Bennett et al v. U.S. Securities and Exchange Commission
Filing
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MEMORANDUM OPINION AND ORDER directing the Clerk to CLOSE THIS CASE. Signed by Judge Paul W. Grimm on 12/17/2015. (kns, Deputy Clerk)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Southern Division
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DAWN J. BENNETT,
et al.,
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Plaintiffs,
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v.
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U.S. SECURITIES & EXCHANGE
COMMISSION,
Case No.: PWG-15-3325
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Defendant.
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MEMORANDUM OPINION AND ORDER
After investigating Plaintiffs Dawn J. Bennett and Bennett Group Financial Services,
LLC for more than three years with regard to alleged violations of federal securities laws, the
U.S. Securities and Exchange Commission (the “Commission” or “SEC”) instituted an
administrative proceeding against them. Compl. ¶ 5, ECF No. 1. And, as part of the proceeding,
the Commission scheduled a hearing to begin January 25, 2016 before an administrative law
judge (“SEC ALJ”). Pls.’ Mem. in Supp. of Mot. for Temp. Restraining Order 1–2, ECF No. 5.
In an effort to halt the administrative proceeding permanently, Plaintiffs filed suit, claiming that
SEC ALJs are “inferior Officers,” but, in violation of the Appointments Clause, U.S. Const., art.
II, § 2, cl. 2, they are not appointed by the SEC Commissioners, who are considered “Heads of
Department” and therefore have appointment power. See Compl. ¶¶ 2–4. They also claim that
the ability to remove SEC ALJs from office, which can be done only for good cause, is vested in
other officers who also can be removed only for good cause, in violation of Article II, as
construed in Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 484
(2010). Id. Plaintiffs ask this Court (1) to “enjoin[] the Commission from carrying out an
administrative proceeding against Plaintiffs” and (2) to declare unconstitutional both “the
statutory and regulatory provisions and practices for selecting and designating SEC ALJs” and
“the statutory and regulatory provisions providing for the position of SEC ALJ and the tenure
protection for that position.” Id. at 22.
Additionally, with the January hearing imminent, Plaintiffs filed a motion for a
preliminary injunction to prevent the administrative proceeding from moving forward during the
pendency of this litigation. ECF No. 22. The parties fully briefed the motion, ECF Nos. 24, 26,
27, and I held a hearing on the matter on December 10, 2015. Because I found that this Court
lacks jurisdiction, I denied Plaintiffs’ motion and dismissed this case. ECF No. 29. This
Memorandum Opinion reiterates and amplifies my rulings made in open court.
Jurisdiction
The federal district courts “shall have original jurisdiction of all civil actions arising
under the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331; see also 28
U.S.C. § 2201 (federal district court may grant declaratory relief “[i]n a case of actual
controversy within its jurisdiction”). But, a statute providing for agency review will divest the
federal district courts of jurisdiction if “the ‘statutory scheme’ displays a ‘fairly discernible’
intent to limit jurisdiction, and the claims at issue ‘are of the type Congress intended to be
reviewed within th[e] statutory structure.’” Free Enters. Fund v. Pub. Co. Accounting Oversight
Bd., 561 U.S. 477, 489 (2010) (quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 207, 212
(1994) (internal quotation marks omitted)). Congress did not intend claims the be reviewed
within the statutory scheme, that is, by the agency only, “if [1] ‘a finding of preclusion could
foreclose all meaningful judicial review’; [2] the suit is ‘wholly collateral to a statute’s review
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provisions’; and [3] the claims are ‘outside the agency’s expertise.’” Id. (quoting Thunder Basin,
510 U.S. at 212–13 (internal quotation marks omitted)). Courts weigh the first factor most
heavily. See, e.g., Bebo v. S.E.C., 799 F.3d 765, 775 (7th Cir. 2015) (referring to the first
Thunder Basin factor as “the most critical thread in the case law” and finding it dispositive);
Altman v. S.E.C., 768 F. Supp. 2d 554, 559–60 (S.D.N.Y. 2011) (observing that the first Thunder
Basin factor “seems most important” and “trumps other considerations”), aff’d, 687 F.3d 44 (2d
Cir. 2012) (per curiam).
A. Intent of Statutory Scheme
The Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a et seq., provides for review
of final administrative orders in the federal courts of appeals. See also 15 U.S.C. §§ 80b-1 –
80b-21 (Investment Advisers Act). In Free Enterprise Fund, the Supreme Court concluded that,
under facts that are distinguishable from this case, this statutory scheme did “not expressly limit
the jurisdiction that other statutes confer on district courts,” and did not “do so implicitly,”
suggesting that any intent to limit jurisdiction over the petitioners’ claims was not fairly
discernible. See Free Enters. Fund, 561 U.S. at 489.
More recent circuit decisions in other
contexts, however, have found the intent to be fairly discernible in this statutory scheme. See
Jarkesy v. S.E.C., 803 F.3d 9, 17 (D.C. Cir. 2015) (“‘Given the painstaking detail with which’
Congress set forth the rules governing the court of appeals’ review of Commission action, ‘it is
fairly discernible that Congress intended to deny [aggrieved respondents] an additional avenue of
review in district court.’” (quoting Elgin v. Dep’t of Treas., 132 S. Ct. 2126, 2134 (2012)));
Bebo, 799 F.3d at 767 (“It is ‘fairly discernible’ from the statute that Congress intended plaintiffs
in Bebo’s position ‘to proceed exclusively through the statutory review scheme’ set forth in 15
U.S.C. § 78y.” (quoting Elgin, 132 S. Ct. at 2132) (emphasis added)).
