Gray Financial Group Inc. is suing the Securities Exchange Commission over the agency’s use of its own administrative law judges instead of federal ones when trying enforcement cases. The lawsuit contends that the regulator’s administrative proceedings are a violation of the U.S. Constitution because the SEC judges are distanced from presidential supervision by at least two layers of tenure protection. The investment firm wants to block the Commission’s administrative action against it.
The regulator is probing whether the firm violated Georgia law when it invested in alternative investment for public pension funds in 2012. The plaintiff’s complaint said that the SEC sent out a Wells notice in 2014 noting that it found that Gray Financial did violate specific federal securities laws. It also said that even though there was no proof of related investment losses, the agency had started a confidential probe into the company.
The investment firm said that even though no formal charges were ever made, the nature of the probe was made public, which, it claims, compelled certain clients to terminate their business relationships with Gray Financial. This led to a decline in firm revenue.
SEC Administrative Proceedings
Under the Dodd Frank Act, the Commission can bring in unregistered persons and firms into administrative proceedings. Recently, however, SEC member Michael Piwowar asked the agency to be more transparent when making a decision about whether to try enforcement cases with its own judges. Piwowar believes the defendants’ rights are more limited in administrative settings as opposed to in federal court.
Just in the latest fiscal year, the regulator submitted 57% of its enforcement cases in district court, 43% in administrative forums, which are presided over by administrative law judges retained by the Commission. The SEC wins the majority of its cases when there is an administrative law judge presiding.
Speaking last week at the SEC Speaks conference hosted by the Practising Law Institute, Piwowar said that to get around the perception that the commission is bringing the harder cases to its judges and to ensure fair and equal treatment for all, the SEC should put out guidelines for how the way it decides which cases should be pursued in federal court and which ones in an administrative forum.
The SSEK Partners Group is an institutional investor fraud law firm.
Atlanta investment firm sues SEC to challenge in-house judges, Reuters, February 19, 2015
SEC sued for using its own judges, Investment News, February 20, 2015
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