Monday, October 12, 2015

Bebo Wants Full Court to Look at ALJ Case, Plans Commission Appeal

By Mark S. Nelson, J.D.

Laurie A. Bebo not only wants the full Seventh Circuit to review a panel decision denying federal court jurisdiction over her legal challenge to the SEC’s administrative law judges, but also will ask the Commission to review an ALJ’s initial decision in the related agency enforcement matter. The appeals panel turned away Bebo in August while just days ago SEC ALJ Cameron Elliot imposed a $4.2 million civil penalty on Bebo in a ruling that also rejected her Article II claim as “meritless” and her due process and equal protection arguments as unpersuasive (Bebo v. SEC, October 8, 2015).

Timing is everything, or is it? A key theme in Bebo’s bid to get the full Seventh Circuit to take up her case is the emphasis (or lack of it) placed by the Supreme Court on when a federal lawsuit is filed in relation to the date on which an administrative proceeding started. Bebo recalled how the Seventh Circuit panel emphasized the fact that she was already in the midst of a hearing before an SEC ALJ during her appeal. The lower court judge dismissed Bebo’s case, but not before saying her claims were “compelling and meritorious.”

But according to Bebo, the panel’s overemphasis of the timing issue led it to likewise overemphasize the possibility of Bebo getting meaningful judicial review after the SEC administrative proceeding, despite the panel’s having owned that her claims might be portrayed as wholly collateral to the enforcement action and as being outside the SEC’s expertise. (Bebo also noted the D.C. Circuit’s more nuanced view of the anti-preclusion factors in its recent Jarkesy opinion).

Bebo would have the full court say that timing is less significant than the panel said it was, a point Bebo finds implicit in three Supreme Court cases. Lawyers for Bebo argued that the administrative matters in Free Enterprise, McNary, and Thunder Basin shared the same pre-enforcement status (no PCAOB sanction, no deportation proceeding, no Mine Act citation, respectively). But Bebo notes that unlike in Free Enterprise and McNary, the Supreme Court denied federal court jurisdiction in Thunder Basin.

For Bebo, the seemingly inconsistent result in Thunder Basin suggests that the timing of an enforcement action and a related federal suit disputing that action are not as important as the Bebo panel found. Bebo notes the implied line in the sand in her case: file suit before the SEC issued its order instituting proceedings and she may get into federal court, but file after the OIP and find the courthouse doors closed.

Moreover, Bebo argues that the panel decision against her is at odds with another Seventh Circuit case. She points to a decades-old ruling in which the court sent some claims to the Federal Trade Commission, but allowed a federal court to hear a challenge to the FTC’s authority. Bebo also noted a Second Circuit opinion letting a federal court hear a claim regarding the statutory interpretation of the SEC’s ability to discipline accountants.

Besides arguing that the Bebo panel’s view of the jurisdiction issue is contrary to Supreme Court decisions and circuit law, Bebo also pressed the full Seventh Circuit to mull the importance of her case in light of the many similar cases that so far have produced jumbled results. Bebo also urged the full court to skeptically view the panel’s invocation of the Supreme Court’s FTC v. Standard Oil opinion, in which the high court said that a respondent does not necessarily suffer irreparable harm just by going through an agency proceeding. Bebo said that case is inapt because of its focus on Administrative Procedure Act issues that do not undergird her case.

A second entry today in the Seventh Circuit’s docket indicated Bebo may also seek panel rehearing. Yet both of the petitions Bebo submitted are styled as requests for en banc rehearing.

Commission appeal on tap. Bebo told the Seventh Circuit she also will petition for Commission review of the ALJ’s initial decision against her. Last week, ALJ Elliott pithily rejected her Article II claim as “meritless” while also finding her due process and equal protection claims “unpersuasive.”

The SEC had charged Bebo, the ex-CEO of Assisted Living Concepts, Inc., and the company’s ex-CFO, John Buono, with engaging in fraudulent accounting for the company’s compliance with occupancy and financial covenants in leases for senior living facilities. ALJ Elliot imposed a $4.2 million civil penalty on Bebo after an administrative hearing. Buono settled the SEC’s charges against him this past January.

On the Article II claim, ALJ Elliot relied on the Commission’s opinion in Raymond J. Lucia Companies, in which a three-commissioner majority said the agency’s ALJ’s are beyond the reach of Article II because they are employees, not inferior officers. The Commission reached the same Article II conclusion in its Timbervest opinion issued soon after Raymond J. Lucia Companies (Timbervest also dealt with ALJ bias claims and the multiple layers of tenure protection enjoyed by the SEC’s ALJs).

Commissioners Daniel M. Gallagher and Michael S. Piwowar dissented from parts of Raymond J. Lucia Companies, but said the federal courts are better equipped to decide the Article II claim despite the Commission’s freedom to speak on the matter. Commissioner Gallagher left the Commission in early October on the same day he and Commission Piwowar issued their Raymond J. Lucia Companies dissent.

The case is No. 15-1511.

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