Challenges to SEC Forum Selection Decisions
Two cases challenging the SEC’s use of administrative proceedings based on the Constitution’s Appointment Clause are headed for the Circuit Courts. One, Duka v. SEC will be considered by the Second Circuit. A second, Hill v. SEC, will be heard by the Eleventh Circuit. Both courts concluded they had jurisdiction to consider the question. A recent Seventh Circuit decision, however, determined that district court’s do not have jurisdiction to consider such challenges. Bebo v. SEC, No. 15-1511 (7th Cir. August 24, 2015).
Laurie Bebo is a respondent in a pending Commission administrative proceeding. That case has been heard and is pending decision. The complaint alleged an accounting fraud at Assisted Living Concepts, Inc. Ms. Bebo was the CEO of the firm. Her answer raised, among other things, the issues presented here – that Section 928 of Dodd-Frank is facially unconstitutional under the Fifth Amendment because it gives the SEC unguided authority to select the forum and that the appointment clause was violated when the ALJ’s were selected.
While the Initial Decision has not been rendered in the administrative action, at its conclusion Ms. Bebo will have the right to pursue appeals through the SEC and to an appellate court, assuming the decisions are adverse. Instead, Ms. Bebo elected to file suit, invoking the district court’s jurisdiction under 28 U.S.C. § 1331. The complaint alleged, among other things, the two Constitutional issues presented in her answer. The district court dismissed the suit for lack of jurisdiction. The Circuit Court affirmed.
The statutory issue presented in the case, according to the Circuit Court, is one of jurisdiction: does the review afforded by 15 U.S.C. §78y bar district court jurisdiction over a constitutional challenge to the SEC’s authority when the plaintiff is a respondent in a pending administrative proceeding?
The inquiry here is claim specific. The Supreme Court held in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010) that the administrative process does not bar all such claims. Rather, citing Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), Free Enterprise employed a three factor test to analyze the question. Those factors are: 1) if a finding of preclusion could foreclose all meaningful judicial review; 2) if the suit was wholly collateral to the statute’s review provisions; and 3) whether the claims are outside the expertise of the agency. Assessing these factors the Court concluded that “Read broadly, the jurisdictional portion of Free Enterprise Fund seems to open the door for plaintiff . . .”
That door was closed, however, by Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012).Elgin established “several key points that undermine Bebo’s effort to skip administrative adjudication . . .” First, the fact that her claims present facial constitutional challenges is not sufficient. Second “jurisdiction does not turn on whether the SEC has authority to hold § 929P(a) of Dodd-Frank unconstitutional, nor does it hinge on whether Bebo’s constitutional challenges fall outside the agency’s expertise.” Third, the claim that the fact finding capabilities in the administrative proceeding are more limited than those of a federal district court is not sufficient. Finally, the fact that Ms. Bebo may prevail in the administrative case which would obviate any review of her constitutional claims does not “render the statutory review scheme inadequate.”
While the claims here may be wholly collateral to the statutory review scheme, this point is not dispositive. Calling this question “unsettled,” the Court concluded that “the most critical thread in the case law is the first Free Enterprise Fund factor: whether the plaintiff will be able to receive meaningful judicial review without access to the district courts. . . The key factor in Free Enterprise Fund that rendered §78y inadequate is missing here.” Accordingly, the district court correctly determined that it does not have jurisdiction.