The Seventh Circuit has held that federal district courts do not have subject matter jurisdiction over challenges to ongoing SEC administrative enforcement proceedings where the challenger is already a party to those proceedings. Instead, a party to a pending administrative proceeding must defend against the proceeding and then seek review
New York District Court Appears to Sustain Attack on SEC Administrative Proceedings
A federal District Judge in the Southern District of New York appears to have conditionally sustained a facial challenge to an administrative enforcement proceeding conducted by Administrative Law Judges (“ALJs”) of the Securities and Exchange Commission. In an August 3, 2015 decision in Duka v. SEC, 1:15-cv-00357, Judge Richard M. Berman held that he had subject-matter jurisdiction to entertain the plaintiff’s application to enjoin the administrative proceedings, that SEC ALJs are “inferior officers” of the United States for purposes of the U.S. Constitution’s Appointments Clause, and that the ALJs at issue had not been appointed by the SEC Commissioners in seeming violation of the Appointments Clause. However, the court gave the SEC seven days to cure the defect “by having the SEC Commissioners issue an appointment or preside over the matter themselves.”
Constitutional Challenges to SEC Administrative Proceedings
May defendants charged in SEC administrative proceedings challenge the constitutionality of those proceedings in federal district court? The determination of whether district courts have subject matter jurisdiction over such challenges has become the critical prelude in the ongoing controversy over the SEC’s seemingly arbitrary use of its “home court” alternative to pursue claims and remedies against violators of the federal securities laws.
Dodd Frank gives the SEC the power to impose civil penalties in cease-and-desist proceedings before an administrative law judge (ALJ) against any person who violates federal securities laws. Previously, the SEC could only bring such cases in federal court, except against persons associated with regulated entities. Now, the SEC has the ability, and complete discretion, to prosecute these claims and seek the same relief administratively or in district court. Administrative proceedings create significant disadvantages for defendants who face accelerated hearing schedules and lack important procedural rights they would have the ability to assert in district court.
Goodyear Pays for the Acts of its Subsidiaries in a $16 Million FCPA Settlement
Following recent trends, the U.S. Securities and Exchange Commission brought an administrative proceeding against a U.S. issuer for the alleged corrupt activities of its foreign subsidiaries. Earlier this week, Goodyear Tire & Rubber Company agreed to pay the SEC over $16 million to settle charges alleging that it violated the accounting provisions of the Foreign Corrupt Practices Act by failing to prevent or detect over $3 million in bribes paid by its Angolan and Kenyan subsidiaries. Goodyear also must report its compliance remediation efforts to the SEC annually for the next three years.
The SEC’s Charges
According to the SEC’s cease and desist order, between 2007 and 2011, Goodyear’s downstream subsidiaries in Kenya and Angola bribed employees of both private and government-owned companies to obtain business. The subsidiaries also bribed police, tax authorities and other local officials, though the SEC’s order did not allege the purposes of those payments. The bribes “were falsely recorded as legitimate business expenses in the books and records of the subsidiaries, which were consolidated into Goodyear’s books and records.”
District Court Rejects Constitutional Challenge to SEC Administrative Proceedings
We recently wrote that critics, including Judge Jed Rakoff, have been questioning the SEC’s policy of increasingly bringing enforcement actions in its administrative forum rather than federal court. We noted that several cases had been filed recently that challenged the constitutionality of the SEC’s administrative proceedings. The first of those cases has now been decided: In Chau v. SEC, Judge Kaplan of the U.S. District Court for the Southern District of New York ruled that the court lacked subject-matter jurisdiction to hear an action to enjoin an SEC administrative proceeding on constitutional grounds.
Critics Question SEC’s Increasing Use of Administrative Enforcement Proceedings
The SEC is increasingly bringing enforcement actions in its administrative forum rather than federal district court, setting the stage for a legal and policy battle over this tactic.
The SEC’s approach has been made possible by a series of legislative enhancements to the agency’s enforcement powers that began with the passage of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The result of these enhancements has been to greatly expand the remedies available to the Commission in an administrative proceeding beyond its traditional tool, the cease and desist order. The latest expansion occurred with the passage of the Dodd-Frank Act in 2010, which authorizes the Commission to seek civil money penalties against non-regulated persons or entities (i.e. not associated with investment advisors, brokerage firms, and other registered entities). Prior to Dodd-Frank, the SEC could file such actions only in federal court. This new enforcement authority gives the SEC a powerful incentive to bring more cases in the administrative forum.