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Notably, the plaintiffs’ positions in Bebo and Jarkesy were distinct from that of the
petitioners in Free Enterprise Fund: In Bebo and Jarkesy, as in this case, the plaintiffs sought to
enjoin agency enforcement proceedings that already had begun, whereas in Free Enterprise
Fund, the petitioners would have had to violate the law to induce agency action from which they
then could bring a claim, as discussed in further detail below. In any event, notwithstanding
their finding that the intent to limit jurisdiction was fairly discernible from the statutory scheme,
the Bebo and Jarkesy Courts addressed the Thunder Basin factors to determine whether Congress
intended to limit jurisdiction with regard to the specific claims at issue. See Bebo, 799 F.3d at
773–75; Jarkesy, 803 F.3d at 18–24; see also Free Enters. Fund, 561 U.S. at 489 (stating that
statutory scheme divests court of jurisdiction if the statute shows “a ‘fairly discernible’ intent to
limit jurisdiction, and the claims at issue ‘are of the type Congress intended to be reviewed
within th[e] statutory structure’” (quoting Thunder Basin, 510 U.S. at 207, 212) (emphasis
added)).
Thus, given that Plaintiffs’ constitutional claims relate to ongoing administrative
proceedings, following Bebo and Jarkesy, it appears that Congress’s intent to limit district court
jurisdiction is fairly discernible. See Bebo, 799 F.3d at 767; Jarkesy, 803 F.3d at 17. In keeping
with Bebo and Jarkesy, I considered the Thunder Basin factors to determine jurisdiction in this
particular instance. And, a review of the Thunder Basin factors reinforced the conclusion that
Plaintiffs’ constitutional claims first must be reviewed through the administrative process
(followed by review at the Court of Appeals), and not through a district court action.
B. Thunder Basin Factors
Free Enterprise Fund, 561 U.S. 477, is the starting point for my analysis of the Thunder
Basin factors.
In Free Enterprise Fund, the petitioners’ challenge pertained not to the
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constitutionality of the appointment of an SEC ALJ but rather to the constitutionality of the
Public Company Accounting Oversight Board (“Board”), which operated under Commission
oversight. 561 U.S. at 485–86. At the time the petitioners filed suit in district court, the Board
had begun a formal investigation but had not issued a final order imposing sanctions against
them. Moreover, it would not necessarily do so, as the Board did not issue a final order as to
every action that it took.
Significantly, judicial review was available only for Commission, not Board, action.
Therefore, when the petitioners sought to challenge the very existence of the Board, rather than
one of its rules or a sanction it imposed, there was nothing for them to appeal to obtain federal
court review within the statutory scheme. The Government argued that the petitioners should
“incur a sanction (such as a sizable fine) by ignoring Board requests for documents and
testimony” as a means to “win access to a court of appeals.” Id. at 490. The Supreme Court did
“not consider this a ‘meaningful’ avenue of relief,” id. at 490–91 (quoting Thunder Basin, 510
U.S. at 212), noting that the Court “normally do[es] not require plaintiffs to ‘bet the farm . . . by
taking the violative action’ before ‘testing the validity of the law,’” id. at 490 (quoting
MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118, 129 (2007)). On the basis of facts not found
in this case, the Supreme Court concluded that preclusion of district court jurisdiction would
foreclose all meaningful judicial review. Id.
The Free Enterprise Fund Court next concluded that the “general challenge” the
petitioners made to the Board was “‘collateral’ to any Commission orders or rules from which
review might be sought,” given that “[the] petitioners object[ed] to the Board’s existence, not to
any of its auditing standards,” and there was no proceeding pending from which they could
appeal. Id. at 490. Additionally, the Court concluded that the claims at issue were “outside the
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Commission’s competence and expertise,” as they did not “require ‘technical considerations of
[agency] policy.’”
Id. at 491 (quoting Johnson v. Robison, 415 U.S. 361, 373 (1974)
(emendation in Free Enters. Fund).
Two years later, the Supreme Court reconsidered the Thunder Basin factors in Elgin v.
Department of Treasury, 132 S. Ct. 2126 (2012), taking a different tack in its analysis of what
qualifies as a “wholly collateral” claim. There, Elgin, a federal employee discharged for a
statutory violation, appealed to the Merit Systems Protection Board (“MSPB”), in accordance
with the Civil Service Reform Act (“CSRA”), 5 U.S.C. § 1101, which governed review of
adverse federal employment actions. Id. at 2130–31. He argued that the statute he was found to
have violated was unconstitutional, and the MSPB dismissed the appeal. Id. Thereafter, instead
of appealing to the Federal Circuit, which had “‘exclusive jurisdiction’ over appeals from a final
decision of the MSPB” under the CSRA, Elgin, along with the other discharged employees,
brought the same constitutional claims in federal district court, which concluded that it had
jurisdiction to hear the claims. Id.
