In virtually every sport, playing on one’s “home court” is recognized as a distinct advantage over a visiting team as a result of playing on a familiar field and in front of rabid fans. The same is true in virtually every system of justice in America: any litigator would welcome the opportunity to try cases before judges with whom they are familiar – and opposing counsel is not – especially if the litigator and the judge are both playing for the same team.
According to the Securities and Exchange Commission’s (“SEC”) website, the mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As a support of this mission, the SEC’s Division of Enforcement conducts formal and informal investigations into possible violations of the federal securities laws, and prosecutes the SEC’s civil suits in the federal courts and within its own internal administrative proceedings. On its face, these actions appear reasonably constituted to effectuate the overall mission of the SEC. The SEC’s Rules of Practice can be found here.
In enforcement actions against regulated entities and other publically traded companies, the SEC has a variety of options, including issuing injunctions, ordering the disgorgement of funds, revoking or suspending registrations, and imposing bars or suspensions from employment. In enforcement actions against regulated persons, the SEC has the authority to order civil penalties as well as disgorgement. These enforcement decisions are prescribed by appointed federal district court judges or by administrative law judges employed by the SEC. While federal court orders may be appealed to the United States Court of Appeals, administrative law judge actions are appealed internally within the SEC.
The majority of cases are settled by agreement between the SEC and the defendants of enforcement actions. However, pursuant to powers granted by the 2010 Dodd-Frank financial legislation, the SEC increasingly assigns contested cases to its own appointed judges. In other words, the SEC reviews the decisions of the SEC and, not surprisingly, the defendants face the consistently negative outcomes. Dodd-Frank allows the SEC to seek financial penalties in administrative proceedings from entities and persons who are not even under its regulatory purview.
In a May 6, 2015 article, The Wall Street Journal reported that the SEC received a favorable ruling against 90% of the defendants appearing before the SEC’s own judges in contested cases during the period between October 2010 and March 2015. When compared to the cited 69% success rate the SEC has against defendants in federal courts over the same period, the disparity is staggering. According to the Journal article, the SEC attributes the difference to case mix, asserting that most of the SEC’s complicated insider-trading cases are heard in federal court, and not by the SEC’s in-house judges.
When SEC rulings are appealed – where the appeals are heard by the SEC’s own commissioners – the SEC home court advantage continues with a virtually perfect success rate. The Wall Street Journal reports that commissioners decided the appeal in the SEC’s favor 95% of the time.
The Wall Street Journal’s analysis also revealed astounding numbers about the findings of certain individual SEC judges. For example, one four-year veteran SEC administrative law judge has found all of the 28 defendants who came before him in contested cases liable on at least one or more of the charges. Similarly, The Wall Street Journal revealed that the SEC had win rates in the high 80th percentile with other SEC appointed judges.
At the time the Wall Street Journal article was published, the Senate Appropriations Subcommittee pressed SEC Chair Mary Jo White with regards to the SEC’s apparent home court advantage and whether the SEC intended to provide public guidance on the forum selection issue. She responded that “the appearance of fairness is important” and she was “considering…whether we should do public guidelines to make that clear and transparent.” Three days later, the SEC’s Enforcement Division issued a four-page guidance on forum selection in contested actions.
SEC Guidance on Forum Selection
In essence, the SEC’s guidance on forum selection provides that when recommending a contested enforcement action to the SEC, the Enforcement Division selects the forum that will best utilize the SEC’s limited resources to carry out its mission.
The SEC’s formula for determining the appropriate forum for enforcement actions is at times opaque, however, allowing the SEC the necessary flexibility to tip the scale in its favor. The guidance provides that the Enforcement Division considers a number of factors when evaluating the choice of forum and that each case is different, with individual factors carrying different weights in different cases. Not all factors will apply in every case and, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum. Additionally, the SEC’s choice of forum is entirely within its sole discretion.
Factor 1: The availability of the desired claims, legal theories, and forms of relief in each forum.
Certain claims, theories, and relief may only be available in one forum. For example, claims of failure to supervise are likely to be brought in administrative proceedings, but in situations where there is a need for emergency proceedings or relief – such as in cases where the proceeds of the alleged wrongdoing will be moved offshore or evidence destroyed – those cases are likely to be heard in a federal district court.
Factor 2: Whether any charged party is a registered entity or an individual associated with a registered entity.
Registered entities and their associated persons have long been subject to SEC oversight, but in actions which contemplate association bars and suspensions, these cases are likely to be brought in an administrative proceeding because the SEC will be able to quickly apply bars and suspensions. Additionally, the guidance explains that the SEC’s judges have the specialized knowledge and experience to address the issues frequently arising in contested cases involving registered entities or their associated persons.
Factor 3: The cost‐, resource‐, and time‐effectiveness of litigation in each forum.
The guidance explains that this factor takes into consideration what may be the most efficient and effective use of the SEC’s resources. Generally speaking, administrative hearings are adjudicated more rapidly than in federal court actions. That being said, the SEC’s guidance contemplates that there are circumstances in which it may be more efficient to bring an action in federal district court. Examples include matters where the contested case could be decided on a dispositive motion or the issues could be narrowed by a motion for summary judgment.
Additionally, the anticipated amount and expense of pretrial discovery factor into the consideration of what forum to select. For example, in administrative proceedings, the Enforcement Division is required to produce all non-privileged documents in its possession, but this requirement does not exist in district court litigation. On the other hand, while depositions are a common occurrence with federal district court proceedings, but they are not in administrative hearings.
Factor 4: Fair, consistent, and effective resolution of securities law issues and matters.
In explaining this factor, the SEC again points to the specialized knowledge and experience of its own judges. The guidance reasons that if a matter is likely to raise unsettled and complex legal issues under the federal securities laws, or the interpretation of SEC rules, consideration should be given to whether, in light of the SEC’s expertise concerning those matters, obtaining an SEC decision on such issues, subject to appellate review in the federal courts, may facilitate development of the law. Conversely, where the contested cases involve an application of federal or state law, the federal district court may be the appropriate forum.
The Advantage Persists
While the guidance gives some insight into the SEC’s forum selection, the non-exclusive listing of factors is not binding, and the determination remains in the sole discretion of the SEC. Furthermore, the application of these factors seems weighted towards the selection of SEC administrative proceedings and a preference for the SEC’s own internal knowledge and the specialized experience of its judges. Though the factors are a step towards transparency, they do not solve, much less address, the SEC’s distinct home court advantage.
Shortly after the release of the Wall Street Journal article, former SEC enforcement chief, George Canellos, called for changes to the SEC’s system of in-house judges, alleging that it was time to “end the very grave appearance of injustice.” The SEC, on the other hand, through its enforcement chief Andrew Ceresney, credits its excellent record in administrative proceeds as reflective of “the strength of the evidence presented in each case, and not our choice of venue.” Only time will tell whether the SEC’s advantage weakens with increased transparency.
One Way to Negate Home Court Advantage
In the case of an Order Instituting Proceedings, the SEC directs that an Administrative Law Judge conduct a public administrative proceeding to determine whether the allegations in the Order are true and to issue an Initial Decision within a specified period of time. Subsequent to this Initial Decision, a party may initiate a de novo appeal internally to the Commission.
If satisfaction cannot be had from the Commission decision, pursuant to 15 U.S.C. § 78y(a)(1), 15 U.S.C. § 77i, an appeal can be made to the United States Court of Appeals for the District of Columbia or for the Circuit in which the respondent resides or has its principal place of business. Historically, the SEC has had a disadvantage in the United States Court of Appeals for the District of Columbia.
