The Securities and Exchange Commission's Shift to Administrative Proceedings Kayvan B. Sadeghi and Justin D. Hoogs

• Pages: 133-148

133

CHAPTER 7

The Securities and Exchange

Commission’s Shift to

Administrative Proceedings

Kayvan B. Sadeghi and Justin D. Hoogs

Securities and Exchange Commission (SEC) administrative proceedings

are governed by a shifting legal and regulatory framework. In 2015, the

SEC issued guidance addressing how it determines whether to bring any

given case in an administrative proceeding rather than in federal court,

and it also proposed revisions to its existing Rules of Practice governing

the conduct of such proceedings. In 2016, the SEC adopted final amend-

ments to its Rules of Practice. To understand the 2015 guidance and 2016

rule changes, one must consider the SEC’s increasing use of administrative

proceedings and the criticism and legal challenges that followed.

In recent years, the SEC has notably shifted toward bringing more

insider trading enforcement actions before SEC administrative law judges

(ALJs) in lieu of bringing civil enforcement actions in federal court.

1

In

June 2014, the trend was confirmed by Andrew Ceresney, then director of

the SEC Division of Enforcement, who explained that the benefits to the

SEC include leverage in settlement negotiations and “a more streamlined

1 See Brian Mahoney, SEC Could Bring More Insider Trading Cases In-House,  (June11,

2014), http://www.law360.com/articles/547183/print?section=securities.

Loewenson56940_Ch007.indd 133 23/03/17 9:45 AM

134 CHAPTER  The SEC’s Shift to Administrative Proceedings

proceeding” before what he referred to as “a sophisticated trier of fact.”2

Although he denied any connection between the two, the shift also followed

a series of high-profile insider trading trial losses by the SEC in federal

court beginning in 2013.3

This shift toward using administrative proceedings for insider trading

cases became apparent in fiscal year 2014 when the SEC brought about

23% of insider trading matters as administrative proceedings.4 This was a

marked jump from the prior three years, when the SEC brought 15%, 10%,

and 2% of insider trading matters as administrative proceedings in 2011,

2012, and 2013, respectively.5 The rising trend of insider trading matters

brought by the SEC as administrative proceedings continued to grow in

fiscal years 2015 and 2016, during which the SEC brought approximately

30% and 35% of insider trading matters, respectively, as administrative

proceedings.6

The dramatic increase in the use of administrative proceedings, not

just in insider trading cases, sparked criticism and legal challenges, and it

prompted guidance from the SEC as to the factors weighed in determining

where to file and rule changes to address some of the concerns raised by

defendants. This chapter discusses the legal framework for SEC administrative

2 Id.

3 In 2013, the SEC lost its long-running enforcement action against Mark Cuban. See SEC

v. Cuban, No. 08-CV-02050-D (N.D. Tex. 2008). That year, defendants also defeated insider

trading claims in SEC v. All Know Holdings Ltd., No. 11-CV-8605 (N.D. Ill. 2011); SEC

v.Kovzan, No. 11-CV-2017-JWL (D. Kan. 2011); SEC v. Jensen, No. 11-CV-05316 (C.D. Cal.

2011); and SEC v. Tang, 09-CV-05146 JCS (N.D. Cal. 2009). That losing streak continued

in 2014, with defendants prevailing at trial in eight more cases, including high-profile

losses for the SEC in SEC v. Obus, 06-CV-03150 (S.D.N.Y. 2006), and SEC v. Moshayedi,

No. 12-CV-1179 (C.D. Cal. 2012).

4 SEC, Select SEC and Market Data—Fiscal 2014, https://www.sec.gov/reportspubs/select

-sec-and-market-data/secstats2014.pdf (SEC brought twelve of fifty-two insider trading

matters as administrative proceedings in FY 2014).

5 SEC, Select SEC and Market Data—Fiscal 2011, https://www.sec.gov/reportspubs/select

-sec-and-market-data/secstats2011.pdf (SEC brought nine of fifty-seven insider trading

matters as administrative proceedings in FY 2011); SEC, Select SEC and Market Data—

Fiscal 2012, https://www.sec.gov/reportspubs/select-sec-and-market-data/secstats2012.pdf;

SEC, Select SEC and Market Data—Fiscal 2013, https://www.sec.gov/reportspubs

/select-sec-and-market-data/secstats2013.pdf.

6 SEC, Select SEC and Market Data—Fiscal 2016, https://www.sec.gov/reportspubs/select

-sec-and-market-data/secstats2016.pdf.

Loewenson56940_Ch007.indd 134 23/03/17 9:45 AM