Wednesday, December 21, 2016

ALJ regime challenge properly tossed for lack of jurisdiction

By Amy Leisinger, J.D.

Joining the Second, Seventh, Eleventh and D.C. Circuits, a Fourth Circuit panel held that challenges to the validity of the SEC’s administrative regime must first be addressed by the Commission. In affirming the district court’s decision to dismiss an action by an adviser attacking the constitutionality of administrative law judges for lack of subject-matter jurisdiction, the panel found that the adviser has the opportunity for meaningful judicial review within the current SEC statutory framework (Bennett v. SEC, December 16, 2016, Duncan, A.).

Injunction to halt proceedings rejected. In September 2015, the SEC instituted administrative proceedings against a host of a local radio show about investing and her financial services firm, Bennett Group Financial Services, LLC, for allegedly exaggerating the amount of assets under her management and inflating claims of investment returns. The adviser filed an action in Maryland federal court to enjoin the proceedings, also asking the court to declare unconstitutional both the statutory and regulatory provisions and practices for selecting and designating SEC ALJs and the provisions providing for the position of SEC ALJs and related tenure protections. She also asked the court to enter a preliminary injunction to prevent the administrative proceeding from moving forward during the pendency of the district court action.

The district court rejected her arguments, finding that it lacked subject-matter jurisdiction over the claims and that the adviser must assert her constitutional challenges to the SEC procedures before the Commission itself. The adviser appealed to the Fourth Circuit, arguing that the district court’s conclusion would have the effect of eliminating district court jurisdiction in every case where an administrative proceeding is pending and that, were she to wait for the SEC proceedings to be finalized to appeal, her claim for an injunction against her would be moot.

Meaningful judicial review. In Thunder Basin Coal Co. v. Reich, the Supreme Court said that a statute providing for agency review will divest the federal courts of jurisdiction if the statutory scheme displays a fairly discernible intent to limit jurisdiction and the claims at issue are of the type Congress intended to be reviewed within the statutory structure. The Thunder Basin Court also said that Congress did not intend claims to be reviewed within the statutory scheme by the agency if a finding of preclusion could foreclose all meaningful judicial review, if the suit was wholly collateral to a statute’s review provisions, and if the claims were outside the agency’s expertise.

Reviewing these factors, the panel agreed with the district court that the adviser’s constitutional claims must first be reviewed through the administrative process, followed by review at the Court of Appeals, and not through a district court action. The panel rejected her contention that the harm to her is the existence of an unconstitutional proceeding that can only be remedied by halting the proceeding before it occurs. Unlike in Free Enterprise, where the challenge was not connected with a particular proceeding, the adviser’s claim targets an aspect of an ongoing Commission action, which will conclude in a reviewable administrative adjudication, the panel noted. The appeal constitutes meaningful judicial review, the panel found, notwithstanding the fact that the adviser first must complete the administrative process.

Other factors. Further, the panel explained, a claim is not wholly collateral if it is brought after an administrative proceeding commences and if it is the means by which the aggrieved party seeks to prevail against the agency, as it is in the current case. In addition, the panel found that the agency-expertise factor does not support subject matter jurisdiction, as the SEC could resolve the matter by coming down in the plaintiffs’ favor on questions the agency routinely considers, and the Supreme Court has noted that “one of the principal reasons to await the termination of agency proceedings is ‘to obviate all occasion for judicial review.’”

No subject-matter jurisdiction. If the adviser’s arguments prevail, the panel concluded, “[a]nyone could bypass the judicial-review scheme established by Congress simply by alleging a constitutional challenge and framing it as ‘structural,’ ‘prophylactic,’ or ‘preventative.’” As such, the panel affirmed the district court’s determination regarding lack of subject-matter jurisdiction.

The case is No. 15-2584.

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