by T. GormanPosted on Posted in SECActions

The second circuit joined the two other circuits which have rejected challenges to the SEC’s venue selection decisions, concluding that district courts do not have jurisdiction to hear the suits presenting the question while an administrative proceeding is pending. To the contrary the administrative process provides the sole route for presenting appellants’ Appointments Clause challenge. Tilton v. SEC, Docket No. 15-2103 (2nd Cir. Decided June 1, 2016).

Here the SEC initiated an administrative proceeding in March 2015 which named as Respondents the appellants in this action: Lynn Tilton, Patriarch Partners, LLC and other affiliated entities. The SEC Order alleged that Respondents had violated the Investment Advisers Act. Two days later appellants initiated this suit alleging that the presiding ALJ’s appointment violated the Appointments Clause of the Constitution. The SEC moved to dismiss for lack of jurisdiction. While there are conflicting district court decisions on this question, the lower court granted the SEC’s motion, dismissing the action. In reaching its conclusion the district court relied primarily on the Supreme Court’s decisions in Elgin v. Department of Treasury, 132 S.Ct. 2126 (2012), Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561 U.S. 477 (2010) and Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994).

To analyze the jurisdictional question at the core of this case the court considered two key issues: First, if it is “fairly discernible from the text, structure and purpose of the securities laws that Congress intended the SEC’s scheme of administrative and judicial review to preclude district court jurisdiction. Second, if the answer to the first question is in the affirmative then it must be determined if the “Appointments Clause claim is “of the type Congress intended to be reviewed within the statutory structure.” (internal citations omitted).

First, the “text, structure, and purpose of the securities laws make clear that Congress intended the SEC’s scheme of administrative review to permit the Commission to bring its expertise to bear in enforcing the securities laws.” In Thunder Basin the Supreme Court concluded that a similar statutory scheme precluded district court jurisdiction. The same conclusion applies to the securities laws, the court concluded. Appellants do not contest this point. Rather, they argue that the Appointments Clause challenge is a distinct type of claim which presents a “threshold constitutional challenge to agency practice.”

Second, to analyze appellants’ challenge the court considered three points drawn from the Supreme Court’s jurisprudence: 1) The availability of meaningful judicial review; 2) whether the issue is wholly collateral to the administrative action; and 3) the expertise of the agency.

The initial question centers on whether the statutory scheme assures that the appellants have an “opportunity for meaningful judicial review of their Appointments Clause claim.” Appellants do not dispute that the statutory scheme provides for some review. Rather, they claim that any review would not be “meaningful” because it could not provide an adequate remedy for the constitutional violation alleged here. This is particularly true here, they claim, because of the ongoing administrative proceeding which would constitute a constitutional injury.

While the court admitted that appellants’ argument “is not without force,” citing other district court decisions which reached this conclusion, Judge Sack, writing for the majority, noted that the court was not convinced. Although appellants cite Free Enterprise to support their claim, it does not.

The question is Free Enterprise differed from the one presented here. In that case the PCAOB’s members were appointed by the SEC. Some, but not all, of the Board’s regulatory actions required SEC approval in the form of a final Commission order. The losing party, as here, could appeal to a federal court of appeals. There was no provision for federal review of Board actions that did not require SEC approval however. For example, the report which was critical of the accounting firm in that case resulted from an inspection and did not require SEC approval or a final Commission order. Thus there was no clear administrative route to federal review. This differs significantly from the scheme here which provides for review in a federal circuit court.

Appellants’ claim is also at odds with established practice regarding “challenges to a tribunal’s constitutional legitimacy.” In cases such as FTC v. Standard Oil Co. of California, 449 U.S. 232 (1980), where the company brought suit claiming that it would suffer irreparable injury if forced to continue through an administrative proceeding before presenting its constitutional issues to a federal court, the court rejected the claim. Rather, the “Supreme Court concluded that a federal court would be able to meaningfully review the oil company’s claim after the administrative proceeding ended . . .”

In other cases the High Court has held that post-proceeding judicial review would not be meaningful where the proceeding itself posed a risk of some additional irreparable harm. Here appellants have failed to identify any such harm. Accordingly, the court concluded that the appellants will have access to meaningful judicial review though the administrative process.

The court also rejected the claim that the Appointments Clause issue was wholly collateral to the administrative proceeding. In this case is it not “wholly collateral” because “it was procedurally intertwined with the SEC’s ongoing proceeding, where it functioned as an affirmative defense.

