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E-MailDavid Zaring is an Associate Professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania. This post is based on an article authored by Professor Zaring.
The Dodd Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all.
The SEC has vigorously—and, my article argues, correctly—defended its power to choose where it sues. Agencies have always enjoyed unfettered discretion to choose their enforcement targets and their policy making fora. Formal adjudication under the Administrative Procedure Act (APA), which is the process SEC ALJs offer, has been with us for decades, and has never before been thought to be unconstitutional in any way. It violates no rights, nor offends the separation of powers; if anything scholars have bemoaned the fact that it offers inefficiently large amounts of process to defendants, administered by insulated civil servants who in no way threaten the president’s control over the executive branch. Nonetheless, because defendants, advised by high profile lawyers, have raised appointments clause, due process, equal protection, and right to a jury trial claims against the agency, the article reviews the reasons why these claims will fail, and discusses the timing issues that have led the two appellate courts to address the claims to dismiss them as prematurely brought.
The most interesting questions posed by the SEC’s new policy are not doctrinal; they are empirical and cultural. An agency’s turn to formal adjudication is a rare thing these days; it warrants an investigation of how the institution works in its reinvigorated form at the SEC. To do so, the article reviews the first 359 decisions issued by ALJs after the passage of Dodd-Frank. These decisions, if representative, suggest that defendants can rarely escape liability before ALJs, but can reduce their damages, relative to the amount sought by the agency’s Enforcement Division. The sample does not suggest that the ALJs vary in the likelihood that they will rule for the agency, and, that, unsurprisingly, represented defendants are the defendants most likely to enjoy some degree of success in administrative proceedings.
The look and feel of the decisions is not dissimilar to securities laws decisions rendered by the district courts in length or language, though ALJs cite to different sources of law. An analysis of the decisions also documents the routine nature of much of what ALJs do; defaulting defendants who fail to respond to complaints, imposing sanctions on brokers and investment advisers who have already been adjudged to commit securities fraud in federal court, and so on. Adding high profile insider trading and other cases of first impression to this mix is different from ordinary ALJ work, but those cases are not yet a common part of their dockets.
Corporate lawyers have traditionally looked to equitable principles—especially fiduciary obligations of loyalty and care—to solve the principal-agent problems posed by the separation of ownership and control in the modern corporation. Courts in the state of Delaware apply these equitable principles as standards (and not rules) concerned with responsibility and fairness. Federal criminal and securities cases, which interpret hazy common law terms like “fraud” and “intent” also feature, at least traditionally, a number of judges, often located in Manhattan, who subject the government to principles-based standards of propriety.
But federal agencies, and the ALJs who work for them, unlike the Delaware or federal courts, make their decisions about policy constrained by procedure, rather than fairness. ALJs who made sweeping equitable rulings against their agencies would likely be quickly reversed on appeal to the commissioners for whom they work. They are generally uninterested in the fuzzy equitable mores of the chancery and more focused on the requirements of process set forth in the securities laws as interpreted by the Commission, and, as a more general matter, the corpus of requirements of administrative procedure. This procedure-based orientation is importantly different from the equity-based hopes that the corporate bar place in the judges who would hear their cases. It is this cultural difference—between sweeping equitable relief, and more narrow process policing, that explains much of the alarm evinced by the corporate bar over SEC administrative proceedings.
The full article is available for download here.
