(Michael Barnes, Liberty Headlines) Rep. Warren Davidson, an Ohio Republican, filed federal legislation on Wednesday to restore due process rights for individuals and businesses being pursued by the U.S. Securities and Exchange Commission.
Dubbed the Due Process Restoration Act of 2017, the bill provides defendants in legal cases with the option to have their proceedings advance in a federal district court instead of internal SEC administrative courts.
The agency’s enforcement powers were greatly expanded under the Obama-era Dodd-Frank Act of 2010, which authorized the SEC to impose civil penalties through its internal court system – a system in which the agency prevails in more than 90 percent of its cases.
Unlike traditional courts, the SEC’s administrative proceedings do not afford many common due process protections.
The ongoing case of Lynn Tilton, founder of Patriarch Partners, LLC, highlights concerns over the courts’ lack of constitutional protections.
In 2015, the agency alleged Tilton and her firm committed fraud by hiding poorly performing investment funds loaded with distressed loans. The SEC is seeking $208 million in penalties. In the process, Tilton racks up lawyers’ fees, and her career and Patriarch Partners’ reputation is irreparably damaged.
According to Bloomberg News, the fix was in from the beginning.
Before her trial, Tilton’s lawyers sought notes and recordings of witness interviews. They were denied. They asked for a dismissal because the agency failed to disclose a business relationship with the accounting firm of a witness. Denied.
They said the SEC failed to turn over evidence that could help clear Tilton. They claimed the SEC was allowed to present testimony that would have been barred in federal court, and they’ve argued that the rules blocked them from questioning witnesses beforehand.
“The procedural bias in favor of he SEC is baked into the cake,” an independent financial services executive told Bloomberg.
In the aftermath of the Wall Street financial crisis, congressional Democrats and the Obama administration instituted the most consequential financial regulations since the Great Depression. In passing Dodd-Frank, the public was assured the government was solving Wall Street’s “too big to fail” problem.
But critics, including U.S. district court judges and some SEC judges themselves, say the SEC’s expanded administrative authority is an abuse of power.
Administrative proceedings do not allow for the option of trial by jury. They only offer limited access to government evidence, and they do not protect against unreliable evidence, such as hearsay.
“Due process should be afforded at every level to prevent government overreach,” said Davidson. “Whether it is the Securities and Exchange Commission, the Consumer Financial Protection Bureau, or any other government institution, no government bureaucracy should be given the power of judge, jury and executioner.”
Former congressman Scott Garrett, a New Jersey Republican, introduced similar legislation in 2015. It gained the support of the National Association of Criminal Defense Lawyers, and the U.S. Chamber of Commerce.
“This legislation would better ensure procedural fairness when the Securities and Exchange Commission brings an administrative proceeding by giving respondents the option to timely terminate such proceeding, while still allowing the SEC the option to refile the action in federal district court,” a statement from the NACDL said.
Late last year, the U.S. Court of Appeals for the 10th Circuit ruled that the SEC’s administrative law judges are unconstitutional. The U.S. Court of Appeals for the District of Columbia Circuit reached the opposite conclusion several months earlier, giving the issue a chance of being heard at the U.S. Supreme Court.
For Lynn Tilton, and others like her, a legislative fix or court resolution can’t come soon enough. Tilton told the New York Post earlier this year that she sees a more reasonable SEC under President Trump, and insinuated that the previous administrative actions were politically motivated.
“As you know, they voted 3-2 along party lines to even bring this case,” Tilton said.