DC Circuit: No Jurisdiction For Suits Re SEC Forum Selection Choice
Suits challenging the SEC’s forum selection decisions continue to proliferate. As the trend has unfolded the Commission posted a memo on its website discussing the issue of forum selection and has proposed modifications to the Rules of Practice for administrative proceedings. A few ALJ rulings have gone against the staff. None of this, however, is likely to stem the tide. Currently there are divergent rulings on the question. A number of decisions hold that the district court’s lack jurisdiction over suits challenging the SEC’s venue selection decisions. See, e.g. Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015). Other courts have reached a contrary result. See, e.g., Hill v. SEC, No. 1:15-cv-1801, 2015 WL 4307088 (N.D. Ga. June 8, 2015); Duka v. SEC, No. 15 Civ. 357,2015 WL 1943245 (S.D.N.Y. April 15, 2015). Hill is heading for the Second Circuit while Duka is going to the Eleventh Circuit. Both are based on a tied to a constitutional appointment clause theory.
Now the D.C. Circuit has weighed in on the side of the SEC. Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015). There the Circuit Court concluded that district courts lack jurisdiction to hear these suits, following the lead of the Seventh Circuit in Bebo. At the center of Jarkesy is the question that underlies all of these suits – the adequacy, and ultimately the exclusivity of, the procedures in the Administrative Procedure Act and the securities laws for raising challenges to the SEC’s venue selection decisions. Under those statutes the issues can be raised in the administrative process and ultimately in the circuit court.
The plaintiff-appellants here are George Jarkesy and Patriot28, LLC. The firm is an unregistered investment adviser and general partner of two hedge funds. Mr. Jarkesy is the manager of the adviser. Shortly before the administrative hearing was set to commence this action was filed alleging violations of fundamental constitutional rights. Specifically, the complaint alleged violations of the Fifth Amendment Due Process Clause and the Equal Protection clause centered on claims regarding the lack of a jury trial, an assertion that the forum selection decision was motivated by animus and an alleged violation of Brady rights.
The district court dismissed the complaint, concluding that the statutory scheme provided the sole forum for raising and litigating plaintiffs’ issues. The hearing before the ALJ proceed, concluding with a finding of liability. The SEC denied a stay pending resolution of the appeal to the D.C. Circuit but has not ruled on the petition for review.
The D.C. Circuit affirmed. Federal courts possess only limited jurisdiction, the Court began. Where there is a special statutory review scheme “it is ordinarily supposed that Congress intended that procedure to be the exclusive means of obtaining judicial review in those cases to which it applies,” the Court stated (internal quotations omitted). Nevertheless, the resolution of the question of the district court’s jurisdiction in this suit is governed by Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994). That case identified two key points to guide the court’s determination: 1) whether there is a fairly discernible Congressional intent that the statutory scheme be exclusive and 2) if the litigant’s claims are of the type Congress intended to be reviewed within the statutory structure.
Here the provisions of the Exchange Act evidence an intent that the statutory forum be exclusive. Once there is a final order from the SEC there is a provision for review in the appropriate circuit court. The court can consider objections urged before the Commission. The statute also specifies the standard of review for factual findings, the procedure for seeking a stay and the process by which the court can remand the matter to the agency to adduce additional evidence.
Plaintiffs do not “seriously” dispute this point. Rather, they focus on the second Thunder Bay factor, arguing that the particular challenges presented are not the type that Congress intended to be considered within the statutory structure. In considering this question the Supreme Court had stated that courts should presume that Congress wanted the district court to remain open to the litigant’s claims if a finding of preclusion would “foreclose all meaningful judicial review.” Key considerations are whether the suit is wholly collateral to the statute’s review provisions and if the claims are outside the agency’s expertise.
Plaintiffs have framed their key issue as a “facial attacks on Dodd-Frank’s amendments to the securities laws based on the Seventh Amendment and the non-delegation doctrine.” The government claimed this issue was not raised in the district court. The Court agrees. Even assuming that the issue was properly presented however, it does not mean that the district court has jurisdiction. To the contrary, since the “constitutional claims, including his [Appellants’] non-delegation challenge to Dodd-Frank, can eventually reach an Article III court fully competent to adjudicate them, it is of no dispositive significance whether the Commission has the authority to rule on them in the first instance during the agency proceedings,” the Circuit Court held.
