Over the past five years, the SEC has increasingly turned to its own administrative court to pursue enforcement actions against public companies. The NYU Pollack Center for Law & Business, in collaboration with Cornerstone Research, investigated recent trends in enforcement via the Securities Enforcement Empirical Database (SEED), and confirmed the trend that many practitioners may have noticed. The results of this study were published in the SEC Enforcement Activity Against Public Company Defendants: Fiscal Years 2010-2015 Research Report (“SEED Report”) (PDF: 6.51 MB).
Even so, the numbers may shock. According to the SEED Report (PDF: 6.51 MB), from 2010 to 2015, the proportion of actions brought as proceedings more than tripled—from 21 percent to 76 percent. The real change, however, occurred in the last two years. In the years 2010 to 2013, the SEC prosecuted its public company cases in civil court 65 percent of the time. But in 2014 and 2015, its venue of choice dramatically shifted, as the number of civil court cases fell to 24 percent.
The implications and importance of this new trend in enforcement, including possible constitutional challenges, are discussed below.
Constitutional Challenges to the SEC’s In-House Actions
Defendants have not hesitated in bringing a host of challenges to the SEC’s use of its own administrative courts and Administrative Law Judges (“ALJs”) in prosecuting cases.
While defendants fared poorly under due process or 7th amendment claims, they found more success arguing that the SEC’s administrative law judge regime, where ALJs are appointed by the SEC’s office of Administrative Law Judges, violates Article II of the U.S. Constitution. Under this more technical theory, the ALJs are “inferior officers” of the executive branch. The power to appoint such inferior officers resides only with the President, the courts of law, or heads of departments. As none of these actors appointed the ALJs, the defendants argue the appointments are unconstitutional.
The courts continue to grapple with the question. Some judges have thrown the complaints out for lack of subject matter jurisdiction, as the securities defendant could still find meaningful review of her claims within the administrative scheme. E.g., Bebo v. SEC 799 F.3d 765 (7th Cir. 2015). Federal courts, however, have stayed at least four administrative proceedings after finding a substantial likelihood of success on the merits of the Appointments Clause argument. Hill v. SEC, 114 F. Supp. 3d 1297 (N.D. Ga. June 8, 2015); Gray Financial Group, Inc. v. SEC, 2015 WL 10579873 (N.D. Ga. Aug. 4, 2015); Duka v. SEC, 103 F. Supp. 3d 382 (S.D.N.Y. April 15, 2015); Tilton v. SEC, No. 15-2103, Dkt. 77 (2d Cir. 2015).
Relationship of Venue Change and Settlements
The SEED Report indicates that settlement timing is greatly impacted by the venue change. The vast majority of administrative proceedings have concurrent settlements. That is, public company defendants resolved enforcement actions on the same day the SEC initiated.
Interestingly, according to the SEED Report, the percentage of public company defendants in civil actions with concurrent settlements has generally decreased over time. In FY 2010 the proportion of public company defendants with concurrent settlements was approximately the same in both civil actions (78%) and administrative proceedings (75%). But in FY 2015, the percentage of civil actions settled concurrently dropped to only 38 percent while the percentage of administrative actions settled concurrently rose to 96 percent.
Relationship of Venue Change and Penalties
The 2010 Dodd-Frank Act enabled the SEC to seek monetary penalties against a variety of defendants in administrative proceedings. According to the SEED Report, the 2010 Dodd-Frank Act was followed by a shift in enforcement venue. The majority of large penalties and disgorgements imposed on public company defendants have shifted from being given in civil actions to being given in administrative proceedings. The shift did not happen immediately after the enactment of Dodd-Frank in 2010. Rather, from fiscal year 2013 through fiscal year 2015, large penalties and disgorgements, of $ 100 million or more per action, were imposed primarily in administrative proceedings.
As noted above, the research discussed in this post was conducted through SEED. SEED is an online resource that provides data on SEC actions filed against defendants that are public companies traded on major U.S. exchanges and their subsidiaries.
Anat Carmy-Wiechman is a Wagner Fellow at NYU School of Law’s Pollack Center for Law & Business. She has published in the American Law and Economics Review, and in Precedent and the Law: Reports to the XVIIth Congress International Academy of Comparative Law, Utrecht, 16–22 July 2006. Wiechman’s research and teaching interests include corporate law, empirical legal scholarship, law and finance, and securities regulation.
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