SEC Probes of Public Companies Steered Toward In-House Courts

It’s no secret that the Securities and Exchange Commission in recent years has steeredgrowing numbers of cases to its own administrative law judges rather than federal courts.

A new study shows that the SEC practice wasn’t just directed at private firms and individuals but public companies as well.

In fiscal years 2014 and 2015, about 75% of SEC actions against public companies were brought as administrative proceedings before its internal tribunal, according to an analysis by litigation consulting firm Cornerstone Research and New York University’s Center for Law and Business. In the three preceding fiscal years, the figure was dramatically lower, ranging between 21% and 35%, the report said.

No longer are federal courts the venue for the largest enforcement actions. Since 2013 the largest penalties were imposed in administrative proceedings, says the report.

The total number of enforcement actions launched against public companies also increased from 681 in 2010 to 807 in 2015.

The shift comes six years after the passage of the 2010 Dodd-Frank Act, which expanded the SEC’s ability to pursue financial penalties in administrative proceedings.

The SEC has taken a lot of heat — from lawmakers to judges to industry observers — over its practice of using its in-house courts, which offer defendants fewer legal protections than do the federal civil court system.

That criticism of the SEC gaining an unfair advantage has focused on its handling of contested cases as opposed to ones where the two sides agree to a settlement after an investigation. Settlements must still be presented before an administrative law judge.

The report on public company enforcement actions paints a more complicated picture.

In 2015, there were 26 cases that went before administrative judges. All but one were settled investigations, mostly involving disclosure and reporting allegations or alleged violations of the Foreign Corrupt Practices Act.

And while fewer cases were taken to federal court in 2015 than in past years, a larger percentage of them were contested complaints.

New York University law professor Stephen Choi, a co-author of the report, told Law Blog he sees at least two possible takeaways from the findings. Companies, he said, may face more pressure to settle when they know the SEC will take their allegations to an appointed administrative judge.

The SEC could also be taking cases administratively that they would have otherwise settled in federal court. For the SEC, disposing of an uncontested case at a tribunal is faster and simpler than having to get a federal judge to sign off on a settlement.

Leave a Reply

Your email address will not be published. Required fields are marked *