The SEC continues to prevail in actions brought challenging its venue selections. On Monday the Supreme Court denied a request for a writ of certiorari in Bebo v. SEC, 799 F. 3d 765 (7th Cir. 2015). Ms. Bebo’s case is one of several that have challenged the SEC’s determine to bring charges against her in an administrative forum rather than in federal district court. While it is the first to reach the Supreme Court, in probability it will not be the last.
The Order in the underlying administrative proceeding asserted that Ms. Bebo, then CEO of Assisted Living Concepts, engaged in a financial fraud at her firm. In the Matter of Laurie Bebo and John Buono, Adm. Proc. File No. 3-16293 (December 3, 2014). In district court her complaint, filed while the underlying administrative proceeding was pending, invoked the court’s jurisdiction under 28 U.S.C. § 1331. It alleged, among other things, two Constitutional issues also presented in her answer in the administrative action. First, it claimed that Section 928 of Dodd-Frank is facially unconstitutional under the Fifth Amendment because it gives the SEC unguided authority to select the forum. Second, it alleges that the Constitution’s appointment clause with respect to how ALJ’s are selected.
The district court dismissed the suit for lack of jurisdiction. The circuit court affirmed. W The court began with the Supreme Court’s decision in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010) where a suit was permitted to move forward, quickly shifted to Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) and the three factor test and ended with Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012). Under that decision the most critical point is whether the plaintiff will be able to receive meaningful judicial review without access to the district courts, the seventh circuit wrote. In this case Section 25 of the Exchange Act provides an adequate remedy. Accordingly, the district court was correct – it lacked jurisdiction to hear the case.
The reasoning of the seventh circuit is similar to that used by the D.C. Circuit to deny jurisdiction in a similar suit, Jarkesy v. SEC, 803 F. 3d 9 (D.C. Cir. 2015). And, more recently, the SEC reached the same conclusion. In the Matter of Raymond J. Lucia Companies, Inc., Adm. Proc. File No. 3-15006)(Opinion by Commission, Sept. 3, 2015).
Two other courts have reached a different conclusion. In Hill v. SEC, No. 1:15-cv-1801, 2015 WL 4307088 (N.D. Ga. June 8, 2015), appeal filed, No. 15-12381 (filed in 11th Cir. July 2, 2015) and Duka v. SEC, No. 150-cv-357, 2015 WL 1943245 (S.D.N.Y. Apr. 15, 2015) the courts concluded that they did have jurisdiction to hear challenges to the SEC’s venue selection determinations. Each court concluded that the appointment clause issue has merit. Both cases are pending resolution in the circuit courts, presenting the prospect that at some point there may be a split among the circuits which could prompt the Supreme Court to consider the question.
What has not been considered to date by the circuit courts is whether the Section 25 appeal is actually effective within the meaning of Elgin. The SEC will no doubt argue that in fact the provision furnishes a more than effective remedy. In theory that may be true. In practice the SEC, when faced with circuit court review of an administrative action brought as an enforcement action, frequently relies on an argument not discussed in these cases – deference under Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984) or similar principles. While there is a split among the circuits over the application of that decision in SEC enforcement actions (the second circuit applies it; the eleventh has not ruled), if the agency can convince the circuit court that its determinations are entitled to deference, Section 25 review may be less than rigorous and in actuality significantly limited. See, e.g. VanCook v. SEC, 653 F. 3d 130, 139 n. 7 (2nd Circ. 2011(giving Chevron deference to the legal position asserted by SEC in an administrative complaint in another case). Nevertheless, at some point there is at least the promise of a circuit split on the question which might compel the High Court to consider the issue.