Thursday, September 17, 2015

Mark Cuban Joins Increasing Clamor Against SEC Administrative Proceedings

By Amanda Maine, J.D.

Businessman Mark Cuban, calling himself a “first-hand witness to and victim of SEC overreach,” has filed an amicus brief in the Eleventh Circuit urging it uphold an injunction of an SEC administrative proceeding against Charles H. Hill, Jr. Cuban drew on his own experience during the SEC’s unsuccessful insider trading action against him to argue that the use of administrative law judges in complex litigation such as insider trading cases is unfair and against the public interest (Hill v. SEC, September 15, 2015).

Background. The SEC instituted administrative proceedings against real estate developer Charles L. Hill, Jr. in February 2015 alleging that he was involved in an insider trading scheme. Hill filed a motion in the district court for the Northern District of Georgia to declare the administrative proceeding unconstitutional and to enjoin the administrative proceeding from occurring until the court issues its ruling. The court found that Hill was likely to succeed on the merits of his case and enjoined the SEC’s administrative proceedings against him. The SEC appealed the court’s order to the Eleventh Circuit (see Securities Regulation Daily Wrap-Up for September 11, 2015 for coverage of Hill’s appellate brief).

Undermining independence. In his brief, Cuban argued that subjecting Hill to an SEC administrative proceeding would cause irreparable harm because such proceedings are “inherently biased.” The SEC has maintained that its ALJs are not “officers,” which would render their method of appointment unconstitutional under the Appointments Clause, but are “employees.” Cuban pointed out that as “mere employees” of the SEC, ALJs cannot perform their duties within the constitutional and congressional dictates of impartiality and fairness. In administrative proceedings, “the SEC prejudges the case and then essentially asks its employee, the ALJ, to validate its judgment,” according to Cuban.

Cuban contrasted the proceeding against Hill with the SEC’s insider trading case against him, which was brought in federal district court and not before an ALJ. The presiding judge in his case was not a mere employee of either litigant, but an independent officer with the power and stature to ensure a fair proceeding, Cuban observed, and his adversary played no part in choosing his own judge. The jury returned a verdict in favor of Cuban in October 2013.

Lack of procedural rights. Cuban also cited his experience litigating against the SEC to criticize the SEC’s rules of practice for administrative proceedings as “woefully inadequate” for complex cases such as insider trading cases. He noted that a trial in an SEC administrative proceeding must take place within four months of the initiation of the litigation, where discovery alone took nearly three years in the SEC’s case against Cuban. There is also no way under the rules of practice to narrow the charges through motions to dismiss, as well as no interrogatories, no requests for admissions, no depositions, and no means of targeting document requests.

Cuban also pointed out that by litigating his matter in federal court, he was able to benefit from a motion to dismiss and from expansive discovery. While the district court’s granting of his motion to dismiss was overturned on appeal, the opinions addressing his motion provided the operation and boundaries of the SEC’s “untested theory on insider trading” that would not be available in an administrative proceeding, he explained. He was also able to take advantage of the broad range of discovery devices available under the Federal Rules of Civil Procedure, including depositions from witnesses that directly contradicted the SEC’s witnesses’ testimony. He would be unable to do so in an administrative proceeding, Cuban said. In addition, Cuban pointed out that the federal jury that returned a verdict in his favor on all charges was able to assess the evidence impartially, which a “structurally-biased ALJ” would be unable to do.

Inadequate appeals process. Cuban contended that the process for appealing the outcome of an administrative proceeding would not remedy irreparable harm. He argued that there is no substitute for a live assessment of witnesses by a neutral fact-finder and that the same Commission that reviews the ALJ’s decision views the ALJ as a “mere employee.” Even if eventually successful on appeal, a respondent in an administrative proceeding would have spent substantial resources in both time and money to arrive at the valid forum of a federal court, according to Cuban.

Public interest. Finally, Cuban argued that staying the administrative proceeding against Hill while the court considers his constitutional claims would not harm the public interest; in fact, the public interest would be harmed by the continued unpredictability created by the SEC’s use of administrative proceedings in complex cases. Noting that there are several constitutional challenges currently winding their way through the federal court system, he urged the Eleventh Circuit to uphold the lower court’s injunction to prevent the SEC from “cram[ming] more of these cases…into the administrative forum.”

The case is No. 15-12831.

No comments: