United States District Court Judge Richard M. Berman of the Southern District of New York has been making headlines in recent weeks as he presides over the highly publicized case between the National Football League (“NFL”) and National Football League Players Association (“NFLPA”) regarding the suspension of New England Patriots star quarterback Tom Brady over his alleged role in “Deflategate.” Taking a page from the Patriot’s playbook, Judge Berman recently deflated the United States Securities and Exchange Commission (“SEC”) and its controversial administrative court forum.
Last week, the SEC scored a victory in its battle to defend the use of administrative proceedings in enforcement actions seeking penalties against unregulated entities or persons. On June 30, 2015, Southern District of New York Judge Ronnie Abrams denied Plaintiffs Lynn Tilton, Patriarch Partners LLC, and affiliated entities’ motion for a preliminary injunction halting the SEC’s administrative proceedings against them. Judge Abrams’ decision in Tilton v. SEC is the latest in a string of challenges to the SEC’s use of administrative proceedings in enforcement actions (also discussed in earlier posts from July 31, 2014 and October 28, 2014). As we have written, the SEC has faced mounting scrutiny for its increasing use of administrative proceedings, including criticism that the Administrative Law Judges (ALJs) presiding over the proceedings are biased in favor the SEC’s Enforcement Decision and that defendants subjected to administrative proceedings are entitled to fewer due process protections, including limited discovery and no right to a jury trial. The SEC began increasing its use of administrative proceedings after the 2010 Dodd-Frank Act enabled the Commission to file actions against unregulated entities or persons in its in-house forum, rather than in federal courts, as it had traditionally been required to do.
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.
Today, the Securities and Exchange Commission (“SEC” or “Commission”) announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the “Big Four” international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC’s Rules of Practice over requests made by the SEC for the production of audit work papers located in China.