Last week, the SEC scored a victory in its battle to defend the use of administrative proceedings in enforcement actions seeking penalties against unregulated entities or persons. On June 30, 2015, Southern District of New York Judge Ronnie Abrams denied Plaintiffs Lynn Tilton, Patriarch Partners LLC, and affiliated entities’ motion for a preliminary injunction halting the SEC’s administrative proceedings against them. Judge Abrams’ decision in Tilton v. SEC is the latest in a string of challenges to the SEC’s use of administrative proceedings in enforcement actions (also discussed in earlier posts from July 31, 2014 and October 28, 2014). As we have written, the SEC has faced mounting scrutiny for its increasing use of administrative proceedings, including criticism that the Administrative Law Judges (ALJs) presiding over the proceedings are biased in favor the SEC’s Enforcement Decision and that defendants subjected to administrative proceedings are entitled to fewer due process protections, including limited discovery and no right to a jury trial. The SEC began increasing its use of administrative proceedings after