The SEC and Administrative Proceedings (Part 2)

We are discussing some of the issues raised by Peter Henning in his DealBook column, The S.E.C.’s Use of the ‘Rocket Docket’ Is Challenged.  

In any event, the limits on discovery, the fact that ALJ decisions are appealed to the Commission, and the quick pace for a decision have long been attributes of the administrative process. Yet suddenly, it seems, parties have been challenging the SEC's decision to bring an administrative proceeding much more frequently.  

What are the reasons for the challenge? For one thing, Dodd-Frank made the proceedings less attractive to some litigants by increasing the SEC's authority to seek penalties. As we previously described:   

  • Dodd-Frank, however, took away one of the disadvantages to administrative proceedings. See Section 929P of Dodd Frank (amending Section 21B(a) of the Exchange Act). The Agency can now seek penalties in the proceedings against persons who are not associated with regulated entities. Indeed, the administrative proceeding against Gupta is the first to seek penalties under this authority. See Remarks at SIFMA’s Compliance and Legal Society Annual Seminar, Director of Enforcement Robert Khuzami, March 23, 2011 (case against Gupta was “the first use by the SEC of its new authority under Dodd-Frank to obtain penalties in an Administrative Proceeding against persons not associated with a regulated entity.”).  

Another reason may be that judges are more willing to entertain claims about choice of forum than they were in the past. Certainly, the incentive to challenge the SEC for its choice of forum received significant impetus from the efforts of Rajat Gupta.  

Gupta was subjected to an SEC AP and he challenged the use of the administrative forum. What made the case stand out was that the district court allowed the challenge to go forward. See Gupta v. SEC, 796 F. Supp. 2d 503 (S.D.N.Y. 2011). The main basis for the challenge was not discovery, neutrality or quickness, but an alleged equal protection violation. Gupta essentially asserted that he was singled out, that actions against other individuals had been brought in district court. See Id. (“The Complaint alleges that the SEC intentionally, irrationally, and illegally singled Gupta out for unequal treatment in a bad faith attempt to deprive him of constitutional and other rights, in retaliation for his strenuous assertion of his innocence.”).   

We blogged on this case extensively. Posts are here, here, here and here. The decision held the potential of subjecting SEC staff to depositions and other discovery while they were seeking to bring a case against Gupta. In light of the decision, the SEC terminated the administrative proceeding. For a discussion of possible reasons why the SEC chose to bring an administrative action against Gupta, go here.  

Given the discretion usually assigned to an agency to decide whether and where to bring a proceeding, the decision was analytically weak. Nonetheless, it was easy to predict what would follow. As we noted:

  • As a result of this reasoning, there are two likely outcomes. First, the number of parallel suits will increase dramatically. Why not? You can obtain discovery against the agency and explore the staff's motivations for bringing the relevant administrative proceeding. Even if the case is ultimately a loser, its possible that it will make available plenty of information useful in the administrative proceeding (and the eventual appeal to the United States Court of Appeals). The increase in the number of suits will require the SEC to reallocate attorneys from the Division of Enforcement to the Office of the General Counsel, the office that defends actions filed against the Commission. Thus, the SEC will have to reduce resources used to investigate and enforce the securities laws. 

And, in fact, a number of actions challenging the SEC's choice of forum have been lodged, as Peter's article notes. 

J Robert Brown Jr.