Thursday, November 19, 2015

Administrative Proceeding Against Ironridge Halted

By Amy Leisinger, J.D.

The SEC has been preliminarily enjoined from conducting its administrative proceeding, including its upcoming scheduled hearing, against Ironridge Global Partners and its subsidiary. According to the court, the plaintiffs demonstrated a substantial likelihood of success on the merits of their claim that the SEC has violated the Appointments Clause of Article II of the U.S. Constitution with its use of administrative law judges, as well as the potential for irreparable harm if the proceeding is not halted (Ironridge Global IV, Ltd. v. SEC, November 17, 2015, May, L.).

Background. In June 2015, the SEC brought an administrative action against Ironridge, accusing the company of acting as an unregistered broker-dealer by engaging in serial underwriting activity, offering investment advice, and receiving and selling billions of shares of stock in microcap companies. Joining a long list of SEC targets attacking the agency’s in-house proceedings as unconstitutional, Ironridge filed suit in the Northern District of Georgia after it was accused of being in violation of the SEC’s broker-dealer registration provisions. The company complained that the proceeding was unconstitutional because it was conducted by an inferior officer that was insulated by tenure protection and not appointed by SEC Commissioners, in violation of Article II.

ALJs and the Constitution. The U.S. Constitution requires that “inferior officers” be appointed by the president, the heads of departments, or courts of law. Opponents of the administrative regime contend that the proceedings are unconstitutional because ALJs are similar to persons deemed to be “inferior officers,” are “established by law,” and carry out “important functions,” such as taking testimony, conducting trials, ruling on the admissibility of evidence, and possessing the power to enforce discovery compliance. The plaintiffs claim that SEC ALJs are inferior officers because they exercise “significant authority pursuant to the laws of the United States” while the SEC contends ALJs are “employees” based on congressional treatment and the fact that they cannot issue final orders or grant certain types of injunctive relief.

Injunction granted. The court rejected the SEC’s contention that the tribunal lacks subject matter jurisdiction over the action, noting that congressional language allowing both district court and administrative actions shows no intent to make an administrative proceeding an exclusive forum. A district court is a viable forum for Commission claims, the court continued, and Congress could not have intended the review process to be exclusive because it expressly provided for district courts to adjudicate both constitutional issues and violations of the federal securities laws.

In addition, the court stated, under the test articulated by the Supreme Court in Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd., a federal district court has jurisdiction over pre-enforcement challenges to agency action if three criteria are met: (1) absence of jurisdiction could foreclose all meaningful judicial review; (2) the plaintiff’s claim is “wholly collateral” to any Commission orders or rules from which review might be sought; and (3) the plaintiff’s claim is “outside the agency’s expertise.” Barring Ironridge’s claims until after the administrative process would prevent meaningful judicial review, the court found, as it could then raise constitutional arguments only after going through the process alleged to be unconstitutional and the alleged harm (being forced to litigate in an unconstitutional forum) would have already been inflicted. “Because the courts of appeals cannot enjoin an unconstitutional administrative proceeding which has already occurred, those claims would be moot and the meaningful review contemplated would be missing,” the court explained. Further, according to the court, Ironridge’s constitutional claims are not so “inescapably intertwined” with the merits of the SEC action against them so as to warrant delayed judicial review and, in fact, are wholly collateral to the administrative proceeding itself. Finally, the court concluded, constitutional claims are not part of the type of issues “routinely considered” by the SEC and fall outside the agency’s expertise. As such, the court found subject matter jurisdiction over the matter.

As Ironridge has demonstrated a likelihood of success on the merits, including the propriety of the chosen venue and the arguable “inferior officer” status of ALJs and a substantial threat of irreparable injury from an unconstitutional administrative proceeding if the injunction is not granted, the court preliminarily enjoined the SEC administrative proceeding to allow the it more time to consider the matter on the merits.

The case is No. 1:15-CV-2512-LMM.