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.
As we have previously reported, practitioners and judges alike have recently been questioning the SEC’s increased use of administrative proceedings. Defense lawyers complain that administrative proceedings, which have historically been a rarely used enforcement tool, are stacked against respondents. Recently, Judge Rakoff of the U.S. District Court for the Southern District of New York publicly discussed the “dangers” that “lurk in the SEC’s apparent new policy.” Director of Enforcement Andrew Ceresney delivered a speech late last month responding to public criticism, in particular countering many points raised by Judge Rakoff.
Until recently, it was extremely rare for the SEC to bring enforcement actions against unregulated entities or persons in its administrative court rather than in federal court. However, as a result of the Dodd-Frank Act (and perhaps the SEC’s lackluster record in federal court trials over the past few years), the SEC is committed to bringing, and has in fact brought, more administrative proceedings against individuals that previously would be filed in federal court. Many have questioned the constitutionality of these administrative proceedings. As U.S. District Judge Jed Rakoff remarked in August 2014: “[o]ne might wonder: From where does the constitutional warrant for such unchecked and unbalanced administrative power derive?” Several recent SEC targets agree with Judge Rakoff, and have filed federal court suits challenging the constitutionality of the SEC’s administrative proceedings. (Notably, in a 2011 order regarding the SEC’s first attempt to use its expanded Dodd-Frank powers to bring more administrative cases, Judge Rakoff denied a motion to dismiss a constitutional challenge to the SEC’s decision to bring an administrative proceeding in an insider trading case against an unregulated person, following which the SEC terminated that proceeding and litigated in federal court.)