Defense lawyers complain the SEC system is unfair, particularly in complex cases. Compared to federal courts, deadlines are tight and defendants have fewer legal protections and less access to potential evidence. They see the system as biased in favor of the agency.
“Decades of fairness and reasonableness have been jettisoned for aggressiveness and a win-at-all-costs mindset,” said Jacob Frenkel, a former SEC enforcement lawyer who now represents defendants.
Frenkel was one of the first to sue in federal court on behalf of a client trying to have his case heard there, rather than in the SEC. The case was settled before a ruling was made.
In another case, the SEC agreed in 2011 to drop an administrative action against Goldman Sachs Group Inc. director Rajat Gupta for passing insider tips and sued in federal court after he claimed the regulatory proceeding violated his rights. Gupta was also convicted after U.S. prosecutors brought charges.
Risky Pools
The SEC has beaten back other challenges to its in-house forum. Lynn Tilton, the so-called Diva of Distressed, failed in June to block an SEC case claiming she and her firm, Patriarch Partners, misled investors about the value of risky pools of corporate loans. Another Manhattan judge said Tilton had to go through the SEC’s process before appealing to a federal court.
The five SEC judges are part of a much larger pool of almost 1,700 administrative judges working in 26 federal departments and agencies, including the National Labor Relations Board, the Federal Energy Regulatory Commission and the International Trade Commission, according to the Federal Administrative Law Judges Conference. By far the largest number, 1,449 as of last year, hear Social Security cases.
The SEC in-house watchdog is probing allegations that agency judges are biased. In an interim report released Friday, Inspector General Carl Hoecker told White that his office “has not developed any evidence to support” such claims.
Whatever changes might be in store, many defendants, and their lawyers, will almost certainly remain suspicious of the SEC court.
“It’s like your parents punishing you and then appealing to them to reverse your punishment. I don’t like my chances,” said Michael Perlis, a former SEC attorney who is now a partner at Locke Lord LLP in Los Angeles. “There needs to be some type of legislative fix for this.”