Watchdog clears U.S. SEC's in-house judges of bias allegations

(Reuters) - An investigation into allegations that U.S. Securities and Exchange Commission in-house judges are prodded to favor the agency in enforcement cases did not uncover evidence to support those claims, the agency’s watchdog said in a report.

The investigation by the SEC’s Office of Inspector General followed a May 6, 2015 story in the Wall Street Journal, suggesting that chief SEC administrative judge Brenda Murray tried to sway agency judges to rule against defendants.

Murray’s remarks to the judges, however, were not related to outcomes in cases they handled, but whether their decisions were timely and procedurally sound, according to a 26-page report sent by SEC Inspector General Carl Hoecker to SEC Chair Mary Jo White on Feb. 9.

The report comes amid a debate about the SEC’s use of its own in-house courts to resolve enforcement cases. The 2010 Dodd-Frank Wall Street reform law gave the SEC greater powers to file cases against a wider universe of defendants before its own agency judges, who are on the SEC’s payroll, as opposed to federal courts.

That has raised the ire of defense lawyers, who have filed a number of lawsuits that raise constitutional concerns about how the judges are appointed. Administrative proceedings also afford clients less protections, such as limited discovery and no juries, defense lawyers say.

Former SEC administrative law judge Lillian McEwen was quoted in The Wall Street Journal story as saying that Murray had criticized her and other judges for ruling too frequently on behalf of defendants.

McEwen’s other complaints included that Murray issued directives on how to rule on motions and pressured judges to require that defendants prove that they did not engage in the SEC’s alleged conduct, instead of the SEC having to prove its case. The practices drove McEwen to retire in 2007, she said.

The SEC inspector general’s office interviewed 15 witnesses, including Murray, McEwen and other SEC judges, according to its report

Murray told investigators that McEwen’s allegations were “completely false,” according to the report. Murray did not care if the in-house judges were loyal to her, but rather that they “tried to bring distinction” to their roles by writing good decisions and holding fair hearings, the report said.

“She wins,” said McEwen when reached by phone on Tuesday and told of Murray’s remarks. “And the SEC will continue to do what it does.”

An SEC spokeswoman declined to comment immediately.

Reporting by Suzanne Barlyn; Editing by Jonathan Oatis