After the First Circuit vacated, holding that the district court lacked jurisdiction, the
Supreme Court granted certiorari to determine whether there was “an exception to CSRA
exclusivity for facial or as-applied constitutional challenges to federal statutes.” Id. at 2131–32,
2134. The Court considered the text, structure, and purpose of the CSRA and concluded that it
was “fairly discernible that Congress intended to deny . . . employees [who could seek review in
the Federal Circuit] an additional avenue of review in district court.” Id. at 2133–34. Reasoning
that “‘the distinction between facial and as-applied challenges is not so well defined that it has
some automatic effect,’” and that jurisdictional determinations cannot “involve . . . amorphous
distinctions,” it held that the CSRA’s “exclusivity does not turn on the constitutional nature of an
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employee’s claim, but rather on the type of the employee and the challenged employment
action.” Id. at 2135–36 (quoting Citizens United v. Federal Election Comm’n, 558 U.S. 310, 331
(2010)).
The Court then analyzed the Thunder Basin factors to discern whether Congress intended
for the claims at issue to be reviewed within the statutory scheme of the CSRA. It stated that
whether the MSPB actually had, or believed that it had, the authority to determine the
constitutionality of statutes was irrelevant to whether an employee could obtain meaningful
review under the statutory scheme. Elgin, 132 S. Ct. at 2136–37. The Court reasoned that
Congress could “inten[d] to preclude district court jurisdiction” even where “the administrative
body could not decide the constitutionality of a federal law,” because the issue nonetheless
“could be ‘meaningfully addressed in the Court of Appeals.’” Id. (quoting Thunder Basin, 510
U.S. at 215). It observed that “the CSRA review scheme fully accommodates an employee’s
potential need to establish facts relevant to his constitutional challenge to a federal statute,”
through judicial notice and the MSPB’s authority “to take evidence and find facts for Federal
Circuit review,” such that “constitutional claims can receive meaningful review within the CSRA
scheme.” Id. at 2138–39.
With regard to the second Thunder Basin factor, the Supreme Court concluded that
petitioners’ constitutional claims were not “wholly collateral” to the CSRA scheme because they
were “the vehicle by which [the petitioners sought] to reverse the removal decisions, to return to
federal employment, and to receive the compensation they would have earned but for the adverse
employment action.” Id. at 2139–40. It reasoned that “[a] challenge to removal is precisely the
type of personnel action regularly adjudicated by the MSPB and the Federal Circuit within the
CSRA scheme,” and “reinstatement, backpay, and attorney’s fees are precisely the kinds of relief
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that the CSRA empowers the MSPB and the Federal Circuit to provide,” that is, “relief that the
SCRA routinely affords.” Id. at 2140. As for the third factor—whether the claims fell within the
agency’s expertise—, the Supreme Court observed that there may be “many threshold questions
that may accompany a constitutional claim and to which the MSPB can apply its expertise,” such
as questions concerning the petitioners’ employment and questions of interpreting a statute that
“the MSPB routinely considers,” either of which could dispose of the case without the need to
reach the constitutional issues. Id. See generally Slack v. McDaniel, 529 U.S. 473, 485 (2000)
(noting that courts “‘will not pass upon a constitutional question although properly presented by
the record, if there is also present some other ground upon which the case may be disposed of”
(quoting Ashwander v. TVA, 297 U.S. 288, 347 (1936) (Brandeis, J., concurring)).
Since the Free Enterprise and Elgin cases were decided, two Courts of Appeals have
addressed the jurisdictional question I must decide. Bebo v. S.E.C., 799 F.3d 765 (7th Cir.
2015), provides an extremely helpful analysis of Free Enterprise Fund and Elgin, especially with
regard to the meaning of “wholly collateral” and the interplay among the Thunder Basin factors.
Bebo, the subject of an administrative enforcement proceeding before the Commission,
challenged the constitutionality of the proceeding in federal district court on grounds including
an Article II violation. The district court found that it lacked jurisdiction, reasoning that
“[a]ppellate review [of the administrative proceeding] in the court of appeals is sufficient.” Bebo
v. S.E.C., 2015 WL 905349, at *4 (E.D. Wis. Mar. 3, 2015). When Bebo argued on appeal that
the applicable administrative review scheme was “inadequate because, by the time she is able to
seek judicial review in a court of appeals, she will have already been subjected to an
unconstitutional proceeding,” the Seventh Circuit was unsympathetic, reasoning that the
Supreme Court already “rejected this type of argument in FTC v. Standard Oil Co., 449 U.S.
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232, 244 (1980), holding that the expense and disruption of defending oneself in an
administrative proceeding does not automatically entitle a plaintiff to pursue judicial review in
the district courts, even when those costs are ‘substantial.’” Bebo, 799 F.3d at 775.
The Seventh Circuit concluded that the first Thunder Basin factor (meaningful judicial
review) militated against the district court’s exercise of jurisdiction because Bebo was “already
the respondent in a pending enforcement proceeding, so she [did] not need to risk incurring a
sanction voluntarily just to bring her constitutional challenges before a court of competent
jurisdiction,” as the Free Enterprise Fund petitioners would have had to do, and following the
administrative proceeding, she would be able to “raise her objections in a circuit court of appeals
established under Article III.” Id. at 774–75. In so doing, the Seventh Circuit relied heavily on
Elgin, observing:
First, Elgin made clear that [a plaintiff] cannot sue in district court under
§ 1331 merely because her claims are facial constitutional challenges. Second, it
established that jurisdiction does not turn on whether the SEC has authority to
hold [a statute] unconstitutional, nor does it hinge on whether [a plaintiff’s]
constitutional challenges fall outside the agency’s expertise. Third, Elgin showed
that the ALJ’s and SEC’s fact-finding capacities, even if more limited than a
federal district court’s, are sufficient for meaningful judicial review. Finally,
Elgin explained that the possibility that [a 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.
