Amicus Curiae Brief — Raymond J. Lucia, et al., Petitioners v. Securities and Exchange Commission

No. 17-130

IN THE

Supreme Court of the United States

RAYMOND J. LUCIA, ET AL., Petitioners,

V.

SECURITIES AND EXCHANGE COMMISSION, Respondent.

On Writ of Certiorari to the U.S. Court of Appeals for

the District of Columbia Circuit

BRIEF FOR URSKA VELIKONJA AND

JOSEPH A. GRUNDFEST AS AMICI CURIAE

IN SUPPORT OF NEITHER PARTY

Brian Wolfman

Counsel of Record

GEORGETOWN LAW

APPELLATE COURTS

IMMERSION CLINIC

600 New Jersey Ave., NW

Washington, D.C. 20001

(202) 661-6582

wolfmanb@georgetown.edu

TABLE OF CONTENTS

TABLE OF AUTHORITIBS............0 ec ceecee neces il

INTEREST OF AMICI... cece ceccceecceeeeeeeeeees 1

INTRODUCTION AND SUMMARY OF

ARGUMENT... cccccccccesccaeecneecceeceaeceneeceeeceaeeenes 2

ARGUMENT... cccccccccesccaeecneecceeceaeceneeceeeceaeeenes 7

I. The SEC Brings a Small Minority of Contested

Actions as Administrative Proceedingg................. 8

II. The Data Reject the Hypothesis That the SEC

Prevails More Frequently Before ALJs Than in

Federal District Court............ccccccccecceeceeeeeeeeeeees 14

III. Empirical Analysis of the Outcome of

Contested Enforcement Proceedings Sheds No

Light on the Question Presented in this Case... 22

CONCLUSION ..... eee ceesececceeeeeecaaeececaeeeeeaaeeees 25

ul

TABLE OF AUTHORITIES

Page(s)

Statutes

15 U.S.C. § 781Q).... ce cccccececcccseeecceeeeeeceeeeseceeeeseeensees 7,9

15 U.S.C. § T80(D)(A) oo. ee cccceeeccceeeeccenseseceeseneeeeseeseeees 7

Dodd-Frank Wall Street Reform and Consumer

Protection Act, Pub. L. 111-208, § 929P, 124 Stat.

L376 oii cc cccccccccccccccccccccccececececsesesescececeusesucececs 2,8

Private Securities Litigation Reform Act of 1995. Pub

L. 104-67, 109 Stat. 737 (codified as amended in

scattered sections of 15 U.S.C.) wo... eee 2

Securities Enforcement Remedies and Penny Stock

Reform Act of 1990, §§ 102, 202-203, 301, 401,

104 Stat. 931, 933-35, 937-40, 941-44, 946-49 ...8

Other Authorities

Andrew Ceresney, Dir., SEC Div. of Enft, Keynote

Speech at New York City Bar 4th Annual White

Collar Institute, May 12, 2015,

https://www.sec.gov/news/ speech/ceresney-nyc-

bar-4th-white-collar-key-note.html .................... 7

Jean Eaglesham, SEC Wins With In-House Judges,

WALL ST. J. (May 6, 2015)... ccc ceeceeeeeees 2,3

Joseph A. Grundfest, Fair or Foul? SEC

Administrative Proceedings and Proposal for

Reform Through Removal Legislation, 85

FORDHAM L. REV. 1148 (2016) ................ 1,4, 5, 12

Gretchen Morgenson, At the SEC, a Question of

Home-Court Edge, N.Y. TIMES, Oct. 5, 2013...... 3

iil

SEC, Select SEC and Market Data Fiscal 2016,

https://www.sec.gov/files/2017-03/secstats

AO 65 ole | ee 8-9

Stanford Class Action Securities Fraud

Clearinghouse, securities.stanford.edu................ 2

Urska Velikonja, Are the SEC’s Administrative Law

Judges Biased? An Empirical Investigation, 92

WASH. L. REV. 315 (2017)...... 1,4, 5, 12, 15, 21, 24

Urska Velikonja, Reporting Agency Performance:

Behind the SEC’s Enforcement Statistics, 101

CORNELL L. REV. 901 (2016)... eee eee 1,9

Urska Velikonja, Securities Settlements in the

Shadows, 124 YALE L.J. F. 126 (2016),

http://www.yalelawjournal.org/forum/securitiessettlements-in-the-shadows .................008. 1,11, 12

INTEREST OF AMICI?

Amici curiae are law professors whose research

and teaching focus, among other things, on empirical

analysis of the enforcement of the federal securities

laws. Joseph A. Grundfest is the William A. Franke

Professor of Law and Business at Stanford Law School

and served as Commissioner of the United States

Securities and Exchange Commission (“SEC” or

“Commission”) from 1985 to 1990. Urska Velikonja is

Professor of Law at Georgetown University Law

Center.

We are, to the best of our knowledge, the only

academics who have conducted empirical analyses of

the outcomes of litigated matters filed by the SEC as

administrative proceedings and in federal court. See

Joseph A. Grundfest, Fair or Foul? SEC

Administrative Proceedings and Proposal for Reform

Through Removal Legislation, 85 FORDHAM L. REV.

1143 (2016); Urska Velikonja, Are the SEC’s

Administrative Law Judges Biased? An Empirical

Investigation, 92 WASH. L. REV. 315 (2017); Urska

Velikonja, Reporting Agency Performance: Behind the

SEC’s Enforcement Statistics, 101 CORNELL L. REV.

901 (2016); Urska Velikonja, Securities Settlements in

the Shadows, 124 YALE LJ. F. 126 (2016),

http://www.yalelawjournal.org/forum/securitiessettlements-in-the-shadows. Professor Grundfest is

also founder and principal investigator at the Stanford

! All parties have consented in writing to the filing of all

amicus briefs. No counsel for a party authored this brief in whole

or in part, and no person other than amici or its counsel made a

monetary contribution to the preparation or submission of this

brief.

2

Securities Class Action Clearinghouse, an online

resource that tracks activity in every federal class

action securities fraud proceeding filed since the

effective date of the Private Securities Litigation

Reform Act of 1995, Pub L. 104-67, 109 Stat. 737. See

securities.stanford.edu.

INTRODUCTION AND SUMMARY OF

ARGUMENT

Briefs filed in this case cite to news articles

alleging that the SEC is more likely to prevail in

lawsuits decided by ALJs than in cases litigated in

federal district courts.? These articles also contend

that following the adoption of the Dodd-Frank Wall

Street Reform and Consumer Protection Act of 2010,

Pub. L. 111-208, 124 Stat. 1376, the Commission is

more likely to litigate matters before administrative

law judges than prior to the Act’s adoption.

In particular, a Wall Street Journal article based

on data analyzed by a Wall Street Journal reporter

concludes that “[t]he SEC brought more than four out

of five of its enforcement actions’ before its ALJs, ‘up

from less than half of them a decade earlier.” Petition

for Writ of Certiorari at 33, No. 17-130, 2017 WL

3189046 (filed July 21, 2017) (quoting Jean

Eaglesham, SEC Wins with In-House Judges, WALL

ST. J. (May 6, 2015) (“Eaglesham”). One amicus

2 See, e.g., e.g., Petition for a Writ of Certiorari at 33, No. 17-

130, 2017 WL 3189046 (filed July 21, 2017) (quoting Jean

Eaglesham, SEC Wins with In-House Judges, WALL ST. J (May 6,

2015); Brief of the Chamber of Commerce of the United States of

America as Amicus Curiae Supporting Petitioners at 9, No. 17-

130, 2017 WL 37138062 (filed August 25, 2017) (citing

Eaglesham).

3

asserts that “[b]etween October 2010 and March 2015,

the SEC won 90% of the cases it brought before its

ALJs, as compared with 69% of cases before district

court judges.” Brief of the Chamber of Commerce of the

United States of America as Amicus Curiae

Supporting Petitioners at 9, No. 17-130, 2017 WL

3713062 (filed August 25, 2017) (citing Eaglesham).

Summarized differently, “[slince the Dodd-Frank Act

of 2010 expanded the Commission’s administrative

enforcement authority, the Commission has brought

more than 80% of its enforcement proceedings in its

in-house tribunal, where it has won over 90% of the

time.” Brief for Petitioners at 3, No. 17-130, 2018 WL

1027816 (filed February 21, 2018) (citing Eaglesham).

In much the same vein, an earlier New York Times

article reported that, in its review of cases filed in

2011, the SEC prevailed in 88% of cases it filed before

ALJs compared to 63% of cases it filed in federal

district court. See Gretchen Morgenson, At the SEC, a

Question of Home-Court Edge, N.Y. TIMES, Oct. 5,

2013, http://www.nytimes.com/2013/10/06/business/

at-the-sec-a-question-of-home-court-edge.html.

Taken together, these articles foster the

impression, relied upon by briefing in this case, that

the Commission has a “home court” advantage when

litigating before its administrative law judges. The

articles also foster the impression that the

Commission is filing more litigation as administrative

proceedings to capitalize on this alleged advantage.

We take no position on the merits of this case and

express no view as to its resolution. We also express

no view as to the fairness or efficiency of the

procedural rules governing the Commission’s

4

administrative process. Those questions are quite

distinct from the constitutional question before the

Court. Instead, we write exclusively to address two

empirical questions raised by the debate over the

Commission’s reliance on administrative enforcement

of the federal securities laws.

First, is there statistically reliable evidence that

ALJs systematically resolve cases in a manner that

differs from the resolution of equivalent Commission

actions filed in federal district court?

Second, has the Commission’ steered a

disproportionate share of contested proceedings to

ALJs because the Commission is more likely to prevail

before those ALJs?

