(Article from Securities Law Alert, August 2015)
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On August 24, 2015, the Seventh Circuit held that a respondent in a pending SEC administrative enforcement proceeding may not “skip the administrative and judicial review process” established in 15 U.S.C. § 78y by bringing suit in federal court to “challeng[e] on constitutional grounds the authority of the SEC to conduct the proceeding.” Bebo v. SEC, 2015 WL 4998489 (7th Cir. 2015) (Hamilton, J.) (Bebo II). The court found it “‘fairly discernible’” from the statute that Congress intended respondents in SEC administrative proceedings “‘to proceed exclusively through the statutory review scheme’ set forth in 15 U.S.C. § 78y” (quoting Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012)).
Background
Pursuant to § 929(P) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has a choice of fora when seeking monetary penalties against non-regulated individuals. The SEC may either “proceed in federal district court or conduct its own administrative enforcement proceeding.” There are “procedural consequences” to the SEC’s choice of forum. For instance, the SEC’s Rules of Practice, rather than the Federal Rules of Evidence and Civil Procedure, govern SEC enforcement proceedings. Respondents in SEC enforcement proceedings therefore have “fewer rights to discovery” than do respondents in district court proceedings, and “no right to a jury trial before the SEC.” However, respondents in SEC proceedings do have the right to seek federal appellate review of final SEC decisions in the circuit court for the district in which they reside or work, or before the District of Columbia Court of Appeals. See 15 U.S.C. § 78y(a)(1). The appellate court may then affirm, modify, or set aside the SEC’s final decision entirely.
In December 2014, the SEC filed an administrative enforcement action alleging securities law violations against the former CEO of Assisted Living Concepts, Inc., Laurie Bebo. “Rather than wait[ing] for the administrative process to end and pursu[ing] judicial review as prescribed by § 78y,” Bebo brought suit in the Eastern District of Wisconsin challenging the SEC’s authority to conduct the administrative proceeding on constitutional grounds. Plaintiff asserted that “§ 929P(a) of Dodd-Frank [was] facially unconstitutional under the Fifth Amendment because it provide[d] the SEC [with] ‘unguided’ authority to choose which respondents [would] and which [would] not receive the procedural protections of a federal district court, in violation of equal protection and due process guarantees.” Plaintiff further “contend[ed] that the SEC’s administrative proceedings [were] unconstitutional under Article II because the [administrative law judges] who preside[d] over SEC enforcement proceedings [were] protected from removal by multiple layers of for-cause protection.” Plaintiff claimed that “[t]his set-up violate[d] Article II . . . because it interfere[d] with the President’s obligation to ensure the faithful execution of the laws.”
The district court found plaintiff’s claims “compelling and meritorious,” but determined that her claims were “subject to the exclusive remedial scheme” established by the Dodd-Frank Act governing SEC enforcement proceedings. Bebo v. SEC, 2015 WL 905349 (E.D. Wis. Mar. 3, 2015) (Randa, J.). The court held that plaintiff was required to “litigate her claims before the SEC and then, if necessary, on appeal to the Court of Appeals for the Seventh Circuit.” Plaintiff appealed.
Seventh Circuit Holds Respondents in Pending SEC Administrative Enforcement Proceedings May Not Bring Constitutional Challenges to the SEC’s Authority in Federal Court Because 15 U.S.C. § 78y Provides for Meaningful Judicial Review of Such Challenges
On appeal, the Seventh Circuit explained that the question before it was “a jurisdictional one: whether the statutory judicial review process under 15 U.S.C. § 78y bars district court jurisdiction over a constitutional challenge to the SEC’s authority when the plaintiff is the respondent in a pending enforcement proceeding.” The court recognized that, in Free Enterprise Fund v. Public Company Accounting Oversight Board., 561 U.S. 477 (2010), the Supreme Court “held that § 78y does not strip district courts of jurisdiction to hear at least certain types of constitutional claims.” The Bebo II court explained that its “focus in this appeal” was to assess “whether Bebo’s case [was] sufficiently similar to Free Enterprise Fund to allow her to bypass the [SEC administrative enforcement proceeding] and judicial review under § 78y.”
In Free Enterprise Fund, plaintiffs brought suit in federal district court challenging the constitutionality of provisions of the Sarbanes-Oxley Act of 2002 that established a special SEC-appointed oversight board for accounting firms. Final decisions of the special oversight board were subject to federal appellate review pursuant to 15 U.S.C. § 78y. Significantly, plaintiffs were not subject to any pending SEC enforcement actions at the time they brought suit.
The Free Enterprise Fund Court found that “plaintiffs would not [have] be[en] able to receive meaningful judicial review without access to the district courts” because § 78y “provides [only] for judicial review of final orders of the SEC and not every adverse action by the [special oversight] board would be ‘encapsulated in a final Commission order or rule.’” To obtain judicial review under § 78y, plaintiffs would have been required either to (1) seek SEC review of one or more of the “board’s auditing standards, registration requirements or other rules”; or (2) “invite a sanction from which to appeal by intentionally violating one of the board’s rules or by ignoring a request for documents or testimony.” The Free Enterprise Fund Court therefore held that the district court could exercise jurisdiction over plaintiffs’ claims.
The Bebo II court found that, “[u]nlike in Free Enterprise Fund, meaningful judicial review [was] available to [plaintiff] under § 78y.” The court reasoned that since plaintiff was “already the respondent in a pending enforcement proceeding,” she would not have to “select and challenge a Board rule at random” or “risk incurring a sanction voluntarily just to bring her constitutional challenges before a court of competent jurisdiction.” The court explained that “[a]fter the pending enforcement action ha[d] run its course, [plaintiff could] raise her objections in a circuit court of appeals established under Article III.”
Significantly, the Bebo II court found “no evidence . . . that Congress intended for plaintiffs like Bebo who [were] already subject to ongoing administrative enforcement proceedings to be able to stop those proceedings by challenging the constitutionality of the enabling legislation or the structural authority of the SEC.” The court found it “‘fairly discernible’ that Congress intended Bebo to proceed exclusively through the statutory review scheme established by § 78y because that scheme provides for meaningful judicial review in ‘an Article III court fully competent to adjudicate petitioners’ claims’” (quoting Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012)).
The court therefore affirmed dismissal of plaintiffs’ claims for lack of subject matter jurisdiction.