Thursday, July 02, 2015

District Court Lacks Jurisdiction Over Constitutional Claims Against SEC ALJs

By Amanda Maine, J.D.

A district court dismissed a complaint because it did not have subject matter jurisdiction to address the plaintiffs’ constitutional claims that SEC administrative law judges do not have lawful authority to preside over their case. The plaintiffs were unable to establish that pursuing their claims through the statutory review scheme would result in a denial of meaningful judicial review (SEC v. Tilton, June 30, 2015, Abrams, R.).

Background. In March 2015, the SEC commenced an administrative cease-and-desist proceeding against investment adviser Patriarch Partners LLC, its founder and CEO Lynn Tilton, and several affiliated companies (plaintiffs). The SEC alleged that the plaintiffs provided false and misleading information about certain CLO funds they managed and engaged in a deceptive scheme relating to the values they reported for these funds’ assets.

The plaintiffs sought to enjoin the administrative proceeding, claiming that the method for appointing and removing the SEC’s administrative law judges (ALJs) violates the Appointments Clause of the U.S. Constitution. According to the plaintiffs, the ALJs are “inferior officers” that enjoy two layers of tenure protection in violation of the Constitution. The SEC moved to dismiss, arguing that the district court lacked subject matter jurisdiction over the plaintiffs’ claims because they must seek review only before a court of appeals after going through the administrative process.

Judicial review. The plaintiffs contended that going through the designated scheme would deny them meaningful judicial review. The district court disagreed, noting that precedent involving the constitutionality of ALJs, such as Landry v. FDIC, has allowed such proceedings to go forward even though the plaintiffs argued that they would be forced to endure the very proceedings they claim are unconstitutional. The court also rejected the plaintiffs’ contention that should the ALJ find for the SEC, they would be subject to “irreparable reputational and financial harm.” The court pointed out that such harm would be no different than the harm that would follow a similar finding in a district court.

The plaintiffs also argued that their constitutional claims could not be raised effectively in an administrative proceeding because SEC rules bar them from raising their claims as counterclaims. The court observed that these claims may effectively be raised as affirmative defenses in SEC administrative proceedings. It also rejected the plaintiffs’ argument that SEC rules do not allow the same kind of discovery available in district court, noting that as a purely legal matter, no discovery is necessary to adjudicate their constitutional claims. Meaningful review will still be had, the court stated, so long as the remedial scheme provides for federal appellate court review. Finally, concerns about the SEC’s potential bias may also be addressed by a court of appeals, according to the court.

Wholly collateral. The plaintiffs also argued that because their constitutional challenge is “facial” (unconstitutional in all instances) rather than “as-applied” (relating to the facts of a specific case), it should be considered collateral and should thus be heard in district court. The court admitted that whether the claims should be considered collateral is a close question, but ultimately concluded that because the plaintiffs are able to raise their claims within an administrative scheme as an affirmative defense, the claims are not wholly collateral to that scheme.

Agency expertise. Finally, while the court recognized that the constitutional claims raised by the plaintiffs may not be within an SEC ALJ’s expertise, the court again pointed out that meaningful review of those claims by an appellate court is available, precluding district court jurisdiction.

The case is No. 15-CV-2472.

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