Id. at 773.
The Bebo Court then turned to the second factor (wholly collateral), noting that “[n]either
Elgin nor Free Enterprise Fund clearly defines the meaning of ‘wholly collateral,’” and that, in
their wake, courts have split in how they determine whether a claim is wholly collateral. Bebo,
799 F.3d at 773. Some courts “focus on the relationship between the merits of the constitutional
claim and the factual allegations against the plaintiff in the administrative proceeding,” finding
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the claim to be wholly collateral if the factual history is distinct, in keeping with Free Enterprise
Fund. Id. (citing Hill v. S.E.C., --- F. Supp. 3d ----, ----, 2015 WL 4307088, at *9 (N.D. Ga. June
8, 2015); Duka v. S.E.C., --- F. Supp. 3d ----, ----, 2015 WL 1943245, at *6 (S.D.N.Y. Apr. 15,
2015); Gupta v. S.E.C., 796 F. Supp. 2d 503, 513 (S.D.N.Y. 2011)). Others “focus on whether
the constitutional claims are being raised as a ‘vehicle’ to challenge agency action taken during
an administrative proceeding, finding the claim not to be wholly collateral if it is that “vehicle,”
in keeping with Elgin. Id. at 773–74 (citing Tilton v. S.E.C., No. 15–CV–2472(RA), 2015 WL
4006165, at *12 (S.D.N.Y. June 30, 2015); Bebo v. S.E.C., 2015 WL 905349, at *4 (E.D. Wis.
Mar. 3, 2015)). Thus, the court acknowledged that it is not fully settled which approach a court
should take. See id.
Nonetheless, it observed that “Bebo’s suit can reasonably be characterized as ‘wholly
collateral’ to the statute’s review provisions and outside the scope of the agency’s expertise,”
Bebo, 799 F.3d at 767, but then “assumed for purposes of argument that Bebo’s claims [were]
‘wholly collateral’ to the administrative review scheme,” without choosing an approach or
resolving either the second or the third Thunder Basin factor, id. at 774. Rather, the court stated
that whether the claims were wholly collateral was immaterial, because “the most critical thread
in the case law is the first Free Enterprise Fund [and Thunder Basin] factor: whether the plaintiff
will be able to receive meaningful judicial review without access to the district courts.” Id. at
774. It reasoned that the second and third factors were “relevant” but “not controlling” because
“the Supreme Court has never said that any of them are sufficient conditions to bring suit in
federal district court under § 1331.” Id. Thus, because the statutory scheme did not foreclose all
meaningful judicial review, the Seventh Circuit held that Bebo “must pursue judicial review in
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the manner prescribed by the statute,” even if her claims were wholly collateral to the statutory
scheme and beyond the agency’s expertise. Id. at 767.
The most recent appellate consideration of this issue to date was in Jarkesy v. S.E.C., 803
F.3d 9, 11 (D.C. Cir. 2015), in which an individual subject to an administrative proceeding
before the Commission filed suit in district court, alleging constitutional violations and seeking
termination of the administrative proceeding. The district court dismissed for lack of jurisdiction
and the D.C. Circuit affirmed, id., on the basis that all three Thunder Basin factors indicated that
Jarkesy’s constitutional claims against the Commission did not “fall outside an overarching
congressional design.” Id. at 17–18, 22.
As for the first factor, the D.C. Circuit concluded that “‘a finding of preclusion’ would
not ‘foreclose all meaningful judicial review’ of Jarkesy’s claims,” id. at 20, observing that the
Supreme Court in Elgin “reiterated that, so long as a court can eventually pass upon the
challenge,” parties can be required to bring constitutional challenges “through the administrative
route.” 803 F.3d at 18 (quoting Elgin, 132 S. Ct. at 2136–37) (emphasis added). Similar to the
Bebo Court, the D.C. Circuit differentiated Free Enterprise Fund, noting that “the considerations
animating the [Supreme] Court’s decision in Free Enterprise [were] absent” because “Jarkesy
would not have to erect a Trojan-horse challenge to an SEC rule or ‘bet the farm’ by subjecting
himself to unnecessary sanction under the securities laws,” as “Jarkesy [was] already properly
before the Commission,” and “should the Commission’s final order run against him, a court of
appeals [was] available to hear those challenges.” Id. Likewise, “Jarkesy’s situation [did] not
share the characteristics that led the Court to permit a judicial challenge outside the
administrative scheme” in McNary v. Haitian Refugee Ctr. Inc., 489 U.S. 479, 492 (1991),
because, as noted, Jarkesy would not have to “‘bet the farm’” to secure judicial review, and
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Jarkesy would not be precluded from obtaining the discovery necessary to substantiate his
constitutional challenges. Id. at 21. Noting that in Bebo, the Seventh Circuit found the presence
of meaningful judicial review sufficient in and of itself to conclude that the district court lacked
jurisdiction, the D.C. Circuit, having found meaningful judicial review to be available to Jarkesy,
instead opted to “approach the various factors as guideposts for a holistic analysis,” and
addressed them each in turn. Id. at 22.
