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Wimping out

6 August 2014 By Reynolds Holding

Wall Street’s lead watchdog looks awfully wimpy trying to duck federal court. The U.S. Securities and Exchange Commission is using its own administrative judges to hear more complaints, as the Dodd-Frank financial reform law permits. That may make lawsuits easier to win, but it weakens judicial oversight as well as suspects’ legal rights.

The SEC redoubled efforts to nail alleged fraudsters after missing Bernard Madoff’s Ponzi scheme a decade ago. It then proceeded to blow high-profile court trials against the likes of Citigroup banker Brian Stoker, pro basketball owner Mark Cuban and, after eight years of litigation, investment adviser Nelson Obus. And before begrudgingly changing his mind on Tuesday, U.S. Judge Jed Rakoff famously refused in 2011 to rubber-stamp the regulator’s $285 million settlement with Citigroup over dodgy CDOs.

So it’s understandable the SEC would seek to avoid such embarrassments with stripped-down hearings before commission-appointed administrative law judges. It pursued 70 percent of its cases in those forums last year, compared with just over 50 percent in 2009, the year before Dodd-Frank’s enactment. In June, it increased the number of such judges from three to five. Its enforcement director said they would be particularly busy hearing insider trading cases.

The strategy carries risks. Administrative proceedings don’t offer jury trials, don’t constrain certain questionable evidence and don’t recognize many other legal protections. Those flaws helped Rajat Gupta persuade authorities to move his insider trading case to federal court, though the former McKinsey boss was convicted anyhow. What’s more, judges rarely review such proceedings, increasing the potential for violations of legal rights.

Even if the SEC winds up winning more cases, using administrative hearings damages its credibility. They may be fine for mundane matters like broker-dealer spats. But high-stakes fraud litigation deserves the rigor of federal courts. Avoiding them suggests the watchdog lacks confidence in its cases.

The SEC has already started to put more muscle into enforcement, accepting, for example, Judge Rakoff’s advice to stop settling serious disputes without admissions of wrongdoing. The next step is for the commission to realize that stronger cases, not friendlier jurists, would best serve its interests.


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