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Welcome to the SEC’s ‘Hotel California’ Docket

Russ Ryan
Senior Litigation Counsel

November 28, 2022

Questioning a government lawyer earlier this month, Supreme Court Chief Justice John Roberts referenced “a series of cases that are a constellation around some fairly basic propositions” concerning agencies like the Securities and Exchange Commission and Federal Trade Commission.[1]  One such proposition is that agencies should do the jobs that Congress has assigned to them.

Case in point:  A backlog of cases languishing on the SEC’s administrative adjudication docket.  The backlog stems from an ill-considered policy decision by the Obama-era SEC to prosecute as many enforcement cases as possible in the agency’s in-house administrative tribunals rather than in federal courts.[2]

That policy shift ensured that cases would be decided initially by SEC employees called administrative law judges (ALJs)—with appeals taken to the SEC itself—rather than by juries overseen by independent federal judges.  Only after years of in-house litigation could accused parties appeal to real courts, which would then apply deferential review standards favorable to the SEC.  Unsurprisingly, the SEC’s win-loss record using its home-court system is significantly better than in court.[3]

But like other SEC policy shifts at the time, the in-house adjudication gambit ultimately proved disastrous.  The Supreme Court in Lucia v. SEC ruled that SEC ALJs were unconstitutionally appointed,[4] effectively requiring the agency to relitigate more than 100 cases then pending on its in-house docket.[5]  The SEC settled some of those cases at fire-sale prices, but many went back to square one and remain pending today.

The Fifth U.S. Circuit Court of Appeals delivered the SEC another blow earlier this year in a case called Jarkesy v. SEC.[6]  Among other things, the court ruled that SEC in-house prosecution violates Seventh Amendment jury trial rights and that SEC ALJs are unconstitutionally protected by multiple layers of protection from removal by the President.  (The SEC is expected to seek Supreme Court review.)

And what about the remaining in-house cases that were forced to reboot after the Supreme Court’s Lucia decision?  Most are at least six years old by now.  Nearly all were fully relitigated and briefed on appeal to the SEC commissioners well over a year ago—some of them two or three years ago.  But the last time the commissioners decided one was November 2020.

Since then, the SEC has obstinately refused to decide any of these cases, thereby indefinitely blocking litigants from appealing to real courts.  Call it the SEC’s version of the Hotel California:  The accused can check out but never leave.

SEC rules nominally commit the agency to decide appeals promptly, stating that even the most complex cases should “ordinarily” be decided within 11 months after completion of briefing.[7]  But the agency is cynically flouting those rules.  In each of its languishing appeals, the SEC has issued a succession of perfunctory orders granting itself ever more time to render a decision—in some cases more than a dozen extensions prolonging the outcome for years.  In one extreme example, the agency has granted itself more than 20 extensions since June 2020.[8]  The only explanation each time is that “in its discretion” the agency has determined that further procrastination is “appropriate.”

The SEC has always been ridiculously slow deciding in-house enforcement appeals, with a 2003 internal agency memo acknowledging that “[t]here is no justifiable explanation for such delays.”[9]  But the current work stoppage is egregious and unprecedented, and SEC leaders know they’re between a rock and a hard place.  Their predecessors overreached so grotesquely on in-house adjudication that courts will have little choice but to rein the agency in if it ever decides these stale cases.

Potential land mines for the SEC include its willful and systematic deprivation of jury trial rights, the obvious bias when it plays the role of both prosecutor and judge, and its April 2022 admission that agency prosecution staff had improper access to adjudication staff files in an unspecified number of cases.[10]  The SEC’s current commissioners presumably are in no rush to invite judicial scrutiny into any of this.

Meanwhile, the SEC work stoppage is no vacation for litigants stuck in the agency’s Hotel California docket either.  Having endured years of SEC investigation and prosecution that bankrupted most of them, left their careers and reputations in tatters, and denied them jury trials, they languish in endless regulatory limbo as the agency dithers.  Time may be ripe for one or more of them to jump the gate and sprint to the nearest courthouse for help.

One potential option for trapped litigants would be to seek a writ of mandamus from the federal appeals court for the circuit in which they reside (or the DC Circuit).  Because their local circuit court would have jurisdiction over a petition for review if the SEC ever decided their case,[11] that court would also be a proper venue for seeking mandamus based on administrative foot-dragging.[12]

While a court might hesitate to direct the SEC how to decide its administrative case, the court might well give the SEC a very short window of time to decide the case upon penalty of dismissal.  Indeed, a court sufficiently troubled by the SEC’s inexcusable lassitude might conceivably dismiss the underlying administrative case outright on due process grounds, or as an appropriate remedy for the agency violating its statutory mandate to “proceed to conclude a matter presented to it” within “a reasonable time.”[13]

For decades, the SEC and other agencies have assured courts and litigants that the notoriously paltry due process protection they offer in their captive, home-court administrative tribunals is worth the deprivations because administrative adjudication is so much more streamlined and efficient, thereby producing prompt decisions.  The SEC’s Hotel California docket demonstrates exactly the opposite reality.

[1] Axon Enterprise Inc. v. FTC, No. 21-86, Oral Argument Transcript at p. 68 (Nov.. 7, 2022).

[2] See generally Joseph A. Grundfest, Fair or Foul?: SEC Administrative Proceedings and Prospects for Reform Through Removal Legislation, 85 Fordham L. Rev. 1143, 1146-47 & n.12 (2016); Alexander I. Platt, SEC Administrative Proceedings:  Backlash and Reform, 71 Bus. Law. 1, 8-9 (2016); Tyler L. Spunaugle, The SEC’s Increased Use of Administrative Proceedings:  Increased Efficiency or Unconstitutional Expansion of Agency Power? 34 Rev. Banking & Fin. L. 406, 410-13 (2015).

[3] See, e.g., Jean Eaglesham, SEC Wins with In-House Judges, Wall. St. J. (May 5, 2015) (noting SEC’s 90% success rate before its own ALJs from October 2010 through March 2015); Jenna Green, The SEC’s on a Long Winning Streak, Nat’l L.J. (Jan. 19, 2015) (noting agency’s 219-0 in-house success rate in 2014).

[4] 138 S. Ct. 2044 (2018).

[5]  See In re Pending Administrative Proceedings, Securities Act Rel. No. 10536 (August 22, 2018).

[6] 34 F. 4th 446 (5th Cir. 2022).

[7] See 17 C.F.R. § 201.900.

[8] In re The Robare Group, Ltd., SEC Admin. Proc. File No. 3-16047.

[9] Copy on file with author.

[10] SEC, Commission Statement Relating to Certain Administrative Adjudications (Apr. 5, 2022).

[11] See 15 U.S.C. § 78y(a).

[12] See generally Telecomm. Research & Action Ctr. v. FCC, 750 F.2d 70, 74-79 (D.C. Cir. 1984) (court of appeals has exclusive jurisdiction over mandamus petition to compel agency action due to unreasonable delay).

[13] 5 U.S.C. § 555(b).

Originally Published in Law360