With regard to the second factor, the D.C. Circuit relied on Elgin to conclude that
Jarkesy’s claims were not collateral because they “ar[o]se from actions the Commission took in
the course of [the Commission’s administrative enforcement scheme]” and were “the ‘vehicle by
which’ Jarkesy [sought] to prevail in his administrative proceeding,” such that they were
“‘inextricably intertwined with the conduct of the very enforcement proceeding the statute grants
the SEC the power to institute and resolve as an initial matter.’” Jarkesy, 803 F.3d at 23 (quoting
district court) (emphasis added). The court noted that, while the Supreme Court reached the
opposite conclusion in Free Enterprise Fund, the circumstances were different there because the
Free Enterprise Fund petitioners brought their claims before any enforcement proceedings
began, such that they were “not in [the administrative review] scheme at all.” Id. It was pivotal
to the D.C. Circuit’s decision that “Jarkesy brought th[e] action after the Commission had
initiated its enforcement proceedings against him, and he [sought] to challenge multiple aspects
of that ongoing proceeding.” Id. (emphasis added). The court stated that “[t]he result might be
different if a constitutional challenge were filed in court before the initiation of any
administrative proceeding . . . .” Id. (emphasis added). The nature of the constitutional claims
was not relevant, however, because the parties and the court would not have “‘clear guidance
about the proper forum for the employee’s claims at the outset of the case’” if they had to rely on
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“the framing of a constitutional challenge—based on potentially ‘hazy,’ ‘amorphous,’ and
‘incoherent’ categories.” Id. at 24 (quoting Elgin, 132 S. Ct. at 2135).
Although not directly on point, the Fourth Circuit’s jurisdictional analysis in Virginia v.
United States, 74 F.3d 517 (4th Cir. 1996), also is instructive.
There, the Environmental
Protection Agency (“EPA”) “took final action” against the Commonwealth of Virginia under the
Clean Air Act (“CAA”), and Virginia filed suit in district court “to challenge the constitutionality
of various provisions of the [CAA].” Virginia, 74 F.3d at 519, 521. The Fourth Circuit affirmed
the district court’s conclusion that it lacked jurisdiction. Id. at 519. It observed that, although
Virginia sought “a ruling that certain parts of the CAA are unconstitutional, the practical
objective of the complaint [was] to nullify final actions of EPA.” Id. at 523. Therefore, it was
“of no consequence” that Virginia brought constitutional claims, because jurisdiction under the
relevant statute “turn[ed] on whether final agency action [was] the target of the challenger’s
claim,” which it was. Id. Thus, the Fourth Circuit held that, even though Virginia “fram[ed] its
complaint as a constitutional challenge to the CAA,” and insisted that it did “‘not seek a review
of any final EPA action,’” but rather directed “its ‘constitutional challenge … to the statute
itself,” judicial “review was available in the circuit court under [the CAA] and that review [was]
exclusive.” Id. at 522. Specifically, Virginia could have obtained judicial review through an
appeal of the EPA action within the statutory scheme. Id. at 519; see also Nat’l Taxpayers
Union v. U.S. Soc. Sec. Admin., 376 F.3d 239, 240–41, 243–44 (4th Cir. 2004) (applying the
three Thunder Basin factors to conclude that district court lacked jurisdiction over a
constitutional challenge to administrative proceedings before the Social Security Administration,
given that the constitutional claims could have been “meaningfully addressed by the court of
appeals in due course”; noting that “‘[t]here is simply no impediment to the adjudication of
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constitutional issues through petitions for direct review of final agency actions in the circuit
courts’” (quoting Virginia, 74 F.3d at 523)). With these opinions in mind, I consider the
Thunder Basin factors in this case.
1. Meaningful Judicial Review
Pursuant to the Securities and Exchange Act, an SEC ALJ may preside over an
administrative proceeding and issue an initial decision, but the Commission “alone possesses the
authority to issue a final order.” Jarkesy v. S.E.C., 803 F.3d 9, 12–13 (D.C. Cir. 2015); see 17
C.F.R. §§ 201.110, 201.111(i), 201.360(a)(1), (b)(1), (d), 201.410(a), 201.411(a). Consequently,
unlike in Free Enterprise Fund, where Board action would not necessarily lead to a Commission
order that the petitioners could appeal, the SEC ALJ’s decision in this case will not go into effect
until the Commission acts.
See Jarkesy, 803 F.3d at 12–13; 17 C.F.R. § 201.411(a).
Significantly, “final Commission orders can be reviewed in the courts of appeals.” Jarkesy, 803
F.3d at 13 (citing 15 U.S.C. § 78y(a)(1)). Therefore, if Plaintiffs are aggrieved, it will be by
operation of a final, appealable Commission decision. See id.
