Richard A. Levan & Associates, PC - National Law Journal

August 7, 2000

Jump to Quote

Challenging the SEC Pays Off

New study finds that judges often cut requested penalties.

By JOSEPH A. SLOBODZIAN SPECIAL TO THE NATIONAL LAW JOURNAL

IT'S NOT EVERY DAY that a broker prosecuted by the Securities and Exchange Commission is exonerated of all charges by an SEC administrative law judge.

It's rarer still when the judge determines that the SEC had "no substantial justification for initiating and prosecuting those charges" and orders the to reimburse the broker $211,943 in legal fees and expenses.

To securities lawyer Eugene I. Goldman, the June 27 ruling by Administrative Law Judge Carol Fox Foelak, Initial Decision re No.168, is further evidence of the independent streak that he first detected among SEC judges two years ago in a study he did. Now, his follow-up study has found the same thing: the judges often hand out less-severe penalties than the SEC seeks. In the Matter of Kirk Montgomery, No. 3-9786-EAJA.

"The trend has continued," says Mr. Goldman, a partner in the Washington, D.C., office of McDermott, Will & Emery and co-chairman of the Chicago firm's SEC defense group. "The difference now is that we have a sufficient number of decisions to kind of predict the propensities of individual law judges."

SEC spokesman John Heine says that Enforcement Division officials hadn't seen Mr. Goldman's latest study and could not comment. Two years ago, Richard H. Walker, the SEC's enforcement chief, acknowledged a change in tone among the judges that he says was reflected in Mr. Goldman's data.

Other practitioners in the securities law bar say that their experiences corroborate Mr. Goldman's findings.

"I think that a few years ago there were real questions about whether you could go into an administrative forum and come out with a favorable decision," says Dixie L Johnson, a partner at Fried, Frank, Harris, Shriver & Jacobson, in Washington. "It didn't happen very often." Ms. Johnson did more than an anecdotal comparison. With Fried Frank associate Kevin A. Harnisch, she wrote her own analysis of decisions by administrative law judges, published this year in The Investment Lawyer, which corroborated Mr. Goldman's findings.
It was 1998 when Mr. Goldman, who was senior counsel for the SEC's Enforcement Division when he 'left the agency in 1983, caught the attention of the securities bar with his study finding that the Enforcement Division's "homecourt advantage" before agency judges was more legend than fact.

Working with McDermott Will associate Stacy L Fuller, Mr. Goldman analyzed 20 decisions by SEC administrative law judges between July 1997 and July 1998.
To the surprise of many, the analysis showed that while Enforcemeht Division lawyers were still winning most of their cases, in 75% of those cases the judges balked at awarding all the sanctions the division had requested.

"I got a lot of calls afterward with the suggestion that this type of data was very helpful to the . securities bar and helpful to the Enforcement Division," Mr. Goldman says, which is why-with the help of a new McDermott Will associate, Douglas G. Edelschickhe embarked on a follow-up study to see if the trends held two years later.

They examined 34 initial decisions by SEC administrative law judges between Sept. 1, 1998, and May 31, 2000. Among the findings:

Although Enforcement Division lawyers continued to win most of their cases on the merits, administrative law judges also continued reducing their sanction requests. Fifty percent of respondents found to have violated securities laws were successful in convincing judges to reduce the amount of disgorgement or civil penalties requested.

Two-thirds of the respondents who litigated received less time out-bars, suspensions and license revocations-from the securities business than what was requested by division lawyers. Although agency judges still approved some form of bar in 86% of the cases in which such a sanction was requested, 61% of the time-out sanctions were shorter than requested by the division.

Administrative law judges rejected all three requests for collateral bars-industrywide sanctions prohibiting the respondent from having any association with people involved in the securities industry. Mr. Goldman traced these decisions to the 1999 decision by the U.S. Court of Appeals for the District of Columbia Circuit, Teicher v. SEC, 177 F.3d 1016, which held that the SEC lacked the statutory authority to impose such a sanction without a connection, at the time of the alleged misconduct, between the respondent and a particular investment adviser.

Judge slaps SEC

Perhaps no recent case illustrates the stance among SEC judges as much as the June decision by Judge Foelak in the case of Kirk Montgomery, a middle manager and chief compliance officer for FSC Securities Corp. in Atlanta, who was exonerated of failing to supervise properly.

Mr. Montgomery then sued for legal fees and costs under the Equal Access to Justice Act and Judge Foelak awarded him $211,943, concluding that there was "no substantial justification for initiating and prosecuting those charges." SEC lawyers have appealed' that ruling to the full commission.

Securities lawyers say that they remember only two or three such cases in SEC history.
"I would say it's a fairly extraordinary event for a case that goes through the level of review and scrutiny imposed by the SEC, only to have it result in an administrative law judge's rejection of the commission's position and the imposition of attorney's fees against the agency itself," says Richard A. Levan, a partner at Philadelphia's Drinker Biddle & Reath LLP, and co-chair of the firm's securities litigation and regulation group.

Mr. Levan, a former federal prosecutor in Washington, D.C., and the top official at the SEC's Philadelphia office from 1991 to 1996, theorized that the trend found in Mr. Goldman's study may be the result of a stronger, more independent corps of administrative judges and the Enforcement Division's "lack of latitude" - compared to federal prosecutors in the preindictment stage - in negotiating settlements with defendants before filing charges.

Both Mr. Levan and Ms.Johnson praise the caliber of the SEC's lawyers, and Mr. Levan adds that he worries about the public perception of the Enforcement Division, given the findings of the Goldman study.

"I think it's a particularly acute situation for an agency that has acknowledged that it cannot possibly pursue all the fraud that it encounters and which therefore enforces its mandate through carefully selected cases," Mr. Levan adds.

Ms. Johnson says that she believes the continuing growth of independent SEC judges is healthy for both the SEC and the judges themselves-as well as potential respondents. "Now, when people are looking at whether to litigate or settle, they should know that [a hearing] is an option," she adds.

Indeed, veteran securities lawyer Lionel E. Pashkoff, senior counsel to the Washington, D.C., office of New York's Proskauer Rose LLP and the SEC's chief of enforcement in 1973 and 1974, says that he has already seen a thawing in the SEC's reluctance to settle cases, caused at least partly by the new prospect of rigorous review by SEC judges. "I think in my practice, and in most peoples' practices, what (the SEC) has done is permit settlement of cases where there is a real defense," Mr. Pashkoff says. "I think the staff is more willing to talk settlement."