November 5, 2014 / 6:47 PM / 4 years ago

U.S. judge criticizes SEC use of in-house court for fraud cases

NEW YORK (Reuters) - A Manhattan federal judge who gained prominence by rejecting U.S. Securities and Exchange Commission bank settlements urged the agency on Wednesday to reconsider becoming “a law unto itself” by increasingly bringing cases in-house instead of in court.

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

U.S. District Judge Jed Rakoff in a speech warned the SEC’s growing use of administrative proceedings to handle securities fraud cases, such as insider trading, posed “dangers” to the impartial development of the law.

Under the 2010 Dodd-Frank law, the SEC gained power to pursue more enforcement cases in-house, whereby trials are decided by staff SEC judges rather than juries.

While the agency might be tempted to turn to SEC administrative judges to avoid trial defeats like in the insider trading action against billionaire Mark Cuban, the courts have “functioned very effectively for decades,” Rakoff said at a securities regulation conference in New York.

“I see no good reason to displace that constitutional alternative with administrative fiat,” he said.

SEC spokesmen did not respond to requests for comment.

In recent years, Rakoff has emerged as a prominent SEC critic. In 2011, he rejected the regulator’s $285 million settlement with Citigroup Inc, saying he had no idea whether it was fair. While an appellate court overturned that ruling in June, Rakoff fueled a debate over whether to let defendants settle claims without admitting or denying wrongdoing.

His speech on Wednesday followed the filing of two lawsuits last month by activist hedge fund manager Joseph Stilwell and a Canadian accused of insider trading in Herbalife Ltd challenging the SEC’s use of administrative proceedings

Rakoff presided over a similar 2011 challenge by former Goldman Sachs Group Inc director Rajat Gupta to an administrative SEC insider trading case. The SEC later dismissed the case and re-filed it in court.


In the fiscal year ending Sept. 30, it launched 235 administrative proceedings, up 10.3 percent from 2013, the SEC said.

The increased number of administrative cases coincided with a series of well-publicized insider trading losses in court, including the Cuban case in 2013 and in June in a lawsuit against Wynnefield Capital Inc fund manager Nelson Obus.

Rakoff cited both cases in noting the SEC last fiscal year won only 61 percent of federal court trials. By contrast, it had a “hardly surprising” 100 percent win record administratively last year, he said.

Beyond any fairness issues defendants face, Rakoff said the trend could hinder “the balanced development of the securities laws.”

Unlike federal judges whose decisions are subject to a total appellate review, Rakoff said rulings from SEC administrative judges’ are given deference on appeal and presumed correct unless unreasonable.

Rakoff urged the SEC to “consider that it is neither in its own long-term interest, nor in the interest of the securities markets, nor in the interest of the public as a whole, for the SEC to become, in effect, a law onto itself.”

Reporting by Nate Raymond in New York; Editing by Marguerita Choy

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below