United States: Supreme Court Declines To Address The Constitutionality Of Securities And Exchange Administrative Forum

On March 28, 2016, the Supreme Court denied a petition for certiorari review brought by Laurie Bebo, the former CEO of Assisted Living Concepts Inc., who challenged the constitutionality of proceedings conducted in an SEC administrative tribunal.  Although the Court denied review, there are many more cases like it winding their way through the federal system, and in the likely event a split develops among the circuits, the Supreme Court may be inclined to address the issue, especially given the amount of attention the issue has received.  Indeed, Bebo's petition itself attracted the notice of celebrity entrepreneur Mark Cuban, who filed an amicus brief in her case arguing that the SEC's administrative tribunal is a "farce" and unconstitutional.

The underlying issue in Bebo is a relatively new one:  Before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"), the SEC was forced to bring enforcement actions in district court.  But section 929P(a) of Dodd-Frank gave the SEC power to seek enforcement penalties in its own administrative proceedings.  As did Bebo, targets of SEC administrative actions have challenged section 929P(a)'s constitutionality, alleging that it violates the Appointments Clause in Article II of the Constitution because the administrative law judges who preside over such proceedings are not appointed by the President or the SEC Commissioners, but are instead hired by the SEC.

In Bebo, an SEC administrative law judge ordered the defendant to pay $4.2 million for violating certain securities laws.  Before the judge issued that order though, Bebo brought her constitutional challenge in the United States District Court for the Eastern District of Wisconsin, seeking a declaration that the SEC's administrative law judges lack constitutional authority to issue such orders. The district court dismissed Bebo's suit for lack of subject matter jurisdiction, holding that Bebo was first required to exhaust SEC administrative proceedings, and then appeal to federal court.  The Seventh Circuit affirmed, relying on two Supreme Court cases:  Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), and Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).

So far, the lower courts have decided these constitutional challenges inconsistently.  The D.C. Circuit has affirmed a dismissal for lack of jurisdiction just like the Seventh Circuit did in Bebo.  See Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015).  A few courts in the Southern District of New York have done the same.  See Tilton v. S.E.C., No. 15-2472 (S.D.N.Y. June 30, 2015); Chau v. SEC, No. 14-1903 (S.D.N.Y. Dec. 11, 2014).  However, one Southern District of New York judge went the other way, holding that the court had subject matter jurisdiction to hear the case, and then also finding in favor of the petitioner and granting a preliminary injunction against the SEC enjoining the administrative tribunal proceedings.  See Duka v. SEC, No. 15-357 (S.D.N.Y. Aug. 12, 2015).  District courts in Georgia have also granted preliminary injunctions halting SEC administrative proceedings.  See Hill v. SEC, No. 15-1801 (N.D. Ga. June 8, 2015); Gray Fin. Grp. Inc. v. SEC, No. 15-492 (N.D. Ga. Aug. 4, 2015); Ironridge Global IV, Ltd. v. SEC, No. 15-2512 (N.D. Ga. Nov. 17, 2015).  All of those district court cases are now pending on appeal in the Second or Eleventh Circuits, respectively.

Notably though, not every case involves the jurisdictional question.  In two other D.C. Circuit cases, the jurisdictional issue was not presented because the petitioner appealed directly from a final order of the SEC administrative tribunal to the D.C. Circuit.  In one, the petitioner did not raise the issue until after the D.C. Circuit had issued an opinion affirming the SEC's ruling, seeking rehearing from the court.  See Pierce v. SEC, No. 14-1079 (D.C. Cir.).  The D.C. Circuit rejected that petition on August 3, 2015, and a petition for certiorari is currently pending in the Supreme Court.  In the other, Raymond J. Lucia Companies v. SEC, No. 15-1345 (D.C. Cir.), the argument was squarely presented from the outset, but the D.C. Circuit has not yet ruled.

With all of these divergent outcomes, the issue very well may wind its way to the Supreme Court.  However, the Supreme Court will probably let most of these cases play out in the lower courts before weighing in, or at least will allow a circuit split to develop before taking up the issue.  The earliest that could happen would be when either the Second Circuit or the Eleventh Circuit decides the appeals pending before them.

The consequences of being subject to an SEC administrative review process are significant.  In federal court, a defendant is entitled to full civil discovery, complete application of the Federal Rules of Civil Procedure and Evidence, in most cases, a jury trial, and adjudication by a neutral arbiter, while a respondent in a SEC proceeding is entitled to none of these protections.  The results of that incongruity speak for themselves.  Whereas the SEC prevailed against 90% of defendants before administrative law judges during a recent five year stretch, its success rate in federal court was only 69% during the same time period.  Jean Eaglesham,  SEC Wins With In-House Judges, Wall St. J., (May 6, 2015).  It is therefore no surprise that there has been an uptick in the number of enforcement actions as in-house administrative proceedings in recent years.  Id.

For now, anyone who is subject to an SEC administrative enforcement proceeding should take steps to halt the proceeding and pursue a constitutional challenge in federal court.  That includes bringing an action for a preliminary injunction, as did the litigants in many of the above-referenced cases.

We are continuing to monitor these cases and will notify you of any developments, including a certiorari grant by the Supreme Court to review these issues.

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
Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

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