By Rodney F. Tonkovic, J.D.
A Third Circuit panel affirmed that a sovereign immunity barred a district court from hearing an action seeking to enjoin an SEC investigation. In this case, the SEC's decision to open an investigation was challenged. Since there are no standards by which a court may evaluate an agency's decision as to whether or not to open an investigation, that decision is committed to agency discretion by law and is not subject to judicial review. As a result, the panel affirmed the district court's dismissal of the complaint for lack of subject matter jurisdiction (Gentile v. SEC, September 10, 2020, Phipps, P.).
Gentile investigated. This action arose out of an SEC investigation into securities transactions through an unregistered broker-dealer. The appellant, Guy Gentile, owns a Bahamian broker-dealer (not registered in the U.S.) where the subject of the investigation maintained an account. Gentile later became a target in the investigation and was subpoenaed twice, but he refused to comply. Instead of initiating an action against Gentile to enforce the subpoenas, the Commission subpoenaed other entities and individuals associated with Gentile and commenced enforcement actions in Florida against two subpoena recipients who refused to comply.
Gentile then moved to intervene in these cases, alleging that the then six-year investigation was ruining his business. The court denied Gentile's motions for lack of legally protected interest. Attacking on another front, Gentile filed this suit in the District of New Jersey, seeking a declaration that the investigation was unlawful and to quash the related subpoenas. The court dismissed Gentile's suit on sovereign immunity grounds, holding that the SEC's authority under Exchange Act Section 21(c) to seek judicial enforcement of its subpoenas in federal court provides an exception to the waiver of sovereign immunity under Section 702 of the Administrative Procedure Act. Gentile appealed, taking issue with the district court's analysis of the APA.
APA waiver. The appellate court first examined the waiver of sovereign immunity under Section 702 of the APA. While government agencies are generally immune from suit, Section 702 contains an explicit waiver to sue for "relief other than money damages." The waiver is subject to conditions and exceptions, however, and the court concluded that the waiver does not extend to challenges to an agency's decision to investigate.
Sovereign immunity. In this case, Gentile sought broad relief, asking that: the investigation be deemed an abuse of process; the subpoenas be quashed; and that the SEC be barred from using any evidence obtained in the subpoenas. The APA's waiver of sovereign immunity, however, extends only to challenges to discrete agency actions, not broad, programmatic challenges, the court said. Gentile's complaint, then, challenged only one discrete action, namely, the initial Formal Order of Investigation which, he claimed, lacked a sufficient nexus to his conduct. And, while Gentile would have been barred from seeking to quash the subpoenas based on particularized defects—the Exchange Act provides the exclusive mechanism for that—the challenge was instead directed at the decision to open the investigation.
The court then concluded that the doctrine of sovereign immunity barred Gentile's challenge to the SEC's decision to open the investigation. Under the APA, there is an exception from judicial review for an agency action "committed to agency discretion by law." The court noted that there is Supreme Court precedent finding that agency decisions not to investigate are committed to agency discretion by law and that the same reasoning applies to decisions to investigate. Accordingly, Gentile’s complaint had to be dismissed for lack of subject matter jurisdiction, and the judgment of the district court was affirmed.
The case is No. 19-2252.