A former Georgia advisor's
Christopher Gibson, an investment advisor once registered in Georgia, sued the Wall Street regulator in federal court in Atlanta on April 18 in part to question the powers of right, or authority, of in-house judges. Those judges, technically called administrative law judges, hear cases over alleged civil misdeeds by financial advisors, brokers and other business people.
Concerns have long raged about the judges' authority to preside over cases brought by the very same agency that appointed them. In recent years, a string of big legal decisions has raised doubts about whether most SEC cases aren't better left to the regular court system.
In the latest —
Now Gibson, the Georgia advisor, is making similar arguments in a federal court in Atlanta. Gibson was accused by the SEC in 2016 of running a front-running and nepotism scheme at the expense of investors in a large fund called Geier International Strategies. He was then the half owner of an investment advisory firm named Geier Group, which was registered in Georgia but not with the SEC.
Gibson has gone through administrative proceedings before two in-house SEC judges but is still awaiting a final decision in his case. His lawsuit contends that the long delay has violated his due-process rights.
Peggy Little, the senior litigation counsel at the New Civil Liberties Alliance ,
"Other people in similar situations are going to be challenging these administrative proceedings," Little said.
Stacked odds
The stakes for advisors and brokers who are hoping for a fair hearing in court could be big.
The SEC has argued the discrepancy arises from its tendency to leave simple matters to in-house judges and take more complicated cases involving schemes such as insider trading to a regular court. But Little and others argue the figures reveal the home advantage that comes when one agency gets to play the roles of "judge, jury and executioner."
"The SEC should be bringing its cases in federal court," Little said. "These administrative courts are not designed to handle claims concerning life, liberty and property interests."
Uncertainty
Administrative law judges, known as ALJs for short, generated little controversy for years. That changed with the adoption in 2010 with the Dodd-Frank Act's overhaul of the U.S. financial system. Now the SEC was authorized to haul anyone accused of securities misconduct, such as insider trading, before its in-house tribunals.
An SEC spokesman declined to comment.
Deborah Meshulam, a partner in law firm DLA Piper's Washington, D.C. office and a former chief litigation counsel in the SEC's enforcement division, said the SEC has already been showing a greater reluctance to take cases before its in-house judges.
"More contested cases are starting in federal court at this time, which makes sense since there's uncertainty about how this is going to play out," Meshulam said. "Agencies can eliminate that by proceeding in federal court."
Haima Marlier, the co-chair of law firm Morrison Foerster's securities litigation, enforcement and white collar defense group, said the Cochran decision throws a "monkey wrench" in the SEC's reliance on in-house by making it clear the constitutionality of their proceedings can be challenged in federal court even before they've reached a decision.
"They have to be prepared for the very real possibility of litigating constitutional claims even before they can get to the merits of the case they're trying to bring," Marlier said.
Other recent cases involving SEC in-house judges have centered on the procedures used for seating and removing them. In 2018,
The second decision is of course not nationally binding. But if taken together with the Lucia and Cochran case, it casts doubt on a huge swath of recent decisions by in-house judges. In his lawsuit against the SEC, Gibson contends he's been subjected to proceedings overseen by administrative law judges who were both improperly appointed and unconstitutionally protected from removal.
That "front-running" violation, according to the SEC, was compounded by Gibson's decision to also have the fund buy his girlfriend's shares in Tanzanian Royalty Exploration at an allegedly elevated price. The SEC also accused Gibson of running an elaborate options scheme to the benefit of his girlfriend, father and himself and at the expense of other investors.
Gibson's lawyer, David Hudson of Hall Barrett in August, Georgia, declined to comment. Gibson now lives in Uruguay, according to his lawsuit.
Long tail
Cochran has similarly used recent Supreme Court decisions on the authority of the SEC's in-house judges. In 2017, she was found by an ALJ to have aided and abetted audits that her former employer had failed to conduct in compliance with federal accounting standards. The judge charged $22,500 and barred from practicing before the SEC for five years.
Then came the Lucia decision finding that in-house judges were being improperly reappointed and that their previous ruling were therefore open to challenge. Cochran was set for a do-over before another administrative law judge in 2018. But with the question still pending over whether in-house judges were unconstitutionally protected from removal, there was always the chance that Cochran could find herself having to go before an administrative law judge for a third time.
Little said her hope is that Cochran will instead find a fair resolution in federal court.
"This is almost a decade later," Little said. "And these are extremely minor claims against her."
