By Rodney F. Tonkovic, J.D.
The Supreme Court has denied certiorari in three securities-related cases. The court declined to hear Laurie Bebo's argument 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 second petition denied today was brought by an adviser seeking review of an SEC administrative law judge's finding of liability for market manipulation. The Court also let stand a Fifth Circuit decision finding that the extender provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) preempted the statute of repose in the Texas Securities Act.
Bebo. According to the SEC, Laurie Bebo, as CEO of Assisted Living Concepts, Inc. (ALC), a publicly-traded assisted living and senior residence provider, took measures to conceal the fact that ALC failed to comply with certain occupancy and financial covenants in its lease to operate eight assisted living facilities. In 2014, the Division of Enforcement commenced an action alleging that Bebo misrepresented ALC’s covenant compliance in various Commission filings between 2009 and early 2012. In an initial decision, an SEC ALJ found that Bebo’s participation was essential to ALC’s Section 10(b) violations and that she acted with scienter and caused ALC’s violations.
Bebo filed a complaint in federal court challenging the SEC’s ALJ regime, arguing that the ALJs are protected from removal by multiple layers of for-cause protection in a manner that interferes with the president’s obligation to ensure the faithful execution of the laws and violates Article II of the U.S. Constitution. The federal district court in Milwaukee dismissed the constitutional challenge, and the Seventh Circuit affirmed the decision, finding that Bebo will have adequate opportunity for meaningful judicial review if the Commission issues a final adverse order. The appeals court denied rehearing in a brief order issued November 5, 2015.
Bebo's petition to the high court asked whether the Exchange Act's administrative review scheme deprives a district court of subject matter jurisdiction where a litigant, who is already a respondent in an administrative enforcement proceeding before the SEC, asserts a constitutional challenge to congressional legislation enabling that administrative proceeding and a challenge to the constitutional validity of the SEC's administrative law judges. Bebo argued that the Seventh Circuit ignored the text, structure, and purpose of Exchange Act Section 25 and instead jumped straight to the factors set out in the Court's 1994 Thunder Basin ruling. When the appeals panel got to this stage, Bebo said, 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. This petition drew the attention of celebrity businessman Mark Cuban, who filed an amicus brief in support of Bebo on March 7.
Koch. The court also denied certiorari in a petition bought by an adviser seeking review of a finding that that his trading did not constitute market manipulation. The SEC found that Donald L. Koch marked the close for three small bank stocks between September and December 2009 in order to give the appearance that his clients’ accounts were retaining their value. On appeal, the D.C. Circuit agreed that Koch marked the close, saying that the SEC had ample evidence to prove the violation. The court rejected Koch’s argument that he could not be liable in the absence of a finding of market impact.
Koch's petition asked whether Supreme Court precedent requires proof not just of scienter but also of an artificial price or other form of deception in the market place to establish market manipulation. Koch maintained that in order to find market manipulation, actual deception or creation of an artificial price in the market must be shown, not just scienter. No proof of deception was shown by the SEC, and the D.C. Circuit misread the law by not requiring such proof, he argued.
RBS Securities. The court also declined to hear a petition brought by RBS Securities Inc., asking whether the Fifth Circuit erred in concluding that the FIRREA extender provision preempts state statutes of repose. The panel ruled that the text, structure, and purpose of the statute all demonstrate Congress’ intent to give the FDIC three years from the date upon which it is appointed receiver to investigate and bring any actions on behalf of a failed financial institution. Therefore, the FDIC’s misrepresentation claims were not barred by the Texas Securities Act’s five-year repose period. The petition argued that less than two years ago, in CTS Corp. v. Waldburger, a similar provision in another statute did not preempt statutes of repose.
Pfeil. Finally, a petition filed on March 22 asks whether the Court's decision in Fifth Third Bancorp v. Dudenhoeffer affords fiduciaries for employee stock ownership plans per se immunity from fiduciary liability whenever the underlying company stock investment in the ESOP trades in an "efficient market," no matter how speculative the sock has become or how close the company is to filing bankruptcy. Raymond Pfeil's petition also asks whether ERISA's duty of prudence requires a plan fiduciary simply to monitor plan investments, or whether it also has a substantive component that requires fiduciaries to remove investments from the plan that are objectively imprudent.
The petitions are Nos. 15-1199 (Pfeil), 15-997 (Bebo), 15-783 (RBS Securities), and 15-781 (Koch).