Each of us has independently addressed these

questions through empirical analyses that rely on

different databases and that apply different analytic

techniques. See Joseph A. Grundfest, Fair or Foul?

SEC Administrative Proceedings and Proposal for

Reform Through Removal Legislation, 85 FORDHAM L.

REV. 1148 (2016); Urska Velikonja, Are the SEC’s

Administrative Law Judges Biased? An Empirical

Investigation, 92 WASH. L. REV. 315 (2017). We have

each independently reached identical conclusions.

Contrary to the suggestions that appear in the press,

there is no statistically reliable evidence that the

Commission has a “home court” advantage before

ALJs. There is also no statistically reliable evidence

that the Commission is steering a disproportionate

share of litigation to the administrative forum in order

3 For analysis of the fairness and efficiency of the procedures

followed in the Commission’s administrative proceedings, see

generally Grundfest, supra, 85 FORDHAM L. REV. 1148 (2016).

D

to capitalize on this non-existent advantage. See

Grundfest, supra, 85 FORDHAM L. REV. at 1175-84;

Velikonja, supra, 92 WASH. L. REV. at 341-62.

To test whether these findings are robust to more

recent enforcement decisions by the Commission, this

amicus brief reports on the findings of an empirical

analysis that examines every enforcement action filed

by the SEC from the beginning of fiscal year 2007

through September 30, 2017, the end of the SEC’s

2017 fiscal year, and resolved prior to January 1, 2018.

We explain our data collection and classification

methodology in the main body of our argument (at pp.

8-10) and document significant classification problems

with the data upon which the Wall Street Journal and

New York Times rely. Contrary to the conclusions

reported in those articles and advanced in the briefing

in this case, we find no statistically significant

difference in the SEC’s success rate in federal district

court as opposed to before ALJs based on the analysis

of the expanded dataset reported in this amicus brief.

We also find that the SEC has continued to litigate a

large majority of contested proceedings in federal

district court, and not before its ALJs. Our analysis of

the more recent data is thus also inconsistent with the

suggestion of “home court” bias in matters litigated

before the Commission’s ALJs.

We are aware of no published academic study that

reaches conclusions inconsistent with those expressed

in this amicus brief, or with our prior articles

addressing this question. We recognize, however, that

the absence of a statistically significant difference in

ALJ and federal district court resolutions as analyzed

in this submission, and in our prior scholarship,

cannot establish that there is no case, or set of cases,

6

in which outcomes before an administrative law judge

and before a federal district court would not have

differed. We are therefore not arguing that the forum

in which a case is litigated is universally irrelevant.

Our analysis is, instead, based on comparisons of

averages, and the data indicate that, on average, the

forum is not outcome determinative. Moreover, the

absence of a difference in average outcomes does not

imply the absence of a difference in the perceived, ex

ante probability of success by each litigant in each

forum. In particular, we are unable to measure the

quality of each case and the expected likelihood of

success on the merits for either party in either forum.

The implications of this limitation on the data are

potentially significant. If, for example, the SEC is

sending its stronger cases to ALJs, its success rates

before ALJs should be higher than in federal court, all

else being equal. Similarly, if the SEC is sending more

difficult cases to ALJs, then the finding that there is

no difference in average outcomes between the two

forums would imply that the ALJ process is biased in

favor of the SEC. If, however, the cases sent to the

different forums have similar average chances of

success on the merits, then our results imply that

conclusions reported in the Wall Street Journal and

relied on in the briefing have no empirical support and

should not be relied on.

For these and other reasons described below, data

describing win-loss ratios before ALJs and in federal

court cannot, in and by themselves, establish the

presence or absence of a “home court” advantage. We

accordingly urge this Court to address all data of this

sort, including the analyses presented in the Wall

Street Journal, The New York Times, in our academic

7

publications, as well as in this amicus brief, with

extreme caution. This Court should resolve the

question presented through the application of

standard interpretive techniques that do not refer to

the empirical questions addressed in this amicus brief.

ARGUMENT

The Securities and Exchange Commission can

often, but not always, exercise discretion as to whether

to file an enforcement proceeding in an administrative

forum or in federal district court. Some actions, such

as proceedings seeking a temporary restraining order,

an asset freeze, or the appointment of a receiver must

be filed in federal court because only a federal court

can order the remedy sought by the Commission. See,

e.g., Andrew Ceresney, Dir., SEC Div. of Enft,

Keynote Speech at New York City Bar 4th Annual

White Collar Institute (May 12, 2015),

https://www.sec.gov/news/speech/ceresney-nyc-bar-

A4th-white-collar-key-note.html. In contrast, the

statutes require that the Commission file other actions

as administrative proceedings, including actions to

suspend or terminate the registration of public

companies for failure to file periodic reports, follow-on

proceedings to bar individuals or entities from the

securities industry, or charges of failure to supervise

employees who committed serious _ securities

violations. See e.g., 15 U.S.C. §§ 781G), 780(b)(4). In

most instances, however, the SEC can choose the

forum in which it litigates contested cases.

