In the past two years, the SEC has drastically reduced the number of contested cases it has sent to its internal administrative law judges (“ALJs”). The number of cases sent to these judges had been increasing since 2010, when the SEC gained new powers under the Dodd-Frank Act.

From then on, and especially after the SEC decided in 2014 to expand the use of the ALJs to contested cases for crimes such as insider trading, members of the legal community have argued that it would be very hard for these judges to remain unbiased given the fact that one of the parties in every case they review is responsible for their income — in a much more direct way than a state or federal court judge. Additionally, the ALJs were generally appointed by a lower-level employee than one might expect (an issue which has led to Constitutional challenges, which are outside the scope of this article).

The Wall Street Journal analyzed the cases sent to the ALJs from October 2010 to March 2015, and found the SEC won 90% of these cases. While this could be attributed to the fact that the SEC does a thorough job investigating before charging defendants with a crime, the fact that the SEC was victorious only 69% of the time in federal courts casts some doubt on this. In fact, the Wall Street Journal has reported that in spring of 2015, the SEC director of enforcement, Andrew Ceresney, shifted the policy of the Commission back to putting contested cases in federal court. Since then, the SEC has been using the federal court system for contested charges. From October 2014 to September 2015, the SEC used the ALJs in 28% of the contested cases, whereas the year before ALJs heard 43%.

Tags: Jack Hewitt, Joseph Pastore, Paul V. May, Securities Arbitration, Securities Litigation