Scales of justice (Image: Shutterstock)

For securities industry professionals — advisors, brokers, public company officers and directors for example — how the Securities and Exchange Commission enforces the federal securities laws matters.

Consider the circumstances of Michelle Cochran versus David Martin.

Certified public accountants in Texas, both have practiced before the SEC as accountants preparing or auditing public company financial statements.

The SEC alleged that Cochran and Martin aided and abetted a public company’s failure to file accurate periodic reports. The SEC imposed monetary penalties against both of them, and barred them from practicing before the commission as accountants.

However, a critical difference between the two CPAs is that the SEC first brought suit against Martin in federal court and later sought to bar him under in an administrative proceeding, thus affording him a right to have a jury determine whether he had violated the federal securities laws before imposing penalties.

Because the SEC elected to bring suit against Cochran in front of its own administrative law judge, Cochran will never enjoy her constitutional right to have a jury determine whether she violated the federal securities laws. The SEC currently has complete control over a defendant’s constitutional right to a jury simply by where the SEC chooses to bring its enforcement action.

Earlier this year, Cochran filed a lawsuit in federal court seeking an order halting the SEC administrative proceeding against her.

The SEC had paused that proceeding while waiting to hear from the U.S. Supreme Court about whether SEC ALJs were properly appointed. After the Supreme Court declared the SEC ALJs unconstitutional last year, the SEC changed the way its ALJs were appointed and pushed forward with its administrative proceeding against Cochran.

Cochran’s current attempt to stop the SEC’s administrative proceeding from going forward — initially rebuffed in federal court in Texas in April and now on appeal — raises a separate constitutional issue relating to how SEC ALJs can be removed, an issue that was raised (but not resolved) during the last trip up to the Supreme Court.

While the manner in which SEC ALJs are appointed and removed presents important constitutional questions, answering those questions would do nothing to address the SEC’s ability to deny a defendant the right to a jury highlighted by the SEC’s different treatment of Cochran and Martin.

Interestingly, in the SEC’s case involving Martin, the SEC conceded (and the federal appellate court in Texas agreed) that the Constitution guaranteed access to a jury to determine whether or not the federal securities laws had been violated.

For anyone accused by the SEC of wrongdoing, the importance of having access to a jury cannot be overstated.

One frequent critic of the SEC’s ability to avoid federal court is Mark Cuban, who was famously exonerated by a jury in a trial against the SEC.

After his experience, Cuban has weighed in on behalf of others facing SEC administrative proceedings pointing out in so-called “friend of the court” briefs that had he been subjected to a SEC ALJ instead of a federal court jury, he “likely would have been found liable by an in-house SEC [ALJ] on an untested legal theory and based on incomplete and misleading facts.”

A ruling in Cochran’s appeal is expected later this year. Regardless of the result, the SEC will continue to bring some cases in federal court and others in administrative proceedings, resulting in similarly situated people such as Cochran and Martin receiving very different types of adjudication.

Unless the Supreme Court or Congress intervenes, some SEC defendants will have access to federal court juries and some will not despite similar allegations and punishments put forth by the SEC.

(Nicolas Morgan represents Cuban, Phillip Goldstein and Nelson Obus in connection with an amicus brief filed in support of Michelle Cochran’s appeal.)