Monday, February 08, 2016

Bebo Asks Justices to Take Case on SEC In-House Courts

By Mark S. Nelson, J.D.

Laurie Bebo will give the Supreme Court another chance to take up a case disputing the SEC’s in-house enforcement apparatus by arguing in a certiorari petition that the Seventh Circuit misapplied the high court’s jurisdictional test in ruling she could not challenge the constitutionality of the SEC’s administrative law judges in a federal district court. The justices are still considering a similar petition filed last year by a different SEC respondent, while the Second, Fourth, and Eleventh circuits mull cases like Bebo’s. The Commission will hear Bebo’s administrative appeal later this year (Bebo v. SEC, February 3, 2016).

Seventh Circuit amiss? Bebo’s petition to the high court is not the first time that parties in similar cases have criticized the Seventh Circuit’s opinion for what it supposedly did not do—look at all three Thunder Basin factors more holistically. A series of Supreme Court opinions (Free Enterprise; Elgin; Thunder Basin; McNary) developed a rubric for evaluating when a federal district court can hear claims related to an administrative proceeding where the agency’s governing statute requires a final agency decision to be appealed to a federal appellate court.

Lawyers for Bebo told the court it should hear her case because the Seventh Circuit skipped a step in this analysis by ignoring the text, structure, and purpose of Exchange Act Section 25 and instead jumped straight to the Thunder Basin factors: (1) no meaningful judicial review; (2) claims wholly collateral to the administrative charges; and (3) claims outside the agency’s expertise. When the appeals panel got to this stage, said Bebo, it inaptly focused on whether Bebo would be denied meaningful judicial review (the court said no), despite noting that her claims may be wholly collateral to the ALJ proceeding and could lie beyond the SEC’s expertise.

Although a recent D.C. Circuit decision, on its face, would appear to go against Bebo because the court found no district court jurisdiction for claims similar to, yet not identical to Bebo’s, Bebo nevertheless pressed the case as an example of how the Seventh Circuit got the jurisdictional analysis wrong. In Jarkesy, the D.C. Circuit noted the Seventh Circuit’s almost singular focus on the meaningful judicial review factor, but went on to say that it views the Thunder Basin factors as “guideposts for a holistic analysis” and declined to state if that one factor could bar district court jurisdiction.

Bebo also spotlights the Seventh Circuit’s focus on the fact that the Commission had begun an administrative proceeding against her before she sued the SEC in federal district court. Bebo said this raises the specter that district court jurisdiction in these types of cases turns on whether an administrative respondent filed a federal lawsuit before the agency started its own proceeding.

Circuit split in principle. The Supreme Court’s rules emphasize the highly discretionary nature of the court’s docket and the several ways the justices might be persuaded to hear a case, including the mainstay argument that a case is compelling because two federal circuit courts have entered conflicting decisions on the same important matter. Bebo argues that a “conflict in principle” exists between decisions in the Second and Seventh Circuits.

Bebo leans heavily on the Second Circuit’s Touche Ross & Co decision in which that court said a challenge to the SEC’s authority to discipline accountants could be heard in federal district court because there was no need to develop a factual record requiring agency expertise. Bebo also noted that the district court in that case had jurisdiction even though the administrative proceeding was in progress.

Moreover, Bebo argued that the Supreme Court has asserted its power to interpret laws ever since the justices decided Marbury v. Madison nearly 213 years ago. According to Bebo, the ALJ issue is one of national importance that should be decided by the court, not the SEC.

The other petition. A petition filed last November by Gordon Pierce also seeks to get the SEC ALJ issue before the Supreme Court, albeit from a different procedural standpoint. The SEC twice charged Pierce in separate orders instituting proceedings: the first OIP resulted in a final decision ordering him to disgorge $2 million; a second OIP handled by a different ALJ produced a final decision that Pierce appealed (and lost) in the D.C. Circuit. Pierce would have the Supreme Court decide if the SEC’s ALJ’s run afoul of the Constitution and whether he can raise this issue for the first time in a petition for rehearing en banc.

Intervening events twice offered Pierce hope that he might upset the SEC’s decisions against him. First, Pierce asked the Commission to vacate the decision from the first OIP and for the appeals court to rehear its decision denying his petition for review of the second OIP after a judge in the Northern District of Georgia halted an SEC proceeding. The D.C. Circuit refused to hear Pierce’s case anew, but the Commission has yet to rule on Pierce’s amended bid to vacate the decisions from both OIPs. Since then, the SEC has issued several opinions backing its ALJs in the face of constitutional challenges (See, Timbervest; Raymond J. Lucia Companies).

A generalized objection to the SEC’s in-house court is that the agency’s rules of practice impose an accelerated and circumscribed process without the trappings of federal courts’ more extensive procedure and evidence rules. For many SEC administrative respondents, these worries became urgent after the Dodd-Frank Act granted the Commission authority to impose new types of penalties in in-house proceedings.

The Commission recently proposed to ease some of the burdens on respondents and to create an electronic filing system for administrative cases. But a bill sponsored by Scott Garrett (R-NJ) (H.R. 3798) would go even further by giving respondents a new path to federal court.

The case is No. 15-997.

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