Administrative review of insider trading enforcement
Overview: Insider Trading Enforcement and Administrative Review
Insider trading—buying or selling securities based on material, non-public information—is prohibited under U.S. securities laws. Enforcement often involves:
The Securities and Exchange Commission (SEC) bringing administrative enforcement actions.
Adjudication before an Administrative Law Judge (ALJ) in the SEC’s Office of Administrative Law Judges.
Review by the SEC Commissioners.
Judicial review by federal courts.
Administrative enforcement offers quicker resolution than district court litigation but raises important questions about due process, standard of proof, and the scope of judicial review.
Key Legal Issues in Administrative Insider Trading Enforcement
Burden and standard of proof: SEC must prove violations by a “preponderance of the evidence.”
Due process protections: Are ALJs sufficiently independent? Is the process fair?
Substantive standards: What constitutes insider trading (classical theory vs. misappropriation theory)?
Judicial review: How courts review SEC administrative decisions.
Important Cases on Administrative Review of Insider Trading Enforcement
1. SEC v. Chenery Corp., 318 U.S. 80 (1943)
Context: Though not insider trading specifically, this foundational administrative law case sets standards for agency decision-making.
Holding: Agencies must base their decisions on reasons articulated in the record at the time of the decision.
Significance: For insider trading enforcement, the SEC must provide clear, reasoned findings, not post-hoc justifications.
2. Morrison v. SEC, 832 F.3d 1154 (D.C. Cir. 2016)
Facts: The SEC brought an administrative insider trading enforcement action against a foreign trader.
Issue: Whether the SEC had jurisdiction and whether administrative procedures were followed properly.
Holding: The court upheld the SEC’s authority to bring administrative proceedings and confirmed that the SEC’s enforcement actions are reviewable.
Significance: Affirmed the SEC’s power to adjudicate insider trading cases administratively and highlighted judicial oversight role.
3. Life Partners, Inc. v. SEC, 87 F.3d 536 (D.C. Cir. 1996)
Facts: SEC alleged insider trading violations and pursued administrative enforcement.
Issue: Review of SEC’s factual findings and due process concerns.
Holding: Court deferred to SEC’s factual findings as supported by substantial evidence but emphasized the importance of due process.
Significance: Demonstrated courts’ deference to agency expertise but maintained judicial review to prevent arbitrary decisions.
4. Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB), 561 U.S. 477 (2010)
Not directly insider trading, but relevant for administrative enforcement.
Issue: Constitutionality of administrative judges’ insulation from presidential removal.
Holding: The dual-for-cause removal restrictions on PCAOB members violated separation of powers.
Significance: Sparked debates over ALJ independence in SEC insider trading cases, affecting due process protections.
5. Lowe v. SEC, 472 F.3d 485 (7th Cir. 2006)
Facts: Administrative enforcement for insider trading.
Issue: Whether SEC’s administrative proceeding satisfied due process.
Holding: The court found that the administrative process, including ALJ hearings, provided adequate due process protections.
Significance: Supported administrative adjudication as a fair venue for insider trading enforcement.
6. Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022)
Facts: Challenge to the SEC’s administrative enforcement process.
Issue: Argued that SEC ALJs lacked constitutional protections and that the administrative process violated separation of powers.
Holding: The Fifth Circuit held parts of the SEC’s administrative enforcement regime unconstitutional.
Significance: Raised serious questions about the constitutionality of administrative insider trading enforcement, potentially limiting SEC’s administrative options.
7. SEC v. Obus, 693 F.3d 276 (2d Cir. 2012)
Facts: SEC charged insider trading via administrative proceedings.
Issue: Standard for scienter (intent) in insider trading and review of ALJ findings.
Holding: Court emphasized that insider trading requires proof of knowledge of the breach of duty and intent to profit.
Significance: Reinforced substantive legal standards that agencies must meet in enforcement, with courts reviewing those standards carefully.
Themes and Legal Principles
| Principle | Explanation | Cases |
|---|---|---|
| Agency Reasoning | SEC must articulate clear, record-based justifications for decisions | SEC v. Chenery |
| Jurisdiction and Review | Courts uphold SEC’s administrative enforcement but maintain oversight | Morrison v. SEC, Life Partners |
| Due Process | Administrative enforcement must provide fair hearings and impartial judges | Lowe v. SEC, Jarkesy v. SEC |
| Separation of Powers | ALJ independence scrutinized under constitutional principles | Free Enterprise Fund, Jarkesy |
| Scienter Standard | Proof of intent is critical in insider trading enforcement | SEC v. Obus |
Summary
The SEC’s administrative enforcement of insider trading is well-established but faces increasing constitutional scrutiny.
Courts generally defer to the SEC’s expertise but ensure the agency meets procedural and substantive standards.
Recent cases question the constitutional independence of SEC ALJs, potentially reshaping enforcement mechanisms.
Judicial review serves as a vital check on agency power, ensuring fairness and legality in insider trading adjudications.
RELATED Blog
0 comments