A case now before the U.S. Supreme Court takes aim at a long-standing system in which Wall Street's regulator, not regular courts, hears cases involving civil misdeeds by financial advisors, brokers and other business professionals.
Critics of the system contend that the Securities and Exchange Commission acts as "prosecutor, judge and, in effect, executioner" when advisors, broker-dealers and other financial professionals are suspected of wrongdoing.
So attorney Gregory Garre told the high court on Nov. 7 in arguments on behalf of Michelle Cochran — an accountant who became entangled with the SEC in 2016 over allegations that she failed to comply with federal auditing standards. Cochran's case,
Something much larger is at stake. A ruling in the plaintiff's favor could curb the authority that SEC judges wield over advisors, broker-dealers and other financial professionals accused of going astray. The SEC's three-pronged mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. The independent federal agency oversees more than 14,800 investment advisors who collectively manage roughly $128 trillion in assets for institutional and retail clients.
The lawsuit comes in tandem with a similar case that questions the authority of in-house judges at the
Critics of in-house judges at the SEC have long argued that they are too close to the investigators who bring allegations of breaches of fiduciary duty, insider training and other violations. In Garre's words, the SEC's ability to bring cases before administrative law judges confers "an extraordinary home court advantage."
Indeed, the judges seldom rule against the SEC in cases involving financial advisors, accountants, broker-dealers or similar professionals.
Kellam Conover, a lawyer representing three investment advisors in a
But Lucia's battle wasn't over. Because his case had only concerned the system for appointing judges, he still had to go back to the SEC to defend himself against the accusations concerning misleading statements. Nearly bankrupted by his first court fight, according to the brief,
Conover's brief contends that clients rarely have the resources needed for a protracted fight against the SEC.
"The unsparing reality is that, normally, the only real choice defendants in SEC administrative actions have is to settle," the brief says.
Various advisors, fund managers and their representatives say they'd prefer to have their day in a regular court. Another
That brief was filed on behalf of the Investor Choice Advocates Network, a nonprofit law firm dedicated to fighting what it considers SEC overreach, as well as on behalf of a trio of prominent businessmen: billionaire entrepreneur Mark Cuban — who was exonerated in 2013 in an insider-trading case — along with fund managers Phillip Goldstein and Nelson Orbus, who have had their own run-ins with the SEC. Nicolas Morgan, the counsel of record on the brief, said he feels strongly that defendants' rights are best protected in the regular court system. But he won't go so far as to say SEC judges have no role in the federal government.
Morgan, the founder and president of the Investors Choice Advocates Network, argues that in-house judges should still have the responsibility of deciding what punishments — typically fines or disbarment — are warranted after a district court has found advisors, brokers and other professionals in violation of SEC regulations. He said defendants could still choose to have their cases heard by the SEC's administrative law judges. But most defendants, he predicted, would prefer the regular court system and its strictly enforced standards of due process, which govern everything from what sorts of evidence can be considered to when procedural deadlines can be extended.
Morgan noted that it was a jury — not an SEC judge — that found Cuban not guilty in his insider-training case, which involved accusations that he relied on
The lawyers in the Cochran case are hoping that a favorable decision by the Supreme Court will give them a chance to appear in a federal court. The accountant's case has moved well beyond its origins into constitutional territory. The SEC brought its administration action against Cohran for alleged accounting violations in 2016. An SEC judge found her liable the following year, fined her $22,000 and barred her from practicing accounting before the SEC for five years.
Cochran's Supreme Court case now questions why SEC judges can be kicked out only by the Merits System Protection Board, which protects federal employees from decisions based on partisan politics. Critics argue that in-house judges, because they are in fact extensions of the executive branch, should ultimately be answerable to the U.S. president. The current system, they contend, unconstitutionally insulates them from presidential removal and violates the separation-of-powers doctrine.
The SEC, which did not respond immediately to requests for comment, centers its arguments largely in the Dodd-Frank Act, the 2010 law that curtailed excesses that led to the 2007-09 financial crisis. Under Dodd-Frank, defendants can appeal an SEC judge's decision in a federal appellate court. But that's only after their cases have gone through the SEC's system.
Peggy Little, senior litigation counsel at the New Civil Liberties Alliance — a nonprofit group representing Cochran — noted that even if Cochran wins before the Supreme Court, she will still have to make her constitutional claims in district court. Should she eventually succeed there, the change in judicial practices will most likely be far smaller than many fear.
"That would mean the SEC could only initiate actions in district court," Little said, "which isn't a big deal, because that's what they did for decades before Dodd-Frank."
