Wednesday, October 21, 2015

Issue Highlight: A Jury Not the SEC

Home court advantage alleged in SEC securities cases brought before administrative judges rather than a jury.  Read this recent thought provoking article in the NYT DealB%k, A Jury Not the SEC, by Suja A. Thomas, a Univ. of Illinois law professor, and Mark Cuban, billionaire investor.  

After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges

Thomas and Cuban refute the argument that after the financial crisis securities issues are considered public rights questions and can constitutionally be transferred to an administrative judge. 

Despite the persistence of this public rights doctrine, there is no constitutional authority for it. First, Article I does not give Congress any authority to determine who decides civil cases. Second, the Seventh Amendment itself tells us who should decide these cases. Under it, juries decide money issues and federal judges decide other matters.

-Anne Tucker

Anne Tucker, Constitutional Law, Securities Regulation | Permalink


Prof. Thomas’s scholarship on the unconstitutionality of summary judgment notwithstanding, there is no such thing as an absolute right to a jury. Judges in civil matters routinely take away judgments from juries, mostly through motions to dismiss and summary judgment.

For a recent project, I collected a lot of data on SEC enforcement actions and can report that a large majority of contested cases are decided on summary judgment where the SEC wins overwhelmingly.

And while I’m at it, their empirical claim that defendants are more likely to win in court has not been supported. The WSJ’s stories on which they rely have serious flaws. In the first round of articles reporting disparate outcomes, the WSJ compared ALJ decisions with trial outcomes (excluding motions to dismiss and, more significantly, summary judgments). Since there’s no summary judgment before the ALJs, the comparison was one of apples to pineapples. Once summary judgments are included, the difference disappears.

That does not imply that defendants are no more likely to win in one venue than the other. The cases that the SEC brings in one versus the other are very different. Only since 2013 has the SEC brought similar cases in both venues. There’s simply not enough data right now to offer any conclusions.

The most plausible explanation for the SEC’s recent shift away from the ALJs is not that they acknowledge they were wrong. Rather, it’s that so many defendants in contested actions before ALJs sue the SEC in district court to declare the proceeding unconstitutional, that it’s rational for a budget-constrained agency to sue those defendants in court.

Posted by: Urska Velikonja | Oct 22, 2015 6:27:21 AM

Hi Urska - thank you for this! I've been wondering about your last point - I mean, lots of agencies do in house adjudication - is the fuss about the SEC because the SEC's proceedings are actually different, or is this really about defendants with enough resources to make noise? I genuinely don't know.

Posted by: Ann Lipton | Oct 23, 2015 8:33:32 AM

I know that the CFTC has been seeking the same authority as the SEC but has put their requests on hold with the storm over the ALJs passes. I don’t really know about others (FTC, etc.) but at least the banking regulators routinely issue significant penalties and bars in administrative proceedings. As far as I know, the SEC’s process isn’t different from other ALJs.
My best guess is that the opposition is a combination of several factors. First, it’s within the SEC’s discretion to select a forum. Other agencies often do not have a (real) choice: they don’t have the resources to litigate cases and if they never did so, there’s no suspicion about opportunistic venue selection. Since the SEC hasn’t abandoned district courts entirely, defendants sued before ALJs worry that they are being treated differently than similarly situated defendants. Second, the differences in process between the two venues are sufficiently large that SEC defendants probably think “how could this possibly not make a difference.” Third, securities defendants who contest charges are affluent individuals represented by experienced counsel (but not the largest financial institutions). Delay is profitable because they can keep doing business while the proceeding is ongoing. Challenging the ALJ is a strategic step in their defense. Finally, the WSJ reporting has fueled these fires.
I guess this is a long way of saying that I don’t really understand why the SEC ALJs have exploded into this massive constitutional battle.

Posted by: Urska Velikonja | Oct 23, 2015 11:42:06 AM

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