJ’s program has eclipsed the Shot Show cases and restored its reputation in FCPA enforcement against individuals.

In the FCPA area, the SEC has to improve its pre-filing review process and they have to learn how to cut their losses and move on.

stacking6The recent Ruehle and Jackson cases demonstrate what I am talking about. First, the SEC brought a case alleging that Jackson and Ruehle were responsible for bribery and for circumventing the company’s internal controls. Later, they dismissed the internal controls part of the case. That shows weakness and also inadequate review of the case before filing. You either stick with the case or you do not.

Second, the SEC has suffered a major blow on statute of limitations issues after the Supreme Court’s ruling in Gabelli. The tolling time period now begins at the inception of a fraud scheme not when it ends. That has ha major impact on the SEC’s cases.

While the SEC has ramped up its FCPA enforcement activity against individuals, it also has to take greater care to ensure the strength of its cases.

So long as the SEC continues to rely on administrative proceedings in order to avoid judicial scrutiny, the SEC’s credibility as an aggressive trial agency will suffer. The defense bar is well aware of the SEC’s tactics and advises their clients accordingly. The SEC needs to rethink its efforts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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