Recently the Securities and Exchange Commission has faced criticism for its in-house tribunal. Defendants complain about the commission’s no-jury, rocket docket proceedings where the judges are employed by the same agency as the prosecutor. With a setup stacked so heavily in favor of the SEC, the Wall Street Journal has found that the SEC wins in administrative proceedings 90% of the time.
During the 16th annual Sommer Lecture at Fordham Law on November 18, speaker Joseph A. Grundfest suggested some changes for the SEC’s administrative proceedings, not to obviate the need for its in-house system but rather to empower federal courts to ensure fairness. Grundfest, the William A. Franke Professor of Law and Business and Senior Faculty, Rock Center on Corporate Governance at Stanford Law School, advised adopting a removal statute—that is, a procedure that would allow the case to shift from the commission to the federal courts.
“Don’t put the administrative process out of business,” Grundfest said to a group of about 100 attorneys and regulators. “Once Congress wraps its head around this situation, they will be so impressed by the Kafkaesque elements, they will start implementing removal proceedings.
“Although defendants don’t have a Constitutional right to a court trial, once removal provisions are enacted, the chances of one increase dramatically,” he added.
Grundfest advanced three basic removal alternatives—discretionary, nondiscretionary, and hybrid removal—and discussed what each one would entail.
The federal government employs 1,700 administrative law judges; of that number, only five work for the SEC, which has been pummelled by several defendants’ legal challenges over the past year. While the SEC maintains its system moves faster and more efficiently than federal courts, critics have said the process denies defendants important federal court protections.
The controversy over the tribunal erupted in May, Grundfest said, when the Wall Street Journal published an analysis of the tribunal’s results. A more recent analysis has shown a gradual retreat from the Dodd-Frank provision granting the SEC more latitude in meting out fines and punishment to errant Wall Street financiers: Of 160 cases affecting more than 500 defendants in the past two quarters, the SEC sent just 11 percent of its contested cases to its administrative law judges, down from 40 percent in 2014, according to another report by the Wall Street Journal.
Grundfest included in his assessment a “watchful-waiting approach” while Congress decides what to do with a bill introduced in the House of Representatives by Scott Garrett. H.R. 3798, or the Due Process Restoration Act, would provide a mandatory right of removal under two provisions: defendants are subject to a cease and desist order and monetary penalty that the commission is seeking; or the need to raise the burden of proof to a higher “clear and convincing evidence” standard.
Until legislative change happens, however, Grundfest said the best strategy for lawyers is to stimulate negotiation with the SEC and create an incentive for the agency to modernize its administrative process so that federal courts “perceive it as a reasonable and fair forum for disputes.”