United States: Seventh Circuit Rejects Court Challenge To Pending SEC Administrative Enforcement Proceeding

The U.S. Court of Appeals for the Seventh Circuit held yesterday that federal District Courts do not have subject-matter jurisdiction to entertain challenges to ongoing SEC administrative enforcement proceedings where the challenger is already a party to those proceedings. A party to a pending administrative proceeding must defend against that proceeding and then seek review from the SEC Commissioners and, eventually, the federal appellate courts.

The Seventh Circuit's decision in Bebo v. SEC is the latest ruling in a multi-front series of challenges to the SEC's authority to bring administrative enforcement proceedings – rather than federal-court actions – especially against nonregulated persons and entities. The Seventh Circuit's ruling disagrees with several recent decisions holding that the statutory scheme for review of SEC administrative proceedings does not preclude court challenges to the constitutionality of the SEC's enabling legislation or to the structural authority of the SEC.

Factual Background

The SEC brought an administrative cease-and-desist proceeding against Bebo, the former CEO of a public company, for violations of the federal securities laws. Bebo answered and asserted two constitutional arguments as affirmative defenses: (i) the Dodd-Frank Act's authorization of administrative enforcement proceedings violates the Fifth Amendment's equal-protection and due-process clauses because it gives the SEC "unguided" authority to choose which respondents will and will not receive the procedural protections of federal-court proceedings, and (ii) the SEC's administrative proceedings are unconstitutional under Article II of the Constitution because the administrative law judges ("ALJs") who conduct such proceedings are shielded from removal by multiple layers of for-cause protection.

Instead of waiting for the administrative process to end, Bebo sued in federal court, alleging that the SEC lacked constitutional authority to continue the administrative proceedings. The District Court dismissed the case, holding that it lacked subject-matter jurisdiction to entertain the challenge in light of the statutory procedures for review of ALJ rulings.

Under applicable law, a respondent in an SEC administrative proceeding may file a petition for review with the Commission, which can either adopt the ALJ's initial decision as the final decision of the agency or grant the petition and conduct de novo review. If the Commission's final decision is adverse, the respondent may seek judicial review under 15 U.S.C. § 78Y(a)(1) either in the U.S. Court of Appeals for the District of Columbia Circuit or in the Circuit Court where the respondent resides or has his or her principal place of business.

Bebo appealed the dismissal, and the Seventh Circuit affirmed.

Seventh Circuit's Decision

The Seventh Circuit agreed with the District Court that the statute provides the exclusive route for judicial review of challenges to a pending administrative proceeding even where a party to such a proceeding contests the SEC's authority to proceed administratively in the first place. Applying the framework that the Supreme Court established in recent decisions challenging other administrative schemes, the Seventh Circuit held that the statutory review provisions did "not foreclose all meaningful judicial review."

The Seventh Circuit distinguished Bebo's situation from that of the challengers in Free Enterprise Fund v. Public Company Accounting Oversight Board, in which the Supreme Court held that subject-matter jurisdiction existed to adjudicate a facial challenge to the statute creating the Public Company Accounting Oversight Board (the "PCAOB"). The Supreme Court there ruled that § 78y did not provide an exclusive system for judicial review where (i) "a finding of preclusion could foreclose all meaningful judicial review," (ii) the challenge was "wholly collateral to a statute's review provisions," and (iii) the plaintiffs' claims were "outside the agency's expertise."

The Seventh Circuit held that requiring Bebo to continue the administrative proceeding and then seek review under the statutory scheme would not deprive her of all meaningful judicial review. The court viewed Free Enterprise Fund as inapposite because, although the plaintiffs in that action had been under investigation by the PCAOB, the PCAOB had not yet brought an administrative proceeding when the plaintiffs challenged the constitutionality of the governing statute. Bebo, in contrast, filed suit after the administrative proceeding had begun. Thus, unlike the plaintiffs in Free Enterprise Fund, she did "not need to 'select and challenge a Board rule at random'" in order to raise her constitutional arguments; nor did she "have to 'bet the farm . . . by taking the violative action' before 'testing the validity of the law.'"  "She is already the respondent in a pending enforcement proceeding, so she does not need to risk incurring a sanction voluntarily just to bring her constitutional challenges before a court of competent jurisdiction. After the pending enforcement action has run its course, she can raise her objections in a circuit court of appeals established under Article III."

The Seventh Circuit punted on whether Bebo's constitutional claims were "wholly collateral" to the statute's review provisions – Free Enterprise Fund's second factor. The Seventh Circuit noted that some courts have construed that factor to "focus on the relationship between the merits of the constitutional claim and the factual allegations against the plaintiff in the administrative proceeding," while others have read the factor to "focus on whether the constitutional claims are being raised as a 'vehicle' to challenge agency action taken during an administrative proceeding."  The Seventh Circuit did not resolve the question, because it concluded that the first factor – availability of meaningful judicial review – was "the most critical thread in the case law."

As for the third factor – whether the plaintiff's claims were "outside the agency's expertise" – the Seventh Circuit observed that the Supreme Court's post-Free Enterprise Fund decision in Elgin v. Department of Treasury had held that, even if an agency might not have expertise over a particular constitutional claim, such a narrow formulation of the question "'overlook[s] the many threshold questions that may accompany a constitutional claim and to which the [agency] can apply its expertise.'"

The Seventh Circuit distilled the Supreme Court's case law into several key points:

  • A plaintiff cannot sue in District Court "merely because her claims are facial constitutional challenges" to an agency's authority to act;
  • The District Court's subject-matter jurisdiction "does not turn on whether the SEC has the authority to hold [the challenged statute] unconstitutional, nor does it hinge on whether [the plaintiff's] constitutional challenges fall outside the agency's expertise";
  • An ALJ's and the Commission's "fact-finding capacities, even if more limited than a federal district court's, are sufficient for meaningful judicial review"; and
  • "[T]he possibility that [the plaintiff] might prevail in the administrative proceeding (and thereby avoid the need to raise her constitutional claims in an Article III court) does not render the statutory review scheme inadequate."

For all of these reasons, the Seventh Circuit ruled that a respondent in a pending SEC administrative proceeding may not sue in a District Court to block that proceeding by asserting constitutional challenges to the SEC's authority. Meaningful judicial review is available under the statutory review scheme.

Bebo's Implications

Challenges to SEC administrative proceedings are a hot topic at the moment. Those challenges involve at least two sets of issues:  the existence of subject-matter jurisdiction to bring the challenge, and the viability of the challenger's substantive constitutional claims. The Seventh Circuit addressed only the jurisdictional issue in Bebo.

The Bebo decision was written narrowly and can be limited to its facts. The ruling technically applies only to District Court challenges brought after administrative proceedings have commenced. Whether the SEC will try to extend the decision to situations where an administrative proceeding is on the verge of being filed (as opposed to being somewhat more remote) remains to be seen.

The Bebo decision will undoubtedly be at issue in one or more pending appeals from District Court rulings upholding jurisdiction over constitutional challenges to SEC administrative proceedings. One such appeal has already been filed in the Eleventh Circuit, in Hill v. SEC, and another seems likely to be filed in the Second Circuit, in Duka v. SEC. The Seventh Circuit disagreed with both of those decisions in Bebo.

Seventh Circuit Rejects Court Challenge to Pending SEC Administrative Enforcement Proceeding

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions