Forum Selection For SEC Cases – District Court or Administrative Proceeding?
In late September the SEC filed a settled insider trading case against an associate of an unregistered investment adviser. In the Matter of Richard O’Leary, Adm. Proc. File No. 3-16166 (September 25, 2014). The next week the agency filed another settled insider trading case as an administrative proceeding. This time the action was against a Wells Fargo analyst and trader. In the Matter of George T. Bolan, Jr., Adm. Proc. File No. 3-16178 (September 29, 2014). The next day two more settled insider trading cases were filed as administrative proceedings. Those actions were against, respectively, a hedge fund analyst and his tippee. In the Matter of Filip Szymik, Adm. Proc. File No. 3-16183 (September 30, 2014); In the Matter of Jordan Peixoto, Adm. Proc. File No. 3-16184 (Sept. 30, 2014).
In early November of this year the Commission again filed a settled insider trading case as an administrative proceeding. This action was against the CEO of Intellicheck Mobilisa, Inc. In the Matter of Steven Durrelle Williams, Civil Action No. 3-146246 (November 3, 2014). A few days later the administrative forum was again selected for filing a settled administrative proceeding based on insider trading charges. In the Matter of Michael S. Geist, Adm. Proc. File No. 3-16269 (Nov. 12, 2014).
The seventh case in this series was file at the end of last week. In the Matter of Robert A. Hemm, Adm. Proc. File No. 3-16298 (Dec. 5, 2014). This case centered on a tender offer for SFN Group, Inc.. by Randstad Holding nv, announced on July 20, 2011. SFN was a strategic workforce solutions provider which offered temporary and permanent staffing solutions. Randstad is a Dutch multinational human resource consulting firm.
On July 12, 2011 a relative of Mr. Hemm’s began working on the tender offer for one of the involved parties. Prior to the announcement of the tender offer Mr. Hemm spoke with the relative several times. Some of those telephone calls took place on July 20, 2011.
During the afternoon of July 20, 2011 Mr. Hem purchased 5,000 shares of SFN stock at an average price of $9,23 per share in his and his wife’s brokerage accounts. By that date substantial steps had been taken in furtherance of the offer. Those included the execution of confidentiality agreements, the retention of attorneys and investment bankers and extensive due diligence by Randstad.
After the market closed on July 20, 2014 the tender offer was announced. The next trading day SFN’s stock price close up 51%. On August 8, 2011 Mr. Hemm sold his shares for $21,763. The Order alleges violations of Exchange Act Sections 10(b) and 14e.
Mr. Hemm settled the action, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to disgorge his trading profits, pay prejudgment interest and a penalty equal to the amount of the trading profits.
Prior to the filing of these seven cases the SEC rarely brought insider trading actions as administrative proceedings. While it is true that the Dodd-Frank Act added remedies to the Commission’s arsenal that were not previously available, that statute was signed into law in 2010. The filing of these seven settled insider trading cases traces to September of 2014, for years after the enactment of Dodd-Frank.
SEC Enforcement Director Andrew Ceresney discussed the use of administrative proceedings in a recent speech. Remarks to the American Bar Association’s Business Law Section Fall Meeting, Washington, D.C. (Nov. 21, 2014). In his remarks the Director discussed some of the benefits of administrative proceedings, noting in part that a prompt decision is typically obtained, there is a specialized fact-finder and that the Law Judge can give “each piece of evidence the weight that they deem appropriate” because the Federal Rules of Evidence do not apply. He also remarked on some concerns about the proceedings noting that the Supreme Court has rejected claims that there is a right to a jury trial for government claims based on statutes such as the securities laws, that the discovery provisions are adequate and that the use of this forum will not hinder the development of the law but rather will further “the balanced and informed development of the federal securities laws . . .”
On the question of forum selection the Director stated that “For settled matters, we often, but not always, choose to file in an administrative forum, largely because of efficiency. The filing quickly ends the matter on a settled basis, among parties that have agreed to a settlement, and there is no need to have implementation of the parties’ agreement subject to the competing demands of busy district court dockets . . .” For litigated cases “we evaluate each case to determine the appropriate forum based on the facts and circumstances.”
Under this approach the seven insider trading cases filed as administrative proceedings since September would not represent a new trend or a move toward bringing these actions as administrative proceedings rather than the traditional civil injunctive action. At the same time the filing of so many insider trading cases as administrative proceedings in a brief period does represent a significant departure from prior practice. That is particularly notable for an agency which frequently looks for consistency. No doubt, the Director is correct that selecting the administrative forum quickly ends the matter – there is no district court to seek the assistance of or to ask questions and delay the entry of the settlement.
A key point in the Director’s remarks is the statement that the agency decides on a case by case basis which forum to select for contested actions. In weighing those options the SEC will clearly consider the factors cited by the Director about the administrative forum – speed, discovery but no depositions and the inapplicability of the Federal Rules of Evidence. Those factors can be significant for an agency which typically conducts a lengthy investigation to marshal the facts prior to filing an action. Whether those factors will increasingly tip the scales in favor of the administrative forum has yet to be seen. The agency does however have a history of moving into new areas slowly, with a string of settled cases.