SEC just dismissed dozens of cases before its ‘not-quite courts,’ thanks to real court rulings

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For over a decade, the Securities and Exchange Commission (SEC) has been forcing people into in-house quasi-judicial proceedings that lack the basic constitutional protections of real courts. These quasi-judicial proceedings have odd features: for instance, SEC staffers serve both as prosecutors and judges in what you might call “not-quite courts,” and SEC commissioners serve as an ersatz court of appeals for the SEC’s quasi-judicial proceedings. I suppose you might even call them pretend courts – but their consequences for defendants have been very real.

Actual courts took notice. In 2018, the Supreme Court determined that the appointment of the SEC’s quasi-judges was inconsistent with the constitutional protections contained in the Appointments Clause. Last year, a federal appellate court found that the SEC’s procedures deprived litigants of their Seventh Amendment right to a jury trial. Earlier this year, the Supreme Court held that targets of the SEC did not have to be subject to its quasi-judicial proceedings before they could challenge those procedures constitutionally.

I am indebted to Russ Ryan of the New Civil Liberties Alliance, who just reported important (and related) news. In a recent piece in his newsletter, aptly titled “The Spectacular Implosion of the SEC’s Adjudication System,” he revealed that last Friday, the SEC abruptly decided to end its enforcement of roughly 40 cases on its docket. His article deserves to be read entirely: I will summarize it here.

The agency’s announcement order sidestepped the significant constitutional problems that the decisions above have highlighted – and that the mass cancellation of cases seems to be intended to cure. Instead, the agency blamed its own administrative errors: apparently, there were many instances in which SEC enforcement personnel looked at private files of the in-house adjudicators. As Ryan wrote, this is “the rough equivalent of a criminal prosecutor having secret access to internal advice memos exchanged between the presiding judge and his law clerks.”

The agency had previously admitted these errors in a few cases, but the SEC had never previously leveled with the public about what appears to be widespread or systemic abuse. One might predict that quasi-judicial proceedings that rest on constitutionally problematic procedures are inherently more likely to be vulnerable to such abuse.

(Is it stating the obvious to say that, when you remove measures that protect us from bad government behavior, you’re likely to get more bad government behavior? I mean, who could have imagined such a thing?)

As Ryan notes, the dismissal of 40 or so cases hardly ends the problem of the SEC’s systemic failures. What about the tainted cases that are already settled and closed? What about the controversial allegations and the adverse factual findings that live on even in those dismissed cases? What about the attorney fees and costs borne by defendants created by a fundamentally unfair system?

Nonetheless, the dismissal of these cases is a step forward for fairness. I can only hope that it is a signpost in the long battle to protect the rights of the people by ensuring that cases will be heard in full-fledged courts. For those ensnared in not-quite courts for years and years, this is very happy news.