White Collar — Investigator, Judge and Enforcer
Contributors: Jeffrey H. Rutherford, Janet Levine, Amy Sandra Lee, and Alan W. H. Gourley.
Addressing the broadening role of administrative proceedings at the U.S. Securities and Exchange Commission (SEC), U.S. District Court Judge Jed Rakoff last year criticized what he called “administrative creep.”
Indeed, in 2015, agencies across the federal government crept into more and more roles, investigating cases, issuing rulings, imposing civil penalties, adjudicating appeals, and enforcing a variety of sanctions. That trend appears unlikely to subside this year.
Agencies are aggressively pushing to bring enforcement cases before their own in-house administrative tribunals, seeking to avoid the more level playing field of the federal courts. The practice has prompted complaints not only from defendants but also from judges and members of Congress. At least in one case, that backlash may have made an impact.
Unless the system is overhauled, companies should expect to find themselves increasingly in administrative proceedings, notes Jeff Rutherford, a partner with Crowell & Moring. “These hearings—the rules they use, the strategies that are effective, the budget that is required, and possibly the outcome—are all very different from a federal court,” says Rutherford, who has represented clients in many such hearings. “You need attorneys on your side who are very familiar with the proceedings of the specific agency to mount the most effective defense.”
In 2014, SEC officials declared they would expand the use of their in-house tribunal using new authority from the Dodd-Frank financial reform law. Administrators and their congressional allies say that in-house proceedings are more efficient than federal district court and that agency in-house judges have greater expertise than their district court counterparts. But with the agency acting as both prosecutor and judge, defendants are feeling embattled. “The agency controls the entire in-house proceeding—the timing, the judges, the process, and the rules,” says Janet Levine, a partner with Crowell & Moring and chair of its Trial Practice. “Even the appeals are heard by the Commission, which authorized the case to begin with.”
The agency appears to have a considerable home-court advantage: in an analysis of cases between October 2010 and March 2015, The Wall Street Journal found that the agency ruled against 90 percent of respondents in cases before its judges, while federal district judges ruled against 69 percent of defendants in federal court over the same period.
But in mid-2015, two federal judges in separate cases found that the SEC had not appointed its five administrative law judges in a constitutional manner. (The federal judges found that the administrative judges qualified as “officers” under the Constitution’s Appointments Clause and therefore should have been appointed by the president, the judiciary, or the agency’s commissioners rather than its personnel office.)
The findings against the SEC have prompted legal challenges against other agencies that appoint their judges in a similar manner. For example, the Federal Trade Commission (FTC) has aggressively used the administrative litigation process in cases accusing companies of lax data security. In mid-2015, LabMD moved to dismiss the FTC’s administrative case against it, arguing that the FTC’s in-house judges’ appointment also violated the Appointments Clause. (The federal Office of Personnel Management (OPM) appoints FTC judges.)
Another challenge that targeted companies face is that “often an administrative proceeding gets a deferential review in federal court,” notes Amy Lee, counsel with Crowell & Moring. The review process came under the spotlight after an administrative law judge levied a record-setting penalty in a case alleging market manipulation by a bank. “The respondent has only limited rights of appeal,” Lee says. “It can go back to FERC and challenge the penalty before a FERC administrative law judge or bring its case to the federal court. The bank has chosen to challenge the penalty in federal court, where it’s arguing that the court should hear the case de novo and give no deference to FERC’s finding in fact or legal conclusions, while FERC argues that the court should simply affirm the agency’s findings and focus on the size of the civil penalty.”
Frustration over FERC’s enforcement of energy market rules has boiled over. The process has been the subject of a Senate Energy Committee hearing and an investigation by the Department of Energy’s (DOE) inspector general, though the process had not been reformed as the Regulatory Forecast went to press.
Meanwhile, other agencies—most notably the Consumer Financial Protection Bureau (CFPB)—appear likely to push harder for their own administrative proceedings, notes Levine. “The legitimacy of these hearings is destined to be further contested, likely all the way to the Supreme Court,” she adds.
Crackdown on Money Laundering
In 2016, increasingly far-reaching global anti-money laundering (AML) regulations will be demanding more thorough compliance efforts, not just of banks but also of any business that accepts large cash sums. Especially hard hit have been the major global financial institutions. “AML was once aimed at the clients of the banks, not the banks themselves,” says Crowell & Moring partner Jeff Rutherford, who represents entities and individuals in AML investigations. “Now the banks are being investigated. Specifically, the Treasury’s FinCEN has become much more aggressive on enforcing the requirements of the Bank Secrecy Act.”
Another sign of the increasing aggressiveness has been a Justice Department initiative to seize the proceeds of foreign official corruption and, where appropriate, return them to benefit the people harmed by the abuse of power. The Kleptocracy Asset Recovery Initiative has targeted current and former officials in South Korea, the Philippines, Nigeria, Equatorial Guinea, and elsewhere. “The initiative’s aims are honorable, and the global focus on AML is making it easier to trace the proceeds to the source,” says Crowell & Moring partner Alan Gourley. “While home country cooperation is obviously difficult when the officials are still in power, many of the funds are invested in real estate and other assets in the United States or other countries willing to cooperate with U.S. investigations.”
[Seventy-eight percent of respondents to a KPMG survey said they had increased spending on anti-money laundering compliance over the past three years. Seventy-four percent predicted further increases over the next three years.]