A few years ago, SB Nation, a sports media company, set out to determine whether home field advantage is real. They crunched the numbers for professional baseball, football, basketball and hockey, and they found that the home team has an edge over the visiting team.
The advantage is not enormous, but it is meaningful. SBN found that an NBA team that played all its games at home would win 10.11 percent more. That transforms a 41-win team to a 45-win team, maybe enough to push a marginal squad into the playoffs. NFL, MLB and NHL home teams also have an advantage at home, though closer to 5 than 10 percent. The numbers, as one might expect, vary considerably by city. San Francisco kills at home, while Miami would be better off playing all its games on the road.
Which brings us to the Securities & Exchange Commission. In 2010, Congress, via the Dodd-Frank Act, handed the SEC the option of playing its games – enforcement proceedings with monetary penalties – at home in its administrative courts rather than on the road in the district courts. Offered a heaping helping of home cooking, the agency bellied up to the table.
Commentators point out that the SEC is hardly the only agency with its own in-house proceedings. But they also note that things have strayed far from the slap-on-the-wrist disciplinary matters for registered brokers and investment advisors that once comprised the administrative docket. Ironically, the goal was the same: Tick through the matters faster than the courts could. Unfortunately, a high-stakes insider trading enforcement action is not the same as the routine securities chaff the ALJs churned through.
And, of course, the SEC’s home court advantage is different from that enjoyed by the typical home sports team, which benefits from the crowd, well-rested players sleeping in their own beds, and, in baseball, the configuration of the field. For example, the agency hires, pays and shares offices with its administrative judges. Unlike matters brought in the courts, there are no jury trials, very little time to prepare and limited pretrial depositions. Yes, the defense can appeal, but the first bite at that apple goes to the same SEC commissioners who signed off on bringing the action in the first place. The second bite means bucking the courts’ traditional deference to agency proceedings. Not exactly a level playing field.
All of which has observers of the SEC enforcement scene crying foul. How can the SEC be allowed to serve as prosecutor, judge, jury and executioner on the securities matters it handles? It seems, well, untoward. Mark Cuban, the billionaire entrepreneur and owner of the NBA’s Dallas Mavericks, who has been sideways with the SEC for some time, railed against the agency in a recent court brief, calling its home-field procedures “woefully inadequate.”
A recent study, “SEC Enforcement Activity Against Public Company Defendants,” highlights the issues. The NYU Pollack Center for Law & Business and Cornerstone Research analyzed data from 2010 to 2015 in the Securities Enforcement Empirical Database (SEED). Among a number of interesting takeaways, a few stand out:
SEC administrative proceedings are lopsided affairs. The agency wins more than 90 percent of the time, compared with a success rate of 69 percent in federal court.
No wonder, then, that the agency likes playing at home. Between 2010 and 2015, the SEC more than tripled the proportion of actions brought as administrative proceedings – from 21 percent to 76 percent.
And consider the timeline for a typical public company case: SEC opens an investigation, the agency works the matter for almost two years, an enforcement action is filed in the administrative forum, and the case is resolved the same day it is filed.
Short, sweet and ... unconstitutional?
Not surprisingly, the SEC’s surge to its home court is under assault in the courts. An article in The New York Times “DealBook” in October spotlighted the rising tide of constitutional challenges to the SEC’s use of “in-house judges.” So far it’s been an uphill battle as defendants struggle to get the courts to reach the constitutional issues. The problem is they first have to avail themselves of the administrative review process, which can be a slog. For example, in 2014 it took an average of 733 days to get a decision in an enforcement case. The upshot is that until the courts decide the raft of constitutional issues being raised, a cloud will hang over the SEC’s administrative proceedings.
The agency, which recently softened some of its procedures in a move critics welcome but see as too little too late, has been defending itself in court and in front of its harshest critics –
the white collar bar. “The SEC has been using administrative proceedings for many years; they are not new,” Andrew Ceresney, director of the agency’s Division of Enforcement, said during his keynote speech at the New York City Bar’s 4th Annual White Collar Institute last year. Ceresney made a special point of noting how many of these matters are signed and sealed before the
administrative law judges deliver their blessing. “The vast majority of the uptick in the numbers of actions we have brought as
administrative proceedings are settled
actions. That is a point often missed
by commentators.”
Mark Cuban isn’t the only one crying foul. (To close out our somewhat tortured sports metaphor, it’s worth noting that the SBN home field study showed that Cuban’s Dallas Mavericks enjoyed an above-average home court advantage, while the Washington’s Wizards, the SEC’s home team, fell well short of the NBA average.) The Bloomberg editorial board recently laid into the SEC for its surge of home-court filings.
“Some have likened the SEC’s quasi-judicial system to a kangaroo court,” Bloomberg writes. “Even if it isn’t, it has the potential to become one. It should be restrained before it does too much damage.”
Published January 31, 2016.