a former georgian consultant Filed a lawsuit against the SEC It is the first case to test the influence of judges within the regulator after a key Supreme Court decision.
Christopher Gibson, a former Georgia-registered investment adviser, sued Wall Street regulators in Atlanta federal court on April 18, in part to challenge the rights or authority of the in-house judges. These judges, technically known as administrative law judges, hear cases of alleged civil misconduct by financial advisors, brokers and other businessmen.
There have long been concerns that judges have the power to preside over cases brought by the same agencies that appoint them. A string of major legal decisions in recent years has raised questions about whether most SEC cases are best left to the regular court system.
recently– SEC v. Michelle Cochran — Superior Court judges unanimously ruled April 14 that Cochrane, the Texas accountant, has the right to challenge the constitutionality of the SEC’s in-house judges in federal district court. If she doesn’t win the case, she will have to defend herself before an SEC administrative law judge against allegations of violations of federal accounting standards dating back to 2013.
Now, Georgia counsel Gibson is making a similar argument in federal court in Atlanta. Gibson was accused by the SEC in 2016 of running a front-running and cronyism scheme at the expense of investors at a massive fund called Geier International Strategies. He was half-owner at the time of an investment advisory firm called Geier Group, which was registered in Georgia but not with the SEC.
Gibson has already entered the administrative proceedings before two in-house SEC judges, but is still awaiting a final decision on his case. His lawsuit argues that the lengthy delay violated his due process rights.
Peggy Little, Senior Litigation Attorney, New Civil Liberties Coalition, nonprofits representing cochrane, said the Gibson case was the first she had seen after the Cochran decision. But it won’t be the last time, she said.
“Others in similar situations will challenge these administrative processes,” Little said.
The stakes can be high for consultants and brokers hoping to get a fair hearing in court. Wall Street Journal 2015 SEC Data Analysis It turns out that the SEC rarely loses cases before its own judges. From October 2010 to March 2015, the regulator won 90 percent of the cases it took internally. By comparison, the newspaper found, the SEC won only 69 percent of cases filed in federal court over the same period.
The SEC argues that the discrepancy is due to its tendency to leave simple issues to in-house judges and more complex cases involving schemes such as insider trading to regular courts. But Little and others argue that the numbers reveal home-field advantage when an institution begins to play the role of “judge, jury and executioner.”
“The SEC should be suing in federal court,” Little said. “These administrative tribunals are not designed to deal with claims involving interests in life, liberty and property.”
Administrative law judges, or ALJs for short, have caused little controversy over the years. This changed with the 2010 Dodd-Frank Act, which overhauled the US financial system. The SEC now has the power to send anyone accused of securities misconduct, such as insider trading, to its internal courts.
A spokesman for the SEC declined to comment.
Deborah Meshulam, a partner in Piper Piper’s Washington, D.C. office and former chief litigator for the SEC’s enforcement division, said the SEC has shown a greater reluctance to try cases before its own in-house judges.
“It makes sense at this point that the federal courts are starting to hear more contentious cases because the outcome is uncertain,” Meshulam said. “Agencies can remove this by filing a lawsuit in federal court.”
Haima Marlier, co-chair of the securities litigation, enforcement and white-collar defense group at law firm Morrison Foerster, said Cochran’s decision creates a “monkey wrench” on the SEC’s reliance on internal agencies by clarifying the constitutionality of its proceedings. They were being challenged in federal court even before they reached a decision.
“They have to be prepared for the very real possibility of constitutional litigation even before they can learn the merits of the case they’re trying to bring,” Marlier said.
Other recent cases involving SEC in-house judges have focused on the process of installing and removing them. In 2018, Supreme Court rules in Lucia v. SEC The SEC has been improperly hiring its ALJ instead of seeking an appointment from the President or his office.Four years later, the Fifth Circuit Court of Appeals in Jakkisi v. SEC Administrative law judges also have unconstitutional protections from being removed by the president.
The second decision is of course not state-binding. But when considered together with Lucia and Cochran, it casts doubt on a number of recent decisions by internal judges. In his lawsuit against the SEC, Gibson argued that he was overseen by administrative law judges who were both improperly appointed and violated constitutional protections from removal.
SEC case against Gibson The main charge is that he breached his fiduciary duty while serving as an advisor to the Gale International Strategic Fund. Regulators accused Gibson of directing the fund to invest heavily in an unprofitable mining company called Tanzanian Royalty Exploration, and then preempting the fund from selling his shares after the value of the shares began to decline.
According to the SEC, this “front-running” violation was compounded by Gibson’s decision to have the fund buy his girlfriend’s stake in Tanzania’s Royalty Exploration for an allegedly high price. The SEC also charged Gibson with orchestrating an option scheme to benefit his girlfriend, father and himself at the expense of other investors.
Gibson’s attorney, David Hudson of August Hall Barrett in Ga., declined to comment. According to his lawsuit, Gibson now lives in Uruguay.
Cochran also used the Supreme Court’s recent ruling on the authority of the SEC’s internal judges. In 2017, an administrative judge found that she aided and abetted an audit by her former employer that failed to comply with federal accounting standards. The judge charged $22,500 and was barred from practicing with the SEC for five years.
Then there was Lucia’s decision, which found that the internal judges had been improperly reappointed so their previous rulings could be challenged. Cochran was scheduled for a retrial in 2018 before another administrative law judge. But with the question of whether internal judges have unconstitutional protections from removal from office still lingering, there was always the possibility that Cochrane would find himself having to serve a third time as a judge on an administrative trial.
Little said she hopes Cochrane will find a fair settlement in federal court.
“That’s almost a decade away,” Cochran said. “These are minuscule claims against her.”