The enforcement arm of the SEC took a big hit Wednesday as a federal appeals court has ruled that the use of in-house administrative judges by the U.S. Securities and Exchange Commission is unconstitutional. The surprise ruling comes just four months after another appeals court ruled that the appointment of the same judges is upheld by the constitution. What changed? And how does this affect the SEC?
The SEC Just Got Hit With A Major Blow. What’s Going To Happen?
Wednesday’s momentous ruling that the SEC’s in-house courts are unconstitutional is a major blow for the Securities and Exchange Commission. In 2010, Congress expanded the SEC’s power to bring claims through their own system. As a result, the SEC has seen a surge of cases come through its doors since then. Of those cases, the SEC boasts a whopping 90 percent win rate, but has also come under attack by defendants crying foul and saying the court system is unfair. Now, with that court system declared unconstitutional, what happens to those rulings?
To be precise, the appeals court found that the appointment of the judges within the court system is unconstitutional. The SEC’s judges are not constitutionally appointed, but rather hired from within an office of judges. As a government agency responsible for upholding securities law, the SEC’s judges must be appointed by the president, a court, or at least a department head. Previously, the judges were ruled as not inferior because they issued non-final decisions open to review by an SEC commissioner.
Regardless of the judges or how they were appointed, the SEC’s court has come under fire for being unfair overall. Defendants are literally at the mercy of the court. The administrative law judges can dole out any penalty they choose, including harsh fines, civil charges, and banning defendants for life from their industries. And while the SEC can’t bring criminal charges directly, the Department of Justice has the right to file criminal charges based on the same charges and their results in the SEC’s courts. And while the SEC is quick to issue verdicts, it spends years building cases. The cases move through the court on a lightning-fast schedule, giving the SEC a massive advantage. Defendants have no due process rights, no right to discovery, and no trial by a jury of peers. And before a defendant can appeal an SEC ruling, s/he must first exhaust all appeals through the SEC’s channels. In short, the SEC’s courts, there to protect the industry from people abusing securities law, may in fact be abusing those very laws themselves.
The U.S. Supreme Court generally takes cases where federal appeals courts disagree on rulings. And with two different courts giving two different verdicts for the SEC, this case looks to be headed to the Supreme Court. The thousands of appeals the SEC is about to be hit with will sit and wait while the case works its way through the highest court of the land. But while the issue at hand is the appointment of administrative law judges as constitutional or not, the focus of all this may be whether or not the lack of due process by the SEC courts is violating civil rights. And should the SEC lose, every case they ruled against can come under appeal.
Investors should follow this case closely, especially as companies appeal their own cases. A successful appeal by a company means millions in fines being returned and a victory against the SEC, both of which will boost share prices in a big way.
Watch Wochit news about US appeals court rejects SEC’s use of administrative law judges.
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