And, because Plaintiffs already are facing agency enforcement for past allegedly violative
conduct, they will not have to intentionally violate a law to appear before an SEC ALJ, obtain a
final appealable decision, and ultimately obtain judicial review. Again, unlike in Free Enterprise
Fund, the “‘bet the farm’” element that precluded meaningful judicial review is not present. See
Free Enters. Fund, 561 U.S. at 489 (quoting MedImmune, 549 U.S. at 129); see also Jarkesy,
803 F.3d at 18 (appellate review meaningful where administrative proceeding already
underway); Bebo, 799 F.3d at 774–75 (same).
In sum, if this Court lacks subject matter
jurisdiction over the pending case, Plaintiffs nonetheless can obtain judicial review through the
appellate process under the Securities and Exchange Act. Granted, under this scheme, Plaintiffs
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cannot obtain judicial review until they reach a federal appellate court.
See 15 U.S.C.
§ 78y(a)(1). Thus, the issue is whether this delayed judicial review would be “meaningful.” See
Thunder Basin, 510 U.S. at 212–13; Free Enters. Fund, 561 U.S. at 489.
The Southern District of New York in Tilton v. S.E.C., No. 15-2472, 2015 WL 4006165,
at *4–6 (S.D.N.Y. June 30, 2015), recently reasoned that such a delay did not foreclose
meaningful review because “[o]ftentimes in our system, a party challenging the legality of the
very proceeding or forum in which she is litigating must ‘endure’ those proceedings before
obtaining vindication.”
For example, in criminal proceedings, defendants raise constitutional
challenges in district court and cannot appeal the trial court holdings until trial concludes. See,
e.g., United States v. Williams, Jr., No. 14-4049 (4th Cir. Dec. 14, 2015) (slip op.) (postconviction appeal on Fourth Amendment grounds based on district court’s denial of defendant’s
motion to suppress). Previously, the Southern District of New York similarly observed:
At least some SEC respondents seem to believe that they can procure a one-way
ticket out of an agency proceeding and into district court simply by raising a
constitutional allegation. Thunder Basin, Free Enterprise Fund, and good sense
say otherwise. This Court’s jurisdiction is not an escape hatch for litigants to
delay or derail an administrative action when statutory channels of review are
entirely adequate. . . . [T]he Court concludes that permitting plaintiffs to seek preenforcement relief from the SEC in this case would be “inimical to the structure
and purposes” of the statutory review scheme governing SEC adjudications and
would not provide an otherwise unavailable means of effective judicial review.
The Court therefore lacks subject matter jurisdiction and the complaint must be
dismissed.
Chau v. S.E.C., 72 F. Supp. 3d 417, 425–26 (S.D.N.Y. 2014) (footnote omitted) (emphasis
added); see Altman v. S.E.C., 768 F. Supp. 2d 554, 559–60 (S.D.N.Y. 2011) (concluding that, “as
the Exchange Act explicitly provides for it, Altman’s claim could be meaningfully addressed in
the Court of Appeals”), aff’d, 687 F.3d 44 (2d Cir. 2012) (per curiam). Indeed, the Supreme
Court and the D.C. Circuit have said that all that is necessary for meaningful judicial review is
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that “a court can eventually pass upon the challenge.” Elgin, 132 S. Ct. at 2136–37 (emphasis
added); Jarkesy, 803 F.3d at 18 (quoting Elgin).
It is true that Chau and Tilton are on appeal to the Second Circuit, and the Second Circuit
stayed the Commission’s administrative action in Tilton while it reviews the district court’s
decision. See Tilton v. S.E.C., No. 15-2103, Order (2d Cir. Sept. 17, 2015), Morris Decl. Ex. 3,
ECF No. 23-3; Chau v. S.E.C., No. 15-461, Order (2d Cir. Dec. 4, 2015) (adjourned pending
decision in Tilton v. S.E.C., No. 15-2103 (2d Cir.). But, I cannot discern the grounds for the stay
from the Second Circuit’s enigmatic order, which states, in full: “On application of the
Appellants, the Securities and Exchange Commission proceedings against Appellants are
STAYED pending further order of this Court.” Id. And, the Second Circuit already affirmed
Altman “for the reasons set forth in [the district court’s] thorough and well-reasoned opinion.”
Altman, 687 F.3d at 46.
The Southern District of New York previously reached the opposite conclusion in Gupta
v. S.E.C., 796 F. Supp. 2d 503, 513 (S.D.N.Y. 2011), deciding (without the benefit of Bebo or
Jarkesy) that only in district court could the plaintiff obtain meaningful judicial review of his
equal protection claim. In that factually-inapposite case, the Commission had brought claims
against twenty-eight other individuals and entities in federal district court before it instituted
administrative proceedings against Gupta based on almost identical claims but seeking enhanced
administrative penalties. Id. at 506. Gupta then filed suit against the Commission, claiming that
its actions violated, inter alia, his constitutional rights under the equal protection clause. Id. at
506–07.
The court concluded that “the SEC’s administrative machinery d[id] not provide a
reasonable mechanism for raising or pursuing [the equal protection] claim,” such that the
plaintiff could not obtain meaningful judicial review without district court jurisdiction. Id. at
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513–14. It reasoned that Gupta would not be able to file counterclaims or pursue “the kind of
discovery of SEC personnel that would be necessary to elicit admissible evidence corroborative
of such a claim” in the administrative proceeding, and that the Commission “would be inherently
conflicted in assessing such a claim.” Id. The court also reasoned that “no administrative record
bearing on this claim will be developed for any federal appellate court to review” Id. at 514.