In assessing whether the claims presented by the suit are wholly collateral to the securities laws, the Court set aside the facial challenge to Dodd-Frank, and found that each of the remaining “claims concern . . . substantive or procedural deficiencies in the Commission’s enforcement of the securities laws . . . [against Plaintiffs] to this point.” The district court was, accordingly, correct in determining that these issues are “’inextricably intertwined’ with the conduct of the very enforcement proceeding the statute grants the SEC the power to institute and resolve . ..” Indeed, the constitutional and APA issues in this case clearly are not outside the SEC administrative enforcement scheme. Rather, they constitute the affirmative defenses raised in the administrative action. The result “might be different if a constitutional challenge were filed in court before the initiation of any administrative proceeding . . .” and Plaintiffs could establish standing to raise the questions but that is not the case here the Court found. With this case Plaintiffs are attempting an end run around the statutory scheme which would only encourage piecemeal litigation.
While some courts have viewed the fact that if vindicated Plaintiffs would not have to proceed through the administrative process as significant to the jurisdictional inquiry indicating the issues are collateral, the Circuit Court rejected this notion stating: “Requiring Jarkesy to undergo the remainder of the proceeding, notwithstanding his threshold claim that it was wrongly instituted, aligns with how the law handles analogous claims in similar contexts.” Thus, even if Plaintiffs are correct that “Congress has unconstitutionally delegated power to the SEC to decide whether to place him in an administrative proceeding rather than in a court action, Jarkesy has no inherent right to avoid an administrative proceeding at all. Thus, ‘his rights can be vindicated by a reversal’ of the Commission’s final order if the court of appeals grants his petition for review, quoting Deaver v. Seymour, 822 F. 2d 66, 71 (D.C. Cir. 1987). While Plaintiffs’ issues will never reach the court of appeals if they prevail this is just a “feature of the administrative-exhaustion requirement, not a bug . . .” the Court concluded (emphasis original).
Finally, the Court rejected Plaintiffs’ claims that Congress could not have envisioned channeling their claims through the administrative process because the issues fall outside the expertise of the SEC. The Commission has “proven fully capable of considering Jarkesy’s attacks on the fairness of his proceeding – at least in the first instance – nothing about the nature of those claims strongly suggests that Congress would have wanted to carve them out of the administrative scheme. To the contrary, the majority of Jaresy’s challenges lie firmly within the Commission’s ordinary course of business.” In the end there are “precious few cases involving interpretation of statutes authorizing agency action in which our review is not aided by the agency’s statutory construction.” (internal quotation omitted).
The issues presented by the challenges to the SEC’s forum selection decisions are fundamental to the fairness of the enforcement process. The production of Brady material, discovery, the right to a jury trail and the admissibility of evidence at the hearing before the ALJ all go to the core of the adjudication process and its fundamental fairness. The fairness of that process is critical to the SEC. When the enforcement program is viewed as fair and effective it facilitates the Commission’s statutory mission of bringing a new ethics to the market place. When the fairness of that program is questioned it undermines confidence in the agency and its mission.
The jurisdictional issue at the center of these cases in many ways is also a function of fairness. As the decision Jaresy makes clear, the statutes furnish a route to judicial review for all of the issues raised in that case at the end of the administrative process. It is unfortunate that the review discussed by the Court does not come for years and only after enduring costly litigation. During those years what the Court fails to discuss is the fact that there is little, if any, meaningful chance that any of the challenges will be sustained. The process is effectively an endurance test – can the parties withstand the pressure and expense of an SEC enforcement action for years while waiting for a meaningful chance challenge the process? The Court’s dismissal of this factor as little more than the way the process works is unfortunate.
Finally, perhaps more critical is another factor the Court fails to discuss – how meaningful will the review at the circuit court be? There is little doubt that on a Petition for Review at the circuit court level the SEC will argue for deference under Chevron. If the review by the circuit court is tinged by that plea, then effectively there will be no review at all. In that case the SEC will have made the forum selection decision, instituted the proceeding and served as the appellate court – no Article III court will have ever conducted a meaningful analysis of the issues. Congress clearly did not – and indeed cannot – delegate legislative authority and all judicial power to an executive branch agency.
Full disclosure: The author is litigating an action presenting the deference issue.