The SEC and the Cascade of Evasions

SECA recent WSJ editorial, The SEC as Prosecutor and Judge, comments on the SEC’s hints that it will be shifting its enforcement of insider trading laws from the courts to administrative adjudications:

A year after vowing to take more of its law-enforcement cases to trial, Securities and Exchange Commission officials now say the agency will increasingly bypass courts and juries by prosecuting wrongdoers in hearings before SEC administrative law judges, also known as ALJs. “I think you’ll see that more and more in the future,” SEC Enforcement Director Andrew Ceresney told a June gathering of Washington lawyers, adding that insider trading cases were especially likely to go before administrative judges.

Ceresney undoubtedly thinks this will be efficient — not to mention advantageous in avoiding those pesky critters known as judges and juries.

The SEC has recently suffered some losses at trial, and these have occurred almost entirely in insider trading cases. Is the shift from courts to administrative proceedings a response to these losses?

Ceresney protests that the SEC is not evading the courts. According to a report by BNA, although Ceresney admitted that “more insider trading cases” will be handled by ALJs, he simultaneously “stressed that this is not a reaction to the commission’s recent trial losses.”

Perhaps the SEC is not merely responding to its losses, but the underlying reality is obvious enough. According to Ceresney, one of the factors that will lead the SEC to chose administrative adjudication is “whether the case would play well before a jury.” No kidding.

The SEC clearly hopes to use administrative proceedings to evade the constitutional right to jury. When discussing the recent trial losses suffered by the SEC, Ceresney defended its evasion by talking about the SEC as if it were a victim of unfortunate circumstances in court — circumstances that ordinarily are called juries. He said that insider trading actions are “challenging cases for us.” “Among other problems, the evidence is ‘typically circumstantial’ and the SEC cannot produce ‘victim witnesses’ to sway juries. He also said that juries — perceiving the SEC as similar to criminal authorities — apply a ‘higher standard than the preponderance of the evidence standard’ to commission cases.”

But the juries have a point. The SEC, in reality, is acting as a prosecutor. Notwithstanding the pretense of “civil penalties” — a strange oxymoron — the SEC candidly proclaims on its website that “the SEC is a law enforcement agency.” Indeed, its proceedings are government enforcement actions that seek to punish or correct, and they thus are criminal in nature. No surprise, then, that juries expect more than a civil burden of proof. Rather than a problem, this is a reminder of why juries are valuable.

Whatever the SEC’s Enforcement Director says in defense of moving insider trading cases out of the courts, this policy is an avoidance of the constitutional right to a jury. The Constitution guarantees juries in the trial of all crimes, and the Sixth Amendment beefs this up by guaranteeing a jury in all criminal prosecutions. The Seventh Amendment adds jury rights in “suits at common law” — that is, in civil cases outside of equity and admiralty — where the amount in dispute exceeds $20. These constitutional provisions cover the full range of SEC proceedings to collect damages or penalties, criminal or civil. Nonetheless, the SEC thinks it can rely on statutory authority to escape the Constitution’s jury rights.

Of course, the SEC has long used its administrative proceedings to dodge judges and juries, and as with so many other administrative evasions, the courts have acquiesced. They have whittled away jury rights to the point that juries tend to be available only at the discretion of the enforcing agency. Therefore, even in many profoundly serious cases, Americans can no longer rely on enjoying this right. No wonder that agencies such as the SEC are so confident they can escape the necessity of persuading judges and juries.

Nonetheless, when the SEC responds to its losses in the courts with a further evasion of judges and juries, it reveals the cascading nature of such evasions. Agencies are not known for graciously accepting their failures, and they therefore rarely remain satisfied with their initial run-around of the courts. Thus, although all binding administrative adjudications are evasions of judges and juries, the problem is not stationary. When agencies are dissatisfied with court proceedings, they tend to seek further evasions, until they can largely avoid going to court. By now, as a result, the SEC considers judges and juries merely optional.

And, of course, it is not just a matter of judges and juries. By escaping these lawful adjudicators, the SEC also escapes the full range of procedural niceties that are known as the due process of law. In its place, the SEC offers only administrative process — what in administrative doublespeak is called “all the process that is due.”

This is the brave new world of constitutional rights. The government can choose to evade judges, juries, and almost all procedural rights, thus rendering your rights illusory — while smarmily offering the reassurance that you are getting what process is due. Making it even worse, when the government wants yet further circumvention of your rights, the courts give their blessing.

