SEC Civil Lawsuit vs. Administrative Proceeding: Key Differences.

If the SEC conducts a federal civil lawsuit, the enforcement proceeding begins when the SEC files a civil complaint in federal district court. If the SEC conducts an administrative enforcement proceeding, the proceeding begins when the SEC issues an “Order Instituting Proceedings” (or “OIP”), and then proceeds to be handled internally by the SEC’s Enforcement Division.

SEC federal civil lawsuit: Defendants may have a right to a jury trial pursuant to the Seventh Amendment.

SEC administrative enforcement proceeding: No jury trial.

The SEC generally determines whether it will seek enforcement in federal district court or in administrative proceedings. If a defendant or respondent has a preference, it will be extremely difficult (if not impossible) to compel the SEC to choose its preferred forum.

SEC federal civil lawsuits are brought by the SEC or by the SEC’s appointed receivers. SEC criminal enforcement actions are brought by the U.S. Department of Justice (DOJ).

The SEC begins its enforcement process by conducting a SEC investigation. An investigation is an inquiry by the SEC, while an enforcement action is the pursuit of charges. If the SEC conducts an investigation but does not pursue charges at the end, it will typically send a “termination” letter to the investigation’s target(s).

SEC investigations generally remain non-public until the SEC files charges in federal district court or issues an OIP. However, if the SEC makes exceptions to this practice, it may do so by issuing a public statement.

The SEC can share investigative information with other federal authorities, including criminal and regulatory authorities. The SEC can also share information with state securities authorities.

The SEC can pursue all sanctions in federal district court, but its ability to pursue sanctions in an administrative enforcement proceeding is limited by the federal securities laws that authorize those proceedings.

Will a Judge or Jury Decide My SEC Case?

The answer to this question depends entirely on where the SEC pursues its enforcement action. If the SEC pursues its enforcement action in federal district court, then an Article III judge (and potentially a jury) will be tasked with deciding the case. If the SEC pursues its enforcement action in an administrative proceeding, then an SEC administrative law judge (ALJ) will typically be tasked with deciding the case. However, the SEC Commission can adjudicate an administrative proceeding without appointing an ALJ. In an administrative proceeding, a jury will not be able to get involved.

What does Jarkesy mean for SEC Administrative Enforcement Actions?

SEC v. Jarkesy is a case heard by the U.S. Supreme Court. The Court issued its ruling on June 27, 2024. In Jarkesy, the Court discussed several issues relating to the SEC’s administrative enforcement proceedings and its authority to pursue securities fraud claims. The Court did not invalidate every type of administrative enforcement proceeding. Instead, the Court’s Jarkesy ruling specifically focused on the SEC’s authority to seek civil penalties without allowing defendants to demand a jury trial. Importantly, the Court did not hold that the SEC lacks the authority to conduct enforcement proceedings. It also did not hold that its administrative proceedings violate the Appointments Clause of the U.S. Constitution.

What is the Public Rights Doctrine?

The public rights doctrine is a longstanding exception to the Seventh Amendment’s requirement that cases involving common-law claims (like fraud) get heard by juries. Under the public rights doctrine, federal courts are required to review a person’s right to a jury trial. If the person’s right to a jury trial is “protected by public rights,” then the person will not be able to demand a jury trial. The public rights doctrine allows the federal government to resolve these cases through “summary” (non-jury) administrative proceedings.

The public rights doctrine is applicable in many scenarios. However, the Supreme Court in Jarkesy recently held that this exception does not apply to the SEC’s civil penalty claims in administrative proceedings when it is pursuing “securities fraud,” which the Court deemed a “common-law claim.”

Thus, if the SEC seeks civil penalties for securities fraud, the defendant is entitled to a jury trial, which an administrative proceeding cannot provide. Because of this, the Supreme Court in Jarkesy held that the SEC must pursue these types of cases in federal district court, provided the defendant (respondent) demands a jury trial.

Can I Challenge the SEC’s Choice of Administrative Forum?

In Lucia v. SEC, the Supreme Court’s decision classified SEC administrative law judges as “inferior officers.” Because of this classification, the Court held that the officials that appoint SEC administrative law judges must be constitutionally appointed officials. The U.S. Supreme Court did not hold that all constitutional and statutory restrictions that limit the SEC’s administrative proceedings apply. Rather, in Lucia, the Court relied exclusively on the Appointments Clause of the U.S. Constitution.

The U.S. Supreme Court decision in Axon Enterprise, Inc. v. FTC, 598 U.S. 175 (2023) generally mandates that federal agency administrative enforcement actions be challenged in federal district court after the agency issues its final order. However, in Axon, the Supreme Court held that a district court may hear a challenge before the agency proceeding concludes when the plaintiff alleges a structural constitutional defect in the agency itself, such as unconstitutionally appointed administrative law judges or unconstitutional protection of those judges from removal.

Thus, according to the Supreme Court in Axon, the SEC’s choice of administrative forum is subject to the same constitutional and statutory restrictions. If the SEC’s choice is constitutionally impermissible and is made by an improperly appointed official, the appropriate forum for resolving the challenge would be federal district court.

Axon’s jurisdictional exception applies only to structural constitutional claims. Ordinary defenses, such as claims that a person did not commit the alleged securities fraud, can only be raised during an enforcement action. After the SEC, rather than deferring to the administrative courts’ jurisdiction to resolve the matter at hand, resolves this matter in its administrative enforcement proceeding, the person may raise his or her routine defenses.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, specifically §929P(a), expanded the SEC’s administrative penalty authority. Now, rather than being limited to regulated securities professionals, it includes those who are not in the securities profession.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

How do procedure and discovery differ between SEC lawsuits and administrative proceedings?

From procedure and discovery to evidentiary rules and appellate rights, there are several key differences between a SEC federal civil lawsuit and an SEC administrative enforcement action. The following are four of the most important differences:

1. Procedure

When the SEC conducts a federal civil lawsuit, the case follows the Federal Rules of Civil Procedure. Along with the Federal Rules of Civil Procedure, federal judges typically have individual standing orders that further clarify the procedure and rules of conduct for their courtroom.

If the SEC conducts an administrative enforcement action, however, then the case will proceed in accordance with the SEC Rules of Practice (17 C.F.R. Part 201). These rules outline the specific procedures that must be followed during an administrative enforcement proceeding.

2. Evidence

In a federal district court, the Federal Rules of Evidence (FRE) apply (although judges have leeway). This means that, for example, a party must show that an expert witness is qualified before testimony may be entered. Similar to federal litigation, there are strict requirements regarding the authenticity and relevancy of evidence that may be used during a trial.

In an administrative proceeding, federal rules do not strictly apply. The presiding ALJ may use the Federal Rules of Evidence as a guideline, but they are not entitled to apply the FRE. This means that evidence that would be objectionable in federal district court might not be objectionable in an administrative hearing.

3. Discovery

Discovery procedures differ greatly between federal civil lawsuits and administrative enforcement proceedings. In a federal civil lawsuit, the discovery phase consists of depositions, interrogatories, requests for admission, and requests for production of documents.

Discovery is significantly more limited in administrative enforcement proceedings. According to SEC Rule 230, the enforcement staff is generally required to disclose its investigative file to the person accused of securities fraud. While the enforcement staff can maintain certain privileges, this requirement generally limits the scope of discovery that is necessary. According to SEC Rule 233, oral discovery is also limited in an administrative enforcement action. Parties may only conduct three depositions per side, though this number may be increased to five if there are multiple respondents. The parties may only conduct oral depositions during the “discovery period” (the period between the filing of the OIP and the beginning of the administrative hearing).

4. Written Discovery

Along with deposition limits, administrative enforcement proceedings also present limitations on written discovery. While parties are eligible to make requests for the production of documents under SEC Rule 230, they are not eligible to make interrogatories or requests for admission in an SEC administrative enforcement action. This is because the SEC Rules of Practice do not authorize these forms of discovery. With that said, parties can petition to do additional discovery.

How do appeals work after an SEC administrative decision?

There are several key differences between the appeal process for an administrative decision and a federal lawsuit.

Appellate Path

In administrative enforcement proceedings, an ALJ issues what is referred to as an “initial decision,” rather than the agency’s “final order.” An unreviewed initial decision, however, becomes final when the Commission issues a “Commission Finality Order.”

If a party petitions for Commission review, then (if approved) the Commission’s final decision may affirm, revise, or set aside the initial decision in whole or in part. This results in a “final order,” which is not subject to any further administrative appeal.

From here, the final administrative order can then be challenged directly in a federal court of appeals.

Compare to a federal civil lawsuit: Federal district courts are the courts of first-instance. This means that if a party is unhappy with the court’s judgment, then it must follow the “ordinary federal appellate process.” This process generally involves filing a notice of appeal, ordering the record, filing appellate briefs, and participating in oral arguments at the appropriate federal circuit court of appeals.

Can Parties Appeal an ALJ’s Initial Decision?

No. Federal circuit courts of appeals are prohibited from reviewing ALJ initial decisions. This is because an ALJ’s decision does not constitute a “final order,” which is the standard requirement for federal circuit court review.

When is a Decision/Judgment Stayed during Appeal?

The other key difference between administrative proceedings and federal civil lawsuits is when a decision or judgment is “stayed” (or held in abeyance) while the appeal is pending.

If a party petitions for Commission review of an ALJ’s initial decision, then the initial decision is generally stayed pursuant to SEC Rule of Practice 360(d)(1). This means the penalty will not be enforced while the appeal is pending.

However, Exchange Act §25(c)(2) specifically states that the judicial review process for Commission orders does not stay the enforcement of the Commission’s decision. As such, appealing to a federal circuit court of appeals does not automatically protect the aggrieved party from enforcement.

In a federal district court, a party can typically expect to have judgment enforcement paused for 30 days after the order is entered pursuant to Federal Rule of Civil Procedure 62(a). However, this is subject to the specifics of the case, including any relevant provisions of the law or the court’s orders. For example, the U.S. District Court for the Northern District of California may have a different stay procedure, and parties must remain cognizant of the specific rules of their district court.

What penalties and emergency remedies can each SEC forum impose?

While most penalties and remedies can be imposed by either SEC forum, both forums generally have authority to impose civil penalties, disgorgement, and other forms of financial penalties when authorized by statute. If you have been accused of securities fraud, you should speak with an experienced attorney about challenging the SEC’s statutory authority to pursue civil penalties against you.

What forms of emergency remedies can the SEC seek in each forum?

While administrative proceedings can result in temporary cease-and-desist orders, the SEC must go to federal district court to obtain temporary restraining orders and preliminary injunctions. Additionally, the SEC commonly seeks asset freeze orders and appointed receivers when it brings a case in federal district court. While the SEC does not typically file these motions in administrative proceedings, both forums can impose emergency orders if they are permitted by the applicable statutes.

What forms of civil financial penalties can the SEC impose in each forum?

As discussed, civil financial penalties are generally available to both forums. This includes civil penalties, disgorgement, and other fines that are authorized by statute. Under Exchange Act §21A, the SEC can seek penalties for insider trading of up to three times the illicit gains or avoided losses, plus interest.

Additionally, the SEC may seek to recover illicit gains, such as commissions or management fees, if the party is required to do so. Under the SEC’s administrative enforcement authority, the SEC can impose fines against all individuals and entities. Under the SEC’s civil enforcement authority, the SEC can seek fines and disgorgement against any entity it investigates. The Supreme Court in Liu v. SEC also set limits on disgorgement.

What other forms of liability can the SEC impose in either forum?

In addition to civil financial penalties, the SEC can also pursue other forms of liability in either forum. This includes cease-and-desist orders, securities industry bars (industry-specific suspensions), officer and director bars, license revocations, and other administrative enforcement remedies.

What form of liability can the SEC never impose?

The SEC never has the authority to impose imprisonment for a criminal charge. This includes civil financial penalties, disgorgement, and all forms of non-monetary liability.

As a result, unless it works with the Department of Justice, the SEC will never have any authority to seek imprisonment.

Are SEC civil enforcement actions similar to investor lawsuits?

The main difference between the SEC and a private securities lawsuit is that the SEC is pursuing enforcement, whereas a private lawsuit is pursuing monetary damages. Thus, if the SEC brings an action, you could be facing penalties and an SEC fine, but you would not be subject to compensatory damages. This does not mean, however, that you are not subject to a private lawsuit. If an investor sues you for securities fraud, this is a separate legal action.

How long does the SEC have to seek monetary relief?

When conducting a federal civil lawsuit, the SEC is subject to the statute of limitations in 28 U.S.C. § 2462. As a general rule, this statute limits the SEC to seeking monetary sanctions five years from the date of the securities fraud.

However, unlike the general statute of limitations that applies to private civil litigation, 28 U.S.C. § 2462 contains no discovery rule provision. As the Supreme Court recently held in Gabelli v. SEC, the government cannot invoke the discovery rule to toll 28 U.S.C. § 2462. Accordingly, if a party is sued for a claim that occurred more than five years prior, then this claim is typically barred.

The statute of limitations for civil financial penalties

As discussed above, the SEC generally has five years to pursue civil financial penalties from the date of the securities fraud.

The statute of limitations in 28 U.S.C. § 2462 applies to all forms of civil financial penalties, including civil monetary penalties, civil disgorgement, and all other SEC fines.

The statute of limitations for disgorgement

The U.S. Supreme Court has also addressed the statute of limitations for disgorgement. Specifically, in Kokesh v. SEC, the Supreme Court held that the SEC’s statutory limitation periods apply to disgorgement.

The Supreme Court also decided that the SEC can seek securities-related fraud disgorgement within 10 years under 15 U.S.C. § 78u(d)(8) as well.

Other disgorgement claims, however, generally contain a five-year limitation period.

The statute of limitations for equitable remedies

15 U.S.C. § 78u(d)(8) provides that the SEC can seek equitable remedies within a ten-year period. The liabilities that are subject to this period include disgorgement of ill-gotten gains.

In Liu v. SEC, the Supreme Court also held that the SEC can seek disgorgement limited to net profits awarded to victims, rather than just the gains that the party improperly took. However, this holding does not directly impact the statute of limitations issue at hand.

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