(Article from Securities Law Alert, June 2016)
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On June 1, 2016, the Second Circuit rejected as premature claims brought by respondents in a pending SEC enforcement proceeding alleging that the SEC’s appointment of the administrative law judge (“ALJ”) in the matter violated the Appointments Clause of Article II of the United States Constitution. Tilton v. SEC, 2016 WL 3084795 (2d Cir. 2016) (Sack, J.). Consistent with the provisions of the SEC’s administrative review scheme, the Second Circuit determined that “the appellants must await a final [SEC] order before raising their Appointments Clause claim in federal court.”
In so holding, the Second Circuit agreed with similar decisions issued last year by the D.C. Circuit and the Seventh Circuit. See Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015);[1] Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015).[2]
On June 17, 2016, the Eleventh Circuit relied in part on the Second Circuit’s decision in Tilton to reverse a district court ruling exercising jurisdiction over constitutional challenges to pending SEC administrative enforcement proceedings. Hill v. SEC, 2016 WL 3361478 (11th Cir. 2016) (Pryor, J.).
Background
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC generally has a choice of fora when bringing enforcement proceedings. The SEC may either file an action in federal district court, or conduct an administrative enforcement proceeding before the SEC or an ALJ. The SEC’s administrative scheme provides for “two layers of review: A party that loses before the ALJ may petition for de novo review by the [SEC], and a party that loses before the [SEC] may petition for review by a federal court of appeals.” Tilton, 2016 WL 3084795.
In the case before the Second Circuit, respondents in pending SEC administrative enforcement proceedings brought suit in the Southern District of New York contending that the SEC proceeding was “unconstitutional because the presiding ALJ’s appointment violated Article II’s Appointments Clause.” The district court dismissed the action for lack of subject matter jurisdiction. The court held “appellants’ Appointments Clause challenge fell within the exclusive scope of the SEC’s administrative review scheme and could reach a federal court only on petition for review of a final decision by the [SEC].” The instant appeal followed.
Applying the Thunder Basin Factors, Second Circuit Holds Congress Intended Appellants’ Appointments Clause Claim to Be Reviewed Within the SEC’s Administrative Scheme
Appellants contended that their Appointments Clause claim was beyond "the exclusive purview of the SEC's administrative review scheme" under the Supreme Court's decision in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994). The Thunder Basin Court stated that in evaluating whether plaintiffs’ “claims are of the type Congress intended to be reviewed within [the applicable] statutory structure,” courts must assess whether: (1) “a finding of preclusion could foreclose all meaningful judicial review,” (2) the claims are “wholly collateral to a statute’s review provisions,” and (3) the claims are “outside the agency’s expertise.”
As discussed in further detail below, the Second Circuit held that the Thunder Basin factors do not persuasively demonstrate that the Appointments Clause claim falls outside the scope of the SEC’s overarching scheme.” Tilton, 2016 WL 3084795.
SEC’s Administrative Scheme Provides for Meaningful Judicial Review of Appellants’ Appointment Clause Claim
While appellants recognized that the SEC’s administrative scheme “offers some judicial review,” they contended that “their exposure to the ongoing [SEC] proceeding—as distinct from any adverse ruling that might result—would itself constitute a grave constitutional injury that could not be redressed after the fact.”
The Second Circuit explained that “litigants who unsuccessfully challenge the authority of a presiding judge or jury to decide a case must often wait to appeal the issue until after the court renders a final judgment.” The Second Circuit reasoned that “[t]he litigant’s financial and emotional costs in litigating the initial proceeding are simply the price of participating in the American legal system.”
Appellants’ Appointment Clause Claim Is Not “Wholly Collateral” to the SEC’s Administrative Review Scheme
The district court held appellants’ Appointments Clause claim “did not qualify as ‘wholly collateral’” to the SEC’s administrative review scheme “because it was procedurally intertwined with the SEC’s ongoing proceeding, where it functioned as an affirmative defense.”
The Second Circuit stated that it was “inclined to agree with the district court’s assessment” pending “further guidance from the Supreme Court.” The court reasoned that appellants’ Appointments Clause claim was analogous to their defenses to the underlying Investment Advisers Act charges at issue because it was “a ‘vehicle by which’ the appellants [sought] to prevail in the proceeding.” Id. (quoting Elgin v. Dep't of Treasury, 132 S. Ct. 2126 (2012)).
Appellants’ Appointment Clause Claim Falls Within the Scope of the SEC’s Expertise
The Second Circuit found that it was “a close question” as to whether “appellants’ Appointments Clause claim [fell] outside the SEC’s expertise.”
However, the Second Circuit observed that in Elgin, 132 S. Ct. 2126, the Supreme Court “emphasize[d] that an agency may bring its expertise to bear on a constitutional claim indirectly, by resolving accompanying, potentially dispositive issues in the same proceeding.”
“Applying Elgin’s approach” to the case before it, the Second Circuit found the SEC might rule in favor of appellants on the Investment Adviser Act claims at issue, “in which case the constitutional question would become moot.”
Appellants Must Await a Final SEC Order Before Raising Their Appointments Clause Claim in Federal Court
Concurring with “the decisions of the Seventh and D.C. Circuits in Bebo and Jarkesy,” the Second Circuit concluded that “appellants must await a final [SEC] order before raising their Appointments Clause claim in federal court.”
[1] Please click here to read our prior discussion of the D.C. Circuit’s decision in Jarkesy.
[2] Please click here to read our prior discussion of the Seventh Circuit’s decision in Bebo.