Of course, you may think this is not so bad for insider traders. But wait until it is applied you in other matters. Having remained silent about the SEC, you will have difficulty protesting when other agencies evade your rights.

The ever widening evasion of constitutional rights is worrisome. Administrative agencies, such as the SEC, enforce important laws, but this is no justification for their evasion of rights — let alone the cascading evasions that threaten to make judges and juries nearly irrelevant. At one point or another, the judges will have to face up to the expanding evasions, and the longer they wait, the more difficult their task will be.

Philip Hamburger

Philip Hamburger is the Maurice and Hilda Friedman Professor of Law at Columbia Law School. He is a scholar of constitutional law and its history, and his publications include Separation of Church and State (Harvard 2002), Law and Judicial Duty (Harvard 2008), Is Administrative Law Unlawful? (Chicago 2014), and numerous articles. Before coming to Columbia, he was the John P. Wilson Professor at the University of Chicago Law School. He also has taught at George Washington University Law School, Northwestern Law School, University of Virginia Law School, and the University of Connecticut Law School.

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  1. R Richard Schweitzer says

    “This is the brave new world of constitutional rights. The **government** can choose to evade judges, juries, and almost all procedural rights, thus rendering your rights illusory — while smarmily offering the reassurance that you are getting what process is due. Making it even worse, when the **government** wants yet further circumvention of your rights, the courts give their blessing.”
    [** supplied]

    A degree of obfuscation results from identifying and personifying “government” rather than the actual parties, the **administrators** of the Federal Administrative State; the “managers,” members of the broader managerial class in the process of establishing social and economic dominance. These actions are being taken by managers, for objectives selected by, and suitable to the interests of, those managers. To characterize those actions as “government actions” is to confuse the *use* of the mechanisms of government with the actions and the objectives of a management class.

    The mechanisms of the federal government are strained by the uses demanded by the managers of the Federal Administrative State to the extent they are losing capacity for their constitutionally delineated functions. The legal system has become so overloaded with issues resulting from Rules of Policy promulgated by the managerial class that its functions in the determinations and applications of law are impaired.

    All of this results from human actions, failures to act, inabilities to act and disaffection. “Government” is not a cause or acting party. It may appear to be by reason of the use made of its mechanisms; but the real causes lie in human conduct.

  2. Gregg Smith says

    Prof. Hamburger is right on the money.

    And, while his focus in this piece is the SEC, the problem is pervasive at all levels of government, local, state and federal. Increasingly the executive branch is seizing (and/or the other two branches are ceding) power and citizens are being caught up. Sure, maybe it’s the SEC today, in a far away DC insider trading case. Tomorrow it is your Aunt Susie, the plumber, who is facing your state’s regulatory board for license revocation for her innovative new business plan. Tomorrow it is your son who faces 18 years of child support determined by an administrator without resort to the courts.

    The separation of powers is supposed to mean something.

    • R Richard Schweitzer says

      “The separation of powers is supposed to mean something.”

      Perhaps – when one of the functions of a particular power in its exercise is to offset, balance or check the exercise of other powers; **and** when that function is consistently applied.

      Probably more important is that the **allocation** of “power” (the acceptance of or consent to authority) “is supposed to *mean* something” (to have specific intent and objective). It should have that “meaning” (and that meaning only) to those individuals to whom the allocations are made. The departures begin and metastasize as those to whom the allocations are made ascribe and establish “meanings” suitable to their own motivations and interests.

  3. libertarian jerry says

    It must be obvious that in the second decade of the 21st. Century that the Constitution of the United States is a dead letter and has been superseded by the administrative state. Most of the original intent of the founding fathers,at least where it counts, have been either ignored,miss interpreted,amended or twisted to make the original Constitution meaningless.The fact is that the average American is a numbered walking corporation. The sovereign citizen is,by and large,a thing of the past. Instead of rights we now have to ask permission. With the 14th,16th and 17th Amendments along with the New Deal,the Great Society and the Patriot Act the American people have become tax serfs for the elites that hold our debt. The sad part of the story is that a voting majority of Americans either through ignorance or coveting voted away their liberties for the sake of security. And in the end this voting majority saddled the rest of us and posterity with the status of debt serfs tied to an unsustainable national debt. Something that the founders tried to avoid at all costs. For all intents and purposes to the 3 branches of government has been added a 4th branch. That being the administrative branch. Whether the IRS,the SEC,the EPA or the hundreds of other bureaucracies on all levels we can kiss our liberty goodbye.

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