Investment Adviser Files Appeal Challenging SEC's Administrative Forum

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By Yin Wilczek

Feb. 27 — The U.S. Court of Appeals for the Second Circuit may be the next federal appeals court to consider whether the SEC's use of its administrative forum is unconstitutional to respondents.

In a Feb. 13 filing, investment adviser Harding Advisory LLC and its chief executive officer Wing F. Chau asked the Second Circuit to review a district court conclusion in December that it had no jurisdiction to consider whether the commission violated Harding and Chau's constitutional rights by proceeding against them administratively over alleged misrepresentations involving a 2006 collateralized debt obligation.

There is an ongoing appeal filed by Houston hedge fund manager George Jarkesy in the U.S. Court of Appeals for the District of Columbia Circuit challenging the constitutionality of the SEC's administrative forum.

Concurrently, the SEC Feb. 23 agreed to review a finding by Administrative Law Judge Cameron Elliot that Harding and Chau violated federal securities laws.

New Dodd-Frank Powers 

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the SEC's enforcement powers in several respects, including giving it the authority to obtain monetary penalties in administrative proceedings against all individuals, not just those associated with regulated entities. The legislation also increased the amount of fines that the SEC can seek in administrative cases.

Defense attorneys have long expressed concern over the SEC's intent to proceed administratively rather than in federal court, noting that among other procedural disadvantages for respondents, discovery is sharply limited and administrative law judge findings are reviewed by the commission itself.

SEC Commissioner Michael Piwowar said in a speech Feb. 20 that the agency should draft guidelines for conducting enforcement proceedings, laying out in particular when cases should be brought in an in-house administrative venue versus in federal courts. Piwowar said such guidelines would help ensure that the commission “does not engage in arbitrary or capricious conduct” in carrying out its enforcement responsibilities.

In its fiscal year 2014, the SEC had a 100 percent success rate in its administrative actions, compared to 61 percent in federal courts. In FY 2013, the SEC prevailed in 90 percent of the cases brought in its administrative forum, compared to 75 percent in federal courts.

There are several ongoing district court cases contesting the fairness of the SEC's administrative venue.

Chau's Case 

The SEC initiated administrative proceedings against Harding and Chau in 2013, alleging that they made material misrepresentations in the sale of securities representing interests in a CDO. Chau and his firm countered with a lawsuit in federal district court to bar the commission from going forward. They argued that the SEC violated their equal protection and due process rights by suing them administratively rather than in federal district court.

The SEC refused to stay its administrative proceedings. In January, ALJ Elliot concluded that Harding and Chau violated federal securities laws. Among other sanctions, Elliot ordered Harding and Chau to jointly and severally pay $1,003,216 in disgorgement and prejudgment interest.

The ALJ also ordered Harding to pay a civil penalty of $1.7 million, and Chau a penalty of $340,000.

In granting their petitions for review, the SEC directed the parties to file their briefs in opposition by April 24, and replies by May 8.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Kristyn Hyland at khyland@bna.com

The SEC's order granting review is available at http://www.sec.gov/litigation/opinions/2015/33-9731.pdf.

Elliot's initial decision is available at http://www.sec.gov/alj/aljdec/2015/id734ce.pdf.