Peter Henning has a nice overview of recent claims made against the SEC's growing inclination to take fraud cases before its handful of agency-judges (ALJs), instead of to court.  Why should that be okay?

From a policy perspective, there's reason to worry.  I did some litigation before an administrative tribunal, and it's not that different from in court litigation, with the exception of evidence admissability and objections.  But it could be really quite different.  Hearsay is in theory fine, there's no requirement that you be able to present evidence in person, and the judge works for the agency that is suing you.  It's fair to say that defendants get less process from an ALJ than they would from a federal judge.

But not that much less.  ALJs are required to hold hearings, permit the introduction of rebuttal evidence, the statute that governs them makes what they do ("formal adjudication" in the verbiage of administrative law) pretty similar to a trial.

That matters for the equities, as does the almost absolute discretion that agencies have to prosecute in the way they see fit.  The SEC can drop claims, send scoldy letters, use ALJs, take you to court, or refer you to the criminal lawyers at DOJ with the recommendation that imprisonment could be sought.  Because we wouldn't want judges second guessing the decisions to, say, emphasize insider trading prosecutions over accounting fraud claims, we leave those policy calls to the agency.

Which then begs the question: why now with the constitutional case against the ALJ, a thing that has existed since the end of WWII?  

Well, the SEC hasn't used its ALJs for high profile cases very often, at least until recently.  But the claims against the turn to administrative tribunals aren't getting a lot of love, and I predict that will continue to happen.  Judge Lewis Kaplan, who isn't afraid to savage a government case alleging financial wrongdoing, concluded that he didn't have the power to judge whether an ALJ proceeding violated due process or equal protection standards, given that other, similar cases had been brought in court.  The SEC recently ignored a declaratory relief case filed by an S&P executive when it brought an administrative complaint against her.

Some well-heeled defendants may have been emboldened to bring these cases by the Free Enterprise Fund decision in the Supreme Court, which constrained the number levels of tenured officials that could separate the president from policymakers.  But administrative adjudication is simply too resource intensive and carefully done to be rendered illegal because of its insulation.  The alternative would be to replace ALJs with political hacks, and no one wants that.  So I'm not predicting a lot of luck for the defendants in these cases.

Administrative Law, Securities, White Collar Crime | Bookmark

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