From Securities Regulation Daily, November 5, 2014

Judge Rakoff Warns About SEC’s Move to More Administrative Proceedings

By Jacquelyn Lumb

Judge Jed Rakoff of the Southern District of New York delivered the keynote address at the Practising Law Institute’s 46th annual institute on securities regulation, in which he warned of the dangers that lurk in the SEC’s new policy of bringing a greater number of enforcement actions as administrative proceedings. He views this policy as a dangerous shift with respect to the development of securities law. Rakoff cited remarks by Enforcement Director Andrew Ceresney, who has said the SEC will bring more insider trading cases as administrative proceedings, and by Kara Brockmeyer, head of the FCPA unit, who has said that frequent administrative proceedings are the new normal.

Dodd-Frank Act. Rakoff noted that the authority granted to the SEC under the Dodd-Frank Act now enables it to obtain nearly everything through an administrative proceeding that it can obtain by going to court. Section 929P(a) gave the SEC the authority to impose civil penalties in cease and desist proceedings. The SEC’s rationale in seeking the expanded authority was to promote greater efficiency, but Rakoff said a claim to greater efficiency by any government bureaucracy is an example of "chutzpah." He pointed out that administrative proceedings permit more limited discovery than federal actions, no interrogatory depositions, and allow the introduction of hearsay.

Success rate. Rakoff said the SEC won 100% of its administrative proceedings in fiscal 2013, compared to 60% of its trials during the same period. He said the judiciary and the public should be concerned, because the move to administrative proceedings hinders the balanced development of the securities laws.

Determinations of law. In insider trading cases in which there was no parallel criminal case, Rakoff said the SEC has not fared as well as with cases in which there was a parallel criminal action. Some of these cases pose novel and complex legal issues, he noted, and the SEC has lost some of them in jury trials, such as the Cuban case. If these cases are brought as administrative proceedings, Rakoff said the law will be made by SEC administrative law judges because the courts must give deference to their decisions.

These cases are unlikely to lead to balanced interpretations of law as they are when brought in federal court, according to Rakoff. He added that, in the long run, it may not be good for the SEC and its reputation for fairness and it is not fair to the development of law. Rakoff said that adjudications in federal courts have been very effective and should not be replaced by fiat. The SEC should not become a law unto itself, he said.

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