Thursday, June 23, 2016

Post-Tilton, ALJ regime challengers gear up for new round of arguments

By Rodney F. Tonkovic, J.D.

A motion requesting permission to file a joint petition for rehearing has been filed in Tilton v. SEC. Undeterred by a recent ruling in the SEC's favor, plaintiff-appellant Patriarch Partners, together with the plaintiff-appellee in Duka v. SEC, Barbara Duka, seek an en banc rehearing of the Second Circuit's opinion affirming the dismissal of Patriarch's constitutional challenge to an SEC administrative proceeding for lack of subject-matter jurisdiction (Tilton v. SEC, June 21, 2016).

On June 1, a Second Circuit panel rejected Tilton's arguments regarding the ability of respondents in SEC administrative proceedings to force constitutional arguments to be heard in federal district court. The divided panel sided with the lower court's finding that it did not have subject matter jurisdiction. Examining the issue under factors outlined in Thunder Basin, Free Enterprise, and Elgin, the two-judge majority concluded that Congress intended the SEC's administrative scheme to preclude district court jurisdiction and that the scheme encompasses an Appointments Clause challenge to a presiding ALJ.

Duka. Barbara Duka the ex-Standard & Poor's Rating Services executive whose handling of ratings for commercial mortgage backed securities allegedly ran afoul of the SEC's rules, is the respondent in a separate, unrelated administrative proceeding. The district court in Duka previously ruled that, based on Duka's complaint, the SEC's administrative law judges may have been appointed in violation of Article II of the U.S. Constitution. The Tilton majority, however, reached the opposite conclusion. After Tilton was decided, the Second Circuit vacated the district court's order that halted the SEC's proceeding against Duka and remanded for proceedings consistent with the Tilton opinion.

Petition for rehearing. The motion notes that Patriarch and Duka are similarly situated and have identical interests in petitioning the court for a rehearing of Tilton. According to the motion, the procedural history demonstrates that the court has consistently viewed Patriarch and Duka's cases as being controlled by the same issues. The decision in Tilton places Patriarch and Duka in similar positions and each has the same arguments to make as to why the court should grant en banc review. Finally, the motion argues that a joint petition would serve the interests of judicial economy. Duka plans to file a parallel motion requesting the same relief.

Raymond Lucia. Another matter taking aim at the Commission's in-house enforcement proceedings is Raymond J. Lucia's appeal currently before the Court of Appeals for the D.C. Circuit. The Commission imposed an industry bar on Lucia, a 40-year veteran of the advisory business, and civil penalties against both him and his firm. Among other arguments, Lucia has contended that the Commission's rules of practice give the agency a “home court advantage” by eliminating the procedure and evidence rules of the federal courts.

The Commission’s Office of the General Counsel has written to inform the D.C. Circuit of the Duka order as well as the Eleventh Circuit's recent decision in Hill v. SEC. In both cases, the Commission notes, the circuit courts vacated district court decisions preliminarily enjoining Commission administrative proceedings, holding that the district courts lacked jurisdiction over the plaintiffs' Appointments Clause challenges; the letter also mentions the holding in Tilton. Lucia, the Commission observed, relied on Duka and Hill in support of the argument that SEC ALJs are "officers" subject to the Appointments Clause.

In response, Lucia's attorneys agree that the jurisdictional question addressed in Duka and Hill is already law in the D.C. Circuit. Neither the Second nor Eleventh Circuit opinions, however, addressed the constitutional merits, and the petitioners did not "rely" on those cases, the letter said. There is, therefore, no threshold jurisdictional obstacle and the vacatur of the district court decisions on purely jurisdictional grounds does not rehabilitate the Commission's defense of its ALJs' appointments, which, the letter notes, has been rejected by every Article III judge to consider it.

The case is No. 15-2103.