Since 1990, the SEC has had the authority to seek

monetary penalties, including civil fines, in

administrative cease-and-desist proceedings, but only

against registered persons, including broker-dealers

8

and investment advisers like the petitioners. See

Securities Enforcement Remedies and Penny Stock

Reform Act of 1990, §§ 102, 202-203, 301, 401, 104

Stat. 931, 933-35, 937-40, 941-44, 946-49. The Dodd-

Frank Act expanded the Commission’s powers to seek

civil fines in administrative cease-and-desist

proceedings to include actions against any individual

or entity, regardless of whether they were registered

with the Commission. Dodd-Frank _ thereby

dramatically expanded the domain of cases in which

the Commission could exercise discretion in forum

selection while still obtaining substantial civil fines.

See Dodd-Frank Wall Street Reform and Consumer

Protection Act, Pub. L. 111-2038, § 929P, 124 Stat.

1376, 1862-64. Our analysis focuses on the subset of

cases in which the Commission can exercise discretion

over forum selection.

I. The SEC Brings a Small Minority of Contested

Actions as Administrative Proceedings.

Media reports suggesting the existence of a “home

court” advantage appear to rest on incomplete data

collection and classification methodologies that are

subject to material dispute.* To establish the

foundation for this conclusion, we begin with a

detailed explanation of our data_ collection

methodology. To assemble the data set that informs

our analysis, we rely principally on annual Select SEC

and Market Data reports from 2007 to 2016, published

by the Commission. See e.g., SEC, Select SEC and

4 The media reports discussed in this amicus brief have not

publicly disclosed the raw data upon which their conclusions are

based, nor have they explained precisely how they collected,

categorized, or analyzed their data.

Market Data Fiscal 2016,

https://www.sec.gov/files/2017-03/secstats2016.pdf.

These reports include a complete list of SEC

enforcement actions filed in a given fiscal year. We

supplement that list by reviewing administrative and

court dockets to ensure that the data set is complete,

and to add actions filed in fiscal 2017 for which the

SEC has yet to release a report.

We exclude from the analysis all actions in which

the SEC does not pursue an original violation of

federal securities laws. We therefore exclude: (1)

follow-on administrative proceedings in which the

SEC seeks to suspend or bar a respondent previously

found liable for violating securities and related laws;

(2) Section 12G)? actions to delist a company; (3)

subpoena enforcement proceedings; and (4) contempt

proceedings. The first two categories of listed actions

can be filed only in an administrative proceeding; the

latter two can be filed only in federal court. Thus, in

no case that falls in any of these four categories does

the Commission exercise any discretion as to forum

selection. We find that in all of these actions, the

Commission’s success rate is substantially higher

than in actions in which the Commission must

establish liability for a predicate securities law

violation. See Urska Velikonja, Reporting Agency

Performance: Behind the SEC’s’ Enforcement

Statistics, 101 CORNELL L. REV. 901, 914-15 n.71

(2016). Unless otherwise indicated, we also exclude

from our analysis resolutions predicated on collateral

° 15 U.S.C. §§ 781G).

10

estoppel arising from a prior criminal conviction for

the same violation.°®

We tabulate and report the information both by

defendant and by enforcement action. We present both

forms of analysis separately to account for the fact that

the SEC sues some defendants individually and joins

others in a single action. There appears to be no

systematic basis upon which the Commission decides

whether to aggregate multiple defendants in a single

action, or whether to file multiple individual actions

against multiple defendants. As demonstrated below,

our conclusions remain the same in every variation in

categorization.

We also exclude from the analysis all relief

defendants. These defendants are named in

Commission complaints only so the agency can obtain

disgorgement, and not so it can establish that any

relief defendant violated any of the securities laws. We

also review charging and related documents in each

proceeding to determine whether the action was

initially settled or contested, and whether the action

was filed in federal court or as an administrative

proceeding.

6 These actions ordinarily result from a joint investigation

by civil and criminal authorities. Both civil and criminal

authorities often file parallel charging documents on the same

day. The SEC’s case is then usually stayed until the criminal case

is resolved. Once prosecutors have secured a guilty plea or

conviction, the SEC moves for summary judgment or settlement.

In our sample, the SEC wins all such summary judgment cases,

and all but one of these cases were filed in federal court.

Excluding these actions ensures that the data are not biased so

as to inflate the Commission’s success rate.

11

Our data indicate that, from fiscal 2007 through

2017, defendants’ initial settlement rate in standalone

actions varied from a low of 32% in fiscal 2009 to a high

of 55% in fiscal 2015, with an average of 41%.’ The

number of _ settled actions initially filed as

administrative proceedings increased considerably

during this period. Between fiscal 2007 and 2010,

before the Dodd-Frank amendments took effect, an

average of 40% of settlements were filed as

administrative proceedings.® That share increased to

83% in fiscal 2015. See Urska Velikonja, Securities

Settlements in the Shadows, 124 YALE L.J. F. 126, 130

(2016) (““Velikonja, Settlements’).

