Are SEC's Administrative Law Judges Biased? An Empirical Investigation
56 Pages Posted: 23 Feb 2017 Last revised: 2 Sep 2017
Date Written: February 22, 2017
The Dodd-Frank Act significantly expanded the SEC’s enforcement flexibility by authorizing the agency to choose whether to bring an enforcement action in court or in an administrative proceeding. The change has faced strong opposition. Federal courts have enjoined several enforcement actions filed in the administrative forum for constitutional infirmities, and cases are currently winding their way through the appellate process. But even if constitutional problems were remedied, controversy would persist. Judges, lawmakers, practitioners, and academics have raised doubts as to whether litigation before administrative law judges (“ALJs”) is fair to defendants. In advancing their arguments, they have relied heavily on a series of reports published in the Wall Street Journal purporting to show that the SEC enjoys a home-court advantage in litigation before ALJs.
As documented in this Article, the evidence offered by the Wall Street Journal is deficient and its conclusions unfounded. This Article compiles and analyzes a large dataset of all enforcement actions filed in fiscal years 2007 to 2015. Contrary to the claim advanced by the Wall Street Journal and the critics of administrative adjudication, SEC litigation before ALJs remains rare. Although the number of contested actions filed in the administrative forum has increased since Dodd-Frank, most of the increase is due to an increase in actions that could have been litigated before ALJs before the Dodd-Frank amendment. More significantly, the Article finds no robust correlation between the selected forum and case outcome. Federal district court judges ruled for the SEC and against defendants in 88% of cases, whereas ALJs ruled for the SEC in 90% of cases. This finding does not imply that the type of forum in which the SEC litigates does not matter. Rather, there are significant empirical obstacles to finding any useful results by comparing case outcomes.
Keywords: securities law, corporate law, administrative law, SEC, securities enforcement, administrative law judges
Suggested Citation: Suggested Citation