Flying Blind?  Changes to Due Diligence After High Court Limits Administrative Powers

Welcome to the August 2024 edition of our newsletter!  In this issue, we’ll examine how a recent U.S. Supreme Court ruling could affect due diligence regarding investment professionals and companies.

Looking Through a Keyhole: Due Diligence After the Recent High Court Ruling

Near the end of its recent term, the Supreme Court found that persons accused of fraud in civil court have a right to trial by a jury of their peers before administrative courts, such as those at the SEC and CFTC, have their say.  The ruling affects other federal agencies as well, such as those concerning environmental protection, which like the SEC can only administer civil remedies.

Over time, the change will deplete the public record concerning relevant individuals, as administrative law judge rulings and case files can typically present a robust history of allegations.  The ruling at issue concerned antifraud provisions, and it remains open whether, and to what degree, the ruling will be interpreted more broadly.

From the perspective of performing due diligence, the ruling places greater importance on examination of the existing public record of persons in regulated industries, including examination of relevant professional licenses, complaints, adverse news articles and customer reviews, and any prior history of litigation.  While the ruling does not neuter the administrative courts altogether, giving priority to the federal trial court can make looking into a subject’s history more opaque than it had been previously.  Establishing an understanding of prior disputes is a critical part of pre-transaction due diligence, and in its ruling the high court not only limited the power and scope of the administrative courts, but also the public’s insight into the matters those courts oversee.