Bill Introduced in Congress to Allow Defendants in SEC Cases to Choose Trial Venue

A bill called the Due Process Restoration Act has been introduced in the U.S. House of Representatives to allow defendants in SEC cases to choose a trial by a federal judge or jury rather than a trial before one of the SEC’s five administrative law judges (ALJ).

The bill — H.R. 3798 — was introduced by the Chairman of the House Financial Services subcommittee on capital markets, Rep. Scott Garrett (R-NJ). If passed, the bill would:

  • Provide a mandatory right of removal that would allow defendants to request that the case be moved to a federal district court.
  • Grant a right of removal to defendants who are subject to a cease and desist order and financial penalties.
  • Raise the burden of proof in ALJ cases to a higher “clear and convincing evidence” standard.

“Strong enforcement of the securities laws is an essential part of the SEC’s mission to protect investors and maintain a fair and efficient marketplace, but in recent years the agency has transformed into a veritable judge, jury, and executioner with its blatant overuse of their in-house courts,” said Garrett. “Every American has the constitutional right to defend themselves before a fair and impartial court, and the Due Process Restoration Act will go a long way towards protecting the rights of the innocent while maintaining the ability of the SEC to punish wrongdoers.”

Garrett said that the SEC’s high success rate against defendants in case heard before its own judges raises concerns about the fairness of the ALJ process. A May 2015 Wall Street Journal report found that the agency won 90% of its cases tried before in-house judges from October 2010 to March 2015 versus 69% when it tried cases in federal court. Last year, SEC officials said that they would use the authority granted by Dodd-Frank to expand the use of in-houses judges for a broader array of cases, including insider trading cases.

While the SEC recently announced it would be providing defendants in ALJ cases with more legal safeguards, Garrett said that those proposed changes “fall well short of addressing many of these concerns and its enforcement practices continue to violate the separation of powers guaranteed by the Constitution.”

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