The SEC Criticizes One of Its Own

Even with the SEC’s home-court advantage in bringing enforcement actions in its administrative court rather than in federal court, the SEC will still criticize its own administrative law judges (“ALJ”) when an ALJ’s decision falls short of established legal standards.  On April 23, 2015, the SEC found that an ALJ’s decision to bar Gary L. McDuff from associating with a broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent or nationally recognized statistical rating organization was insufficient because it lacked enough evidence to establish a statutory requirement to support a sanctions analysis.  The SEC then remanded the matter to the same ALJ – no doubt in an effort to encourage him to revise his initial opinion.

The SEC’s remand arose out of In the Matter of Gary L. McDuff, Administrative Proceeding File No. 3-15764.  The SEC filed its case against Mr. McDuff in administrative court after a jury convicted him of being the mastermind behind an $11 million Ponzi scheme in a criminal proceeding.  In the administrative action, the SEC sought a permanent injunction against Mr. McDuff for future violations of the federal securities laws.  The Exchange Act authorizes the SEC to impose a bar on Mr. McDuff if: (1) McDuff is associated, is seeking to become associated, or, at the time of the alleged misconduct, was associated or was seeking to become associated with a broker or dealer, and (2) McDuff has been enjoined from any action, conduct or practice in connection with acting as a broker-dealer.  The SEC criticized the ALJ for ruling that there was no genuine issue of material fact concerning the first requirement, and for basing sanctions on allegations in a civil complaint as to which McDuff defaulted and a jury returned a general verdict.  In particular, the SEC noted that the record contained no evidence that established whether McDuff was a broker that could be enjoined.

The SEC’s criticism of its ALJ is noteworthy and raises the question of how the SEC’s willingness to speak out against its own will impact the decision-making process of the ALJ’s going forward.  For example, will an ALJ be less likely to issue pro-defense decisions if faced with potential backlash from its own employer?  Unlike Article III judges, an ALJ does not enjoy lifetime tenure.  One thing is certain: with the recent rise in SEC enforcement actions being brought in administrative proceedings and the publicity regarding their potential unconstitutionality, ALJ decisions will be closely monitored in the coming years.