This increase in the percentage of settled actions

filed as administrative proceedings is readily

explained as a consequence of the bargaining

dynamics in settlement proceedings that have no

implication for the presence of an alleged SEC “home

court” advantage before ALJs. In particular, Dodd-

Frank allows both non-registered respondents and the

Commission to settle matters as administrative

proceedings whereas, prior to Dodd-Frank, precisely

the same settlements would have been filed in federal

court. If defendants perceive administrative ceaseand-desist settlements to signal less culpability and to

involve exposure less severe than that associated with

the entry of a federal injunction, then defendants

would, all other factors equal, prefer to settle a matter

’ These data include standalone actions filed in court and in

administrative proceedings, and _ exclude follow-on and

delinquent filing actions.

5 This result is conditioned on a count of respondents, not of

proceedings.

12

if it is filed as an administrative proceeding than if it

is filed in federal court. The increase in settlements

initially filed as administrative proceedings may

therefore reflect defendant preferences more than

strategic forum selection decisions on the part of the

Commission. See Joseph A. Grundfest, supra, 85

FORDHAM L. REV. at 1151-52, 1182-83; Velikonja,

Settlements, 124 YALE L.J. F. at 125-26.

But contrary to claims advanced in the Wall

Street Journal and cited in the briefing, the overall

share of contested cases (rather than settled cases)

filed in administrative proceedings remains small

post-Dodd-F rank, although the relative increase in the

share of contested cases filed in administrative

proceedings is substantial and statistically significant.

See Urska Velikonja, Are the SEC’s Administrative

Law Judges Biased? An Empirical Investigation, 92

WASH. L. REV. 315, 342 (2017) (““Velikonja, ALJ Bias”).

Between fiscal 2007 and 2010, 7% of respondents who

did not initially settle with the SEC faced the agency

in an administrative proceeding. By fiscal 2014, 23%

of non-settling respondents faced the SEC in an

administrative proceeding. The relative share of nonsettling respondents sued in an administrative

proceeding has since declined to pre-Dodd-Frank

levels. See Figure 1.

13

FIGURE 1

Filings in Contested Cases by Forum (by Number of

Defendants)?

700

600

900 __

400 | | | |

300 | |

100

~ L mml font bent fan font WY UR

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

OCourt WAdministrative Proceeding

*k *K *K

In sum, the WSJ and related news stories

incorrectly suggest that the SEC litigates a material

percentage of contested actions before ALJs. At peak,

23% of non-settling respondents in standalone actions

faced the SEC before an ALJ. Currently, about 7% of

respondents do.

’ Figure 2 in the Appendix shows filings in contested actions

using the enforcement action as a unit of analysis. Between fiscal

2007 and 2010, 10% of enforcement actions that were not initially

settled were filed as administrative proceedings. At peak in fiscal

2014, 38% of initially contested enforcement actions were filed as

administrative proceedings.

14

II. The Data Reject the Hypothesis That the SEC

Prevails More Frequently Before ALJs Than in

Federal District Court.

Most defendants who initially contest the SEC’s

charges, whether in administrative proceedings or in

federal court, ultimately settle. Our analysis of

outcomes in contested actions excludes’ these

settlements, and also excludes actions that result ina

default judgment or voluntary dismissals. Our

analysis therefore focuses exclusively on the outcomes

of cases filed in fiscal years 2007 to 2017, in which a

judge, a jury, or an ALJ issued a decision prior to

January 1, 2018. These are the matters that are

litigated fully to conclusion.

This sample includes federal court cases decided

after a full jury or bench trial, cases decided by

summary judgment, and cases dismissed on a

contested motion to dismiss. The sample also includes

administrative cases in which ALJs issued initial

decisions that are not based on respondent’s default,

including cases in which the ALJ’s decision has

subsequently been appealed to the Commission’? and

the case remains pending. This sorting yields a list of

791 defendants in 374 enforcement actions, of whom

602 faced the SEC in court (in 273 enforcement

actions) and 189 appeared before an ALJ (in 101

enforcement actions).

We measure outcomes as of the point of first

decision on liability. That decision may be the result of

10 In this Part II of the Argument, we use the term “the

Commission” to refer to the five commissioners who review

appeals to ALJ rulings. We use the term “SEC” to refer to the

agency.

15

a partial summary judgment or a jury verdict that is

later reversed on appeal. It could also reflect an ALJ

initial decision that is later reversed by the

Commission. The analysis considers only the outcome

by the first court and the first ALJ to decide the matter

as to defendant’s or respondent’s liability."’

A trial or summary judgment is deemed a victory

for the SEC if it prevails on one or more claims against

any defendant in a manner that entitles it to relief

under the federal securities laws, even if no relief is

ultimately awarded. A ruling or verdict for the SEC as

to an element of an offense, absent a finding that a

defendant actually violated a provision of the federal

securities laws, is not counted as an SEC victory

because the SEC would still have to establish that a

violation occurred.

In Table 1 (pp. 16 and 17 below), we report our

initial results by individual defendant and by

enforcement action. In rows one, four, and five, we

include cases predicated on a prior criminal

conviction. In other rows, we exclude these cases. The

first three rows report results using each defendant as

a unit of analysis; rows four through nine report

results by enforcement action. Notes included after

Table 1 explain additional measurement variations we

‘1 In some cases, the respondent or the SEC appeals the ALJ

initial decision to the Commission, which then issues an opinion

deciding the matter after de novo review. Of cases that were

appealed to the Commission between fiscal 2008 and 2017, the

Commission resolved the matter in favor of the respondent as

often as it resolved it in favor of the SEC. As a result, our findings

and conclusions would not be affected by including resolutions

after appeal to the Commission. See Velikonja, ALJ Bias, 92

WASH. L. REV. at 325 n.63.

16

used as robustness checks. No matter how we slice the

data, the SEC’s relative success rate in either forum is

consistently between 80 and 90 percent, and in no

version of the analysis is there a _ statistically

significant difference in success rates between the two

forums.

TABLE 1

SEC Success Rate in Court and in Before an ALJ

(2007-2017)

(8) (N court = 222; Nag = 100)

Court ALJ

By Defendant (1)

(Neourt = 602; Nag = 189) 88% 85%

By Defendant (2), (3)

(Neourt = 5008; Nag = 188) 86% 85%

By Defendant (2), (4)

(Neourt = 002; Nag = 188) 87% 85%

By Enforcement Action (1), (3),

(5) (Neourt = 273; Nag = 101) 85% 83%

By Enforcement Action (1), (3),

(6) (Neourt = 273; Nag = 101) 87% 87%

By Enforcement Action (2), (5),

(7) (Neourt = 212; Nag = 100) 81% 83%

By Enforcement Action (2), (6),

(7) (Neourt = 212; Nag = 100) 83% 87%

By Enforcement Action (2), (5),

(8) (Neourt = 222; Nag = 100) 82% 83%

By Enforcement Action (2), (6),

84% 87%

17

(1) The tally includes summary judgments predicated

on a prior guilty plea or conviction.

(2) The tally does not include summary judgments

predicated on a prior guilty plea or conviction.

(3) Ten defendants faced _ parallel criminal

proceedings. Where those proceedings were

vacated on appeal, the SEC moved to vacate earlier

entered settlements or obtained summary

judgments. The tally includes them as SEC losses

by summary judgment.

(4) Ten defendants faced parallel criminal proceedings

and pleaded guilty or were convicted. On appeal,

criminal judgments were reversed and the SEC

moved to vacate settlements and summary

judgments that it obtained on the basis of criminal

judgments. These defendants are included in the

tally as if the cases were not vacated.

(5) Counting as SEC wins only those multi-defendant

actions where the SEC prevailed against all

defendants.

(6) Counting as SEC wins those multi-defendant

actions where the SEC prevailed against at least

one defendant, but may have lost against some.

(7) Excluding from analysis multi-defendant cases,

where at least one defendant’s resolution is

predicated on earlier guilty plea or conviction.

(8) Excluding from analysis multi-defendant cases,

where all defendants’ resolutions are predicated on

earlier guilty pleas or convictions.

Because we study all actions filed in fiscal years

2007 through 2017, regardless of whether all cases

filed in a given year have been resolved, concern arises

that cases that remain ongoing are the cases that the

SEC is more likely to lose. To address this concern, we

18

also report outcomes by year in which an action was

originally filed (see Appendix, Figures 3.A and 3.C).

All actions filed in fiscal years 2007 and 2008 have

been resolved, and only a handful of actions filed in

fiscal years 2009 to 2012 remain ongoing (five, one,

two, and five cases, respectively). These counts

exclude cases stayed for the duration of parallel

criminal proceedings. We also report results by the

year in which the action was resolved (see Appendix,

Figures 3.B and 3.D). A year-to-year comparison in

outcomes is considerably more variable, as is common

when the sample size is small, but there are no obvious

trends suggesting that the SEC is more likely to lose

actions that take longer to resolve. The presence of

ongoing cases is therefore unlikely to change our

overall result reported above: the SEC prevails

against defendants at very high rates’ in

administrative proceedings and in federal district

court, and there is no statistically significant

difference in the SEC’s success rate between the two

forums.

Insider trading cases are, however, different. As

shown in Figure 4 in the Appendix, the SEC loses

about half of insider trading cases decided both by

courts and by ALJs, whereas its success rate in other

types of actions is much higher. Insider trading cases

represent 9% of contested cases studied but 33% of

SEC losses overall. Of contested cases filed in federal

district court, insider trading cases represent 12% of

our sample but 42% of SEC losses. Of contested cases

litigated before ALJs, insider trading cases represent

only 2% of the sample, but 7% of all losses. The SEC’s

success rate before federal district courts and before

ALJs in insider trading cases is_ statistically

19

indistinguishable. However, because insider trading

cases represent a much larger share of the SEC’s

losses in federal district court, and a much smaller

share of its losses before ALJs, any comparison of

success rates in these two forums that fails to account

for this important variation in case characteristics will

be biased.

To address variation in case and defendant

characteristics, we apply multivariate logistic

regression techniques to test whether there is a

statistically significant correlation between the

likelihood that the SEC will prevail in an action and

the forum in which the matter is litigated. We

categorize defendants and actions by subject matter as

reported in Select SEC and Market Data reports (1.e.,

broker-dealer, insider trading, investment advisor,

issuer reporting, market manipulation, and securities

offering cases).'7 We also control for whether the

defendant is an individual or an entity and, in some

specifications, whether the resolution is based on prior

criminal pleas or convictions.

We first analyze the entire dataset using a range

of specifications, as described in the discussion of

’ Four FCPA cases in our sample were treated as issuer

reporting cases, consistent with the SEC’s categorization of these

actions before fiscal 2011. Eight municipal offering cases were

treated as securities offering cases, and six cases against

registered transfer agents were treated as investment adviser

actions, again consistent with the SEC’s categorization of these

cases before fiscal 2011. Success rates in FCPA, municipal

offering, and registered transfer agent cases are comparable to

the SEC’s success rate in the categories into which those cases

were merged by the Commission (i.e., the SEC prevailed in 3 of 4

FCPA actions, which is consistent with its success rate in issuer

reporting cases generally).

20

Table 1. We then focus on cases filed in fiscal years

2007 to 2012, where all or nearly all cases have been

resolved. We then analyze resolutions handed down in

the years spanning 2012 to 2017, during which our

dataset includes all or nearly all actions that have

been resolved in a given fiscal year. We perform the

analysis with the observations defined by individual

defendant as well as by enforcement action. Select

regression results are reproduced in the Appendix,

Tables 2.A, 2.B, and 2.C. Our data set and the full set

of regression results are available on-line at

https://scholarship.law.georgetown.edu/scb/79/.

The forum in which a proceeding was heard,

whether federal district court or administrative, was

not significantly correlated with outcomes in all but 8

of 33 regression analyses (using the standard 5% level

of significance).'? In those three analyses, the results

suggest that the SEC is at a disadvantage when

litigating before ALJs. In no specification do we find

evidence of home court advantage. The results are

robust. As explained in Table 1, the data are coded

several different ways to account for the presence of

multi-defendant actions and for parallel guilty pleas,

and we perform analyses of every variation.

*K *K *K

Our conclusions differ from those reported in the

Wall Street Journal and New York Times for several

reasons. First, we include in our analysis all

resolutions handed down by a third-party adjudicator,

such as summary judgments, and do not rely

3 One of three statistically significant outcomes, suggesting

that the SEC is at a disadvantage when litigating before ALJs, is

reported in Table 2.C in the Appendix.

21

exclusively on cases decided after a trial or hearing.

Inasmuch as a victory at the summary judgment stage

is every bit as valuable as a victory after trial—

indeed, it can be argued that a victory at summary

judgment is a superior measure of the merits of a

litigant’s position—there appears to be no coherent

reason to exclude summary judgments from the

analysis. Thus, to the extent that the SEC tends to

prevail more frequently at the summary judgment

stage, as appears to be the case,“ the exclusion of

summary judgment and other pre-trial resolutions

biases the data against the SEC.

Second, our analysis adjusts for the fact that

forum selection is not random across all types of cases.

The SEC tends to litigate certain types of cases more

frequently in federal district court (e.g., insider

trading and offering fraud cases) and other types of

cases more frequently before ALJs (e.g., broker-dealer

and investment advisor violations). This distinction is

significant from an analytical perspective because the

SEC is more likely to lose when litigating insider

trading claims than is it to lose when litigating other

types of securities law violations, regardless of forum.

Unless an analysis properly controls for this factor, it

is easy to reach the mistaken conclusion that the

SEC’s success rate in federal district court is lower

than it is before ALJs, when, in reality, the finding

‘4 In our sample, the SEC prevailed at summary judgment

against 408 of 423 defendants (a 96.4% win rate). Even if

summary judgments based on prior convictions or guilty pleas are

excluded, the SEC prevailed at summary judgment against 310

of 325 defendants (a 95.4% win rate). The SEC’s win rate at

summary judgment is higher than in cases decided after trial. See

also Velikonja, ALJ Bias, 92 WASH. L. REV. at 349.

22

should be that the SEC’s success in litigating insider

trading actions is lower than its success in litigating

other types of claims, and that insider trading cases

are litigated overwhelmingly in federal district court,

not in administrative proceedings.

III. Empirical Analysis of the Outcome of Contested

Enforcement Proceedings Sheds No Light on

the Question Presented in this Case.

The absence of a_ statistically significant

difference in the resolution of matters litigated in

federal district court and in administrative

proceedings does not mean that there is no case, or no

set of cases, in which outcomes in those individual

cases would not have differed if litigated in a different

forum. Thus, we do not claim that the choice of forum

is irrelevant in every instance. Instead, the

proposition advanced in our analysis is, instead, that

the forum selection decision seems not to have an

effect when measured on average.

Three additional caveats bear mention in

connection with any analysis of outcomes in litigated

enforcement proceedings. First, these analyses

consider only outcomes in litigated matters, but most

SEC enforcement actions are settled, including the

majority of actions that are initially contested. A

relatively higher share of defendants sued in court

settle than do respondents who litigate before ALJs.

As noted above, we cannot measure the quality of each

type of case. But if the cases are similar in both

forums, then defendants’ greater willingness to settle

in cases filed in federal district court biases the

23

comparison in favor of a higher SEC success rate in

administrative proceedings.”

Second, the SEC does not litigate every case to

conclusion. Instead, the Commission will move to

dismiss the action where further prosecution of an

entity is deemed unnecessary because the sole owner

has been convicted or has died, because a parallel

settled action is filed in an administrative proceeding,

or for a variety of other reasons that often are not

specified. Courts regularly grant these motions.

Because researchers are unable to define precisely the

cases that are voluntarily dismissed for these

procedural reasons, rather than for other more

substantive causes related to the merits, we exclude

these observations from our analysis. The existence of

these voluntary dismissals for indeterminate reasons

generates noise in the data that complicates the ability

to make strong assertions regarding the effects of SEC

forum selection decisions.

Third, and most important, a finding that there is

no average difference in outcomes between matters

litigated in federal district court and matters litigated

in administrative proceedings does not imply that

there is no difference in the a priori probability of

success in each forum. Contested actions filed in court

and in administrative proceeding are similar on

average, but not identical. Courts are more likely to

‘5 For example, if defendants with a 30% or lower chance of

success are more likely to settle when the action is litigated in

court than before an ALJ, the pool of contesting litigants in

federal district court will include fewer defendants with a low

chance of success and more who face better odds. As a result, all

else equal, the SEC’s expected success rate in court should be

lower than before an ALJ.

24

find that the defendant violated scienter-based

provisions of securities laws than are ALJs, but court

cases are somewhat less likely to result in a

defendant’s bar or suspension from the securities

industry or from practicing before the Commission as

accountant or attorney. See Velikonja, ALJ Bias, 92

WASH. L. REV. at 356-57. Median civil fines imposed in

both forums are similar, but at the 75th percentile, the

civil fines are higher in federal district court. Id. at

356. Thus, if the SEC systematically directs easier-towin cases to ALJs, its success rates before ALJs should

be higher, all other factors equal. Similarly, if the SEC

systematically directs its more difficult cases to ALJs,

then the absence of a _ statistically significant

difference in outcomes would imply that the ALJs

process is biased in favor of the SEC. If, however, the

cases sent to each forum have similar chances of

success on the merits on average, then our results

imply that widely-reported press analyses suggesting

a “home court” advantage in administrative

proceedings would be incorrect.

*K *K *K

We urge the Court to ignore references to

statistical disparities in outcomes, suggestions that

the SEC has a “home court” advantage in

administrative proceedings, and that ALJs have a bias

observable through the analysis of aggregate data.

Every published academic study of which we are

aware, and the additional analysis reported in this

amicus brief, supports the conclusion that there is no

statistically significant difference in the SEC’s

probability of prevailing in federal district court or in

an administrative proceeding. We further emphasize

that our conclusions should not be over-interpreted to

25

imply an absence of ALJ bias in any one case, or in any

set of cases. Moreover, because researchers cannot

evaluate ex ante case quality, or account for other

selection biases, a comparison of outcomes in

contested enforcement actions can only support

cautious, qualified conclusions about the potential

presence or absence of bias in any forum.

CONCLUSION

Amici end where we began. We take no position

on the merits of this case and express no views as to

its resolution. We also take no position as to the

fairness or efficiency of the procedural rules governing

the ALJ process, which is a question distinct from the

one before the Court. Instead, we urge the Court to

address the question presented as a matter of

constitutional interpretation as to which the available

statistical evidence provides no meaningful insight.

Respectfully submitted,

Brian Wolfman

Counsel of Record

GEORGETOWN LAW

APPELLATE COURTS

IMMERSION CLINIC

February 28, 2018 600 New Jersey Ave., NW

Washington, D.C. 20001

(202) 661-6582

wolfmanb@georgetown.edu

Counsel for Amicus Curiae

APPENDIX: DATA AND TABLES

FIGURE 2

Contested Actions Filings (enforcement action as

the unit of analysis)

200

180

160

140 —

120 r

100

TAN fal ot OY AF

| | el il

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

OCourt WAdministrative Proceeding

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