SEC Facing New Lawsuit Over Decision To Bring Action in Administrative Forum

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By Phyllis Diamond

Jan. 6 — A corporate executive charged by the Securities and Exchange Commission with cooking the books of a Wisconsin-based assisted living enterprise has fired back at the agency by suing it for bringing its action in an administrative forum rather than in federal district court.

In a lawsuit filed Jan. 2 in the U.S. District Court for the Eastern District of Wisconsin, plaintiff Laurie Bebo, formerly the chief executive officer of Assisted Living Concepts Inc., claimed that the commission's “unlimited ability” to sue administratively violates her constitutional due process and equal protection rights.

She is asking the court to order declaratory and injunctive relief, as well as such “other and further relief” the court deems just and proper, “including reasonable attorneys' fees and the costs of this action.”

Through a spokesperson, the SEC declined Jan. 6 to comment on Bebo's lawsuit.

Real Live Judge

The commission has been criticized in recent months for increasing its use of an administrative forum to bring enforcement cases. Among other instances, lawyers at a recent Practising Law Institute gathering noted that a district court affords a jury, a “real live judge” and an appellate panel that—unlike the SEC—isn't the same body that approved the enforcement action in the first instance.

Shortly thereafter, SEC Enforcement Director Andrew Ceresney called the agency's use of the administrative forum “eminently proper, appropriate, and fair to respondents”.

At an American Bar Association gathering, Ceresney acknowledged that concerns had been raised regarding the lack of a jury in administrative hearings. However, he emphasized, the U.S. Supreme Court “has considered and rejected the argument that there is a Constitutional right to a jury trial for government claims based on statutes like the federal securities laws.”

SEC Allegations

In December, the agency alleged that Bebo and another former ALC listed phony occupants at senior residences in order to meet certain occupancy covenants and avoid defaulting on the leases for the facilities. It contended that a default would have required ALC to pay the full remaining rent due on the lease—“tens of millions of dollars at the time.”

In her lawsuit, Bebo urged that without declaratory and injunctive relief, she “will suffer irreparable harm by being forced to endure an expensive, time-consuming unconstitutional proceeding without recourse for recovering those expenses, and an attack on her reputation without the equal protection of the law and the safeguards of due process.”

Latest Action

Bebo's complaint is the latest of several lawsuits against the agency over an administrative action. In early 2011, former Goldman Sachs Group Inc. director Rajat Gupta claimed the SEC violated his constitutional rights by pursuing insider trading charges against him administratively. The SEC later dropped its administrative case in exchange for Gupta's mooting his constitutional allegations.

Meanwhile, in September 2014, the SEC filed administrative insider charges against former Pershing Square Management LP analyst Jordan Peixoto stemming from Pershing's plan in December 2012 to take a $1 billion short position on Herbalife Ltd. Peixoto countered promptly with a lawsuit against the agency in federal district court alleging constitutional violations. The SEC dropped its case against Peixoto in December, saying two essential witnesses had left the U.S. and weren't available to testify.

To contact the reporter on this story: Phyllis Diamond in Washington at mailto:%20pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at mailto:%20sjenkins@bna.com

Bebo's complaint is available at http://www.bloomberglaw.com/public/document/v_Securities_and_Exchange_Commission_Docket_No_215cv00003_ED_Wis_.