Atlanta investment firm sues SEC to challenge in-house judges

[February 20, 2015]  By Suzanne Barlyn

(Reuters) - An Atlanta-based investment advisory firm sued the U.S. Securities and Exchange Commission on Thursday over the use of internal administrative courts, challenging one of the regulator's most effective post-financial crisis enforcement tools.

Gray Financial Group Inc and its top two executives have been the targets of an SEC investigation since at least August 2013, according to a complaint they filed in U.S. District Court for the Northern District of Georgia, but the agency has not yet filed a formal enforcement case.

The firm, which manages almost $11 billion, received Wells notices in 2014, an indication that the regulator reached a conclusion and civil charges are imminent, the complaint said. It said SEC officials have told Gray that it plans to file an administrative proceeding.

Gray Financial's complaint takes issue with the SEC administrative proceedings, arguing that they are unconstitutional because the U.S. President is unable to remove administrative law judges, a violation of his executive powers.
 

The firm has asked the federal court to order the SEC to share information about the proceedings, including how it selects and hires its administrative judges. It also wants the court to halt any future administrative case against the firm.

The SEC’s investigation of Gray Financial stemmed from whether the firm complied with a 2012 Georgia law that allowed public pensions to invest in alternative investments, such as private equity funds, the complaint said. The firm advises retirement plans.

The SEC has been handling more enforcement cases in its administrative court, instead of federal court, since the 2010 Dodd Frank financial reform law empowered the regulator to seek financial penalties against a broader array of defendants.

Many defense lawyers say administrative proceedings lack procedural protections available in federal courts, such as the ability to take depositions and spend more time gathering evidence. What is more, there are no juries in administrative cases and the SEC’s own judges hear the cases, the lawyers say.

“The SEC’s administrative proceeding process provides the SEC an unfair home court advantage,” said Terry Weiss, a lawyer for Greenberg Traurig LLP in Atlanta representing Gray Financial.

A spokesman for the SEC directed Reuters to a 2014 speech in which SEC enforcement head Andrew Ceresney responded to criticisms about administrative proceedings. The proceeding furthers “the balanced and informed development of the federal securities laws, just as it does in other specialized legal areas in which administrative agencies function,” Ceresney said.

(Reporting by Suzanne Barlyn; Editing by Grant McCool)

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