The final question is whether the Appointments Clause issue falls outside the SEC’s expertise. The court termed this a “close question.” Free Enterpise acknowledged that the SEC does not possess “unique legal expertise in analyzing the constitutional sufficiency of its appointments.” In Elgin the Supreme Court found, however, that in view of the “potential applications of agency expertise to other dimensions of the administrative proceeding” there was no reason to believe that Congress intended to exempt a constitutional challenge from the administrative process. Here the SEC “might bring its expertise to bear on the appellants’ proceeding by resolving accompanying statutory claims that it ‘routinely considers,’ and which ‘might fully dispose of the case’ in the appellants’ favor.’” (internal citations omitted). It follows that the Commission may apply its expertise to resolve the action here. Accordingly, the decision of the district court was affirmed.

Judge Droney dissented, noting that this case is virtually indistinguishable from Free Enterprise. The only real difference is that here an administrative proceeding has commenced. Indeed, the “majority’s application of the Thunder Basin factors has stripped the ‘wholly collateral” and “outside the agency’s expertise’ factors of any significance: in its view, as long as administrative proceedings have been initiated, those two factors are always satisfied.” In fact Free Enterprise controls.

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by T. GormanPosted on Posted in SECActions

In Gabelli v. SEC, 133 S.Ct. 1216 (2013) the Court cautioned against leaving “defendants exposed to Government enforcement action . . . for an additional uncertain period into the future” beyond the five year limitation period of §2462 of Title 28. The High Court then concluded that the cause of action in an SEC enforcement action accrues when the alleged conduct occurred, not at some later point when it is discovered. The eleventh circuit, construing the same statute, found that its time limits delimit the remedies available to the SEC. SEC v. Graham, No. 14-13562 (11th Cir. May 26, 2016).

The SEC filed an enforcement action against Barry J. Graham and others claiming that they sold unregistered securities in violation of the federal securities laws. Specifically, between November 2004 and July 2008 the defendants raised over $300 million from about 1,400 investors, selling unregistered securities. The agency filed its complaint on January 20, 2013. On cross-motions for summary judgment the district court dismissed with prejudice the SEC’s complaint as time-barred.

Section 2462 bars any action “for the enforcement of any civil fine, penalty, or forfeiture” if brought more than five years from the date the claim first accrued. Here the SEC sought injunctive and declaratory relief and disgorgement. The circuit court rejected the claim that the Section applied to the Commission’s request for injunctive relief. An injunction is an equitable remedy that is concerned with future conduct. As such it cannot be a penalty as that term is used in §2462. While that term is not defined in the statute, a penalty typically addresses a wrong done in the past. Since it is backward looking it is, in effect, the opposite of an injunction which is concerned only with the future. Accordingly, an injunction is not a penalty within the meaning of §2462.

The same cannot be said of the SEC’s request for declaratory relief the court concluded. The district court correctly concluded that the Section bars this request for relief. Declaratory relief is backward looking like a penalty. It is a “public declaration that the defendants violated the law [and] does little other than label the defendants as wrongdoers.” The SEC’s contention that that such findings are the predicate to obtain other remedies does not change this point. Some of the remedies the agency might seek based on a declaration, such as penalties, are time-barred; others, such as an injunction, are not. At the same time declaratory relief is not necessary to obtain an injunction. To the contrary, to secure such relief the SEC need only establish a prima facie case of prior violations of the federal securities laws and a reasonable likelihood that the wrong will be repeated.

Finally, the district court properly concluded that the SEC’s request for disgorgement is time-barred by §2462. In reaching that conclusion the court found that disgorgement is in the same category as a forfeiture which is subject to the time limits of the Section. Disgorgement is, according to Black’s Law Dictionary, the “act of giving up something (such as profits illegally obtained) on demand or by legal compulsion . . .” That definition is very similar to the one for forfeiture which is, according to the same source, the “loss of a right, privilege, or property because of a crime, breach of obligations, or neglect of duty.” (internal quotations omitted).

The SEC argued that disgorgement and forfeiture are distinct concepts. That theory was built on the notion that the court’s power to order disgorgement extends only to the amount of the ill-gotten gains. The circuit court, however, rejected this contention, finding that “even under the definitions the SEC puts forth, disgorgement is imposed as redress for wrongdoing and can be considered a subset of forfeiture. Because forfeiture includes disgorgement, §2462 applies to it. Accordingly, the court affirmed in part, reversed in part and remanded the action to the district court.

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