Here, as in Gupta, Plaintiffs seek discovery, in the form of interrogatories and requests
for admissions. Compl. ¶ 12. Yet, as in Jarkesy, 803 F.3d at 21–22, the information sought
could be obtained through a subpoena for a witness to testify or to provide documentary
evidence. Moreover, the appellate court may remand the case to the agency to develop the
factual record. E.g., Virginia v. United States, 74 F.3d 517, 525 (4th Cir. 1996) (noting that, for
“all constitutional claims raised in a petition for review, . . . the CAA permits [the appellate
court] to remand to EPA for the development of whatever record [it] need[s] to decide the issues
before [it] on direct review”); Blitz v. Napolitano, 700 F.3d 733, 741 (4th Cir. 2012) (quoting
Virginia). In any event, the claims at issue here do not require factual development, as they
concern the laws creating SEC ALJs, defining their authority, and providing for their removal,
all of which are subject to judicial notice. See Fed. R. Evid. 201(b) (enabling the court to take
judicial notice of facts “not subject to reasonable dispute”). Thus, the absence of the specific
discovery Plaintiffs reference does not make appellate review of the administrative proceeding
any less meaningful. See Jarkesy, 803 F.3d at 21–22; Virginia, 74 F.3d at 525.
Plaintiffs also complain that they cannot bring counterclaims before the Commission,
Pls.’ Compl ¶ 12, and that their constitutional challenges “are not a defense to any particular
Commission allegation or action,” Pls.’ Mem. 8. But, in Tilton, when the plaintiffs also raised an
Appointments Clause challenge and argued that “SEC rules bar them from raising these claims
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as counterclaims,” the Southern District of New York insightfully stated that the plaintiffs’
assertion “ignores the fact that these claims may be effectively raised as affirmative defenses,”
observing that the plaintiffs and “other similarly situated parties already raised these claims as
affirmative defenses in their administrative proceedings.” 2015 WL 4006165, at *5, *9. The
court observed that “constitutional questions have been considered in numerous SEC
administrative proceedings,” including a current case “that has raised the same Article II
challenge to the ALJ’s appointment and removal scheme.” Id. at *10. Moreover, the court noted
that “[t]he Supreme Court has repeatedly stated that even if an administrative tribunal cannot
address the constitutional claims at issue, meaningful review will still be had so long as the
remedial scheme provides for federal appellate court review of those claims,” as it does here. Id.
at *10 (citing Elgin, 132 S. Ct. at 2136–37; Thunder Basin, 510 U.S. at 215). Therefore,
Plaintiffs can obtain meaningful review without raising these issues as counterclaims in the
administrative proceeding. See id.
Insofar as the Gupta Court also ruled that appellate judicial review would not be
meaningful because “Gupta would be forced to endure the very proceeding he alleges is the
device by which unequal treatment is being visited upon him,” I respectfully disagree, given the
Supreme Court holding that the time and expense of the administrative process are not grounds
for proceeding instead before a district court. See FTC v. Standard Oil Co., 449 U.S. 232, 244
(1980) (characterizing “the expense and annoyance of litigation” as “part of the social burden of
living under government”); Jarkesy, 803 F.3d at 25–26 (observing that, when the Supreme Court
held that the district court lacked jurisdiction over Standard Oil’s claims while the FTC
enforcement proceeding was ongoing, it “was unmoved by the company’s claims of irreparable
harm due to ‘the expense and disruption of defending itself in protracted adjudicatory
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proceedings’ that the company believed never should have begun” (quoting Standard Oil, 449
U.S. at 244 (internal quotation marks omitted))); Bebo v. S.E.C., 799 F.3d 765, 775 (7th Cir.
2015) (citing Standard Oil).
For the same reason, I also respectfully disagree with the
conclusion reached in Hill v. S.E.C., --- F. Supp. 3d ----, 2015 WL 4307088, at *5–9 (N.D. Ga.
June 8, 2015), appeal pending, No. 15-12831 (11th Cir.); Duka v. S.E.C., --- F. Supp. 3d ----,
2015 WL 1943245, at *5 (S.D.N.Y. Apr. 15, 2015); and Ironridge Global IV, Ltd. v. SEC, No.
15-2512-LMM, slip op. at 15–21 (N.D. Ga. Nov. 17, 2015), Morris Decl. Ex. 6, ECF No. 23-6,
that there would be no meaningful judicial review if the plaintiff had to complete the
administrative process, because, in the end, the proceeding he sought to enjoin would have
occurred already. Indeed, if the SEC ALJ imposed sanctions, then, even if the administrative
proceeding could not be undone, it would be meaningful for the appellate court to lift the
sanctions if it found a constitutional violation. Hill and Duka I, like Gupta, were decided
without the guidance of Bebo or Jarkesy.
Here, as noted, Plaintiffs raise two constitutional challenges: They claim that (1) SEC
ALJs are “inferior Officers” but, in violation of the Appointments Clause, they are not appointed
by the SEC Commissioners, who function as the Heads of Department, see U.S. Const., art. II,
§ 2, cl. 2; and (2) the ability to remove SEC ALJs from office, which can be done only for good
cause, is vested in other officers who also can be removed only for good cause, in violation of
Article II, as construed in Free Enterprise Fund, 561 U.S. at 484. Compl. ¶¶ 2–4. Plaintiffs
ultimately may raise these issues in the appellate court, and that appeal constitutes meaningful
judicial review, notwithstanding any limitations in the SEC ALJ’s initial review of these issues
or the fact that Plaintiffs first must complete the administrative process. See Standard Oil, 449
U.S. at 244; Virginia, 74 F.3d at 525; Jarkesy, 803 F.3d at 18, 21–22; Bebo, 799 F.3d at 774–75;
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Tilton, 2015 WL 4006165, at *10; see also Elgin, 132 S. Ct. at 2136–37; Thunder Basin, 510
U.S. at 215. Thus, in adherence to Supreme Court precedent and under the persuasive authority
of the three appellate court decisions on the issue and the majority of the more recent district
court decisions, I find that eventual appellate review is meaningful under the circumstances of
this case, such that limiting this Court’s jurisdiction does not foreclose all meaningful judicial
review. See Standard Oil, 449 U.S. at 244; Virginia, 74 F.3d at 525; Jarkesy, 803 F.3d at 18,
21–22; Bebo, 799 F.3d at 774–75; Tilton, 2015 WL 4006165, at *10; Chau v. S.E.C., 72 F. Supp.
3d 417, 425–26 (S.D.N.Y. 2014); Altman v. S.E.C., 768 F. Supp. 2d 554, 559–60 (S.D.N.Y.
2011); see also Elgin, 132 S. Ct. at 2136–37; Thunder Basin, 510 U.S. at 215.
2. Whether Suit is Wholly Collateral to Statute’s Review Provisions
As discussed, under the “vehicle” approach, a claim is not wholly collateral if it is
brought after the administrative proceedings commence and it is the means by which the
aggrieved party seeks to prevail against the agency.
I am persuaded by Jarkesy that the
“vehicle” approach is the better approach to determining whether claims are wholly collateral.
See Jarkesy, 803 F.3d at 23 (basing its conclusion that claims were not wholly collateral on their
role as the “vehicle” for the plaintiffs to succeed against the agency in an ongoing proceeding);
Bebo, 799 F.3d at 773–74 (contrasting Free Enterprise Fund and Elgin approaches to
determining whether a claim is wholly collateral; noting that, before either Bebo or Jarkesy was
decided, three district courts focused instead “on the relationship between the merits of the
constitutional claim and the factual allegations against the plaintiff in the administrative
proceeding,” as the Free Enterprise Fund Court had done). This approach accords with the
Fourth Circuit’s jurisdictional analysis in Virginia, 74 F.3d at 523, in which the court considered
20
“the practical objective of the complaint” and concluded that the claims fell within the agency’s
purview because “final agency action [was] the target of the challenger’s claim.”
Unsurprisingly, Plaintiffs couch their constitutional claims as unrelated to their
administrative proceeding and therefore wholly collateral.
Certainly, the claims are facial
challenges and do not “arise from actions the Commission took in the course of” the
administrative proceeding. See Jarkesy, 803 F.3d at 23. Yet, Plaintiffs did not bring their claims
until after the administrative proceeding commenced, and the Jarkesy Court gave considerable
weight to the timing of the claims. See id. (stating that claims brought “before” administrative
proceedings began were not “in” the administrative review scheme, unlike claims brought “after”
administrative proceedings began). Moreover, the claims go to the heart of the proceeding
because they are “the ‘vehicle by which’ [Plaintiffs seek] to prevail in [their] administrative
proceeding,” by nullifying it. See Jarkesy, 803 F.3d at 23; Elgin, 132 S. Ct. at 2139–40. Thus,
under the “vehicle” approach taken in Elgin and Jarkesy, Plaintiffs’ constitutional claims are not
wholly collateral. See Jarkesy, 803 F.3d at 23; Elgin, 132 S. Ct. at 2139–40. This factor, also,
disfavors Plaintiffs.
It is true that, if I were to adopt the relationship approached applied in Hill, 2015 WL
4307088, at *9; Duka, 2015 WL 1943245, at *6; and Gupta, 796 F. Supp. 2d at 513, this factor
would favor Plaintiffs, because the constitutional claims do not share a factual basis with the
issues before the agency.
Nonetheless, I agree with the Bebo Court that the first factor—the
availability of meaningful judicial review—is the most significant and is dispositive in this case.
Because Plaintiffs can obtain meaningful judicial review through the appellate process available
under the Securities and Exchange Act, Congress intended for these claims to be reviewed under
the statute and to limit the district court’s jurisdiction in this instance. See Free Enters. Fund v.
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Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 489 (2010); Thunder Basin Coal Co. v. Reich,
510 U.S. 200, 207, 212 (1994).
Conclusion
For the foregoing reasons, I have dismissed this case for lack of jurisdiction. Because I
have determined that I do not have jurisdiction, it is unnecessary for me to reach the merits of
Plaintiffs’ motion for a preliminary injunction. I previously filed an order denying Plaintiffs’
motion and dismissing this case. ECF No. 29. The Clerk is directed to CLOSE THIS CASE.
Dated: December 17, 2015
/S/
Paul W. Grimm
United States District Judge
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