The U.S. Securities and Exchange Commission (SEC) has faced
another set-back in its efforts to pursue insider trading cases. On
June 8, 2015, a federal judge shocked the SEC
by enjoining it from continuing an administrative proceeding in
Hill v. SEC, an insider trading case. Sitting in the U.S.
District Court in Atlanta, Judge Leigh Martin May found the
SEC's practice of using Administrative Law Judges (ALJ) to
litigate claims against nonregistered defendants to be "likely
While the specific constitutional issues raised in Hill
are not applicable in Canada, the case illustrates a dynamic
tension between courts and administrative tribunals. Similar issues
may yet play out in Canada as securities regulators opt to pursue
serious securities cases, carrying significant penalties, before
administrative tribunals rather than in court.
The plaintiff in this case was a self-employed real estate
developer who allegedly made close to $750,000 in profits from
insider trading. After a two-year investigation, the SEC sought
administrative sanctions against him, including a cease-and-desist
order, a civil penalty, and disgorgement. Prior to the passage of
Dodd-Frank in 2010, the SEC could not seek civil penalties from an
unregistered individual through administrative proceedings; rather,
it had to be pursued in federal court, where defendants could
invoke their U.S. constitutional right to a jury trial.
SEC administrative proceedings vary greatly from federal court
actions. Administrative proceedings have relaxed evidentiary and
procedural rules. They generally unfold much faster. And most
importantly for the purposes of Judge May's decision, they may
be presided over by an ALJ, a delegate of the adjudicative power
vested in the Commissioners of the SEC. Like many other
administrative bodies, such delegation of authority is permitted by
the SEC's enabling legislation.
The question facing Judge May was whether ALJs are inferior
officers or employees of SEC. If the former, Article II of the U.S.
Constitution (the Appointments Clause) requires that they be
appointed by the President, or if Congress designates, the
Judiciary or "Heads of Departments".
Judge May analyzed the powers exercised by the ALJs of the SEC
and found them to be inferior officers. Because of the way the SEC
hires ALJs, the Judge found that the appointment "is likely
unconstitutional in violation of the Appointments Clause". On
this basis, Judge May granted a preliminary injunction enjoining
the SEC administrative proceedings from continuing against the
Implications of the Ruling
For the SEC, the ruling has significant ramifications. As
discussed, the SEC has faced continuing challenges enforcing
its rules against insider trading activity. Following a string of
high-profile insider trading trial losses and increasingly onerous evidentiary burdens to
make the case in court, the SEC Enforcement Division has begun to
pursue a more aggressive agenda against insider-trading cases
through administrative proceedings.
No doubt, the ruling will dampen such initiatives. In fact, the
SEC felt compelled to release a public letter declaring Judge May's
decision to be "wrongly decided" and erroneous. It is
unlikely that this will be the last word.
In Canada, the use of administrative tribunals to try cases
involving significant securities matters is prevalent and broadly
accepted. However, the role of the Commission as both the driver
and enforcer of policy has been criticized and reviewed and has been the
subject of judicial consideration. The perception,
generally, has been that tribunals can offer more streamlined
decision-making and a wider range of remedies than courts typically
offer. However, in recent years securities commissions have been
given the ability to impose very significant "administrative
penalties" and disgorgement orders in the exercise of their
public interest jurisdiction. Also, after years of trying to secure
criminal convictions in provincial court, securities regulators
achieved success sanctioning insider trading through
administrative proceedings. As tribunals increasingly become the
most important forum in which serious securities matters are
adjudicated, and as their power to impose significant and
far-reaching remedies grows, we may see renewed efforts to narrow
the jurisdiction of Canadian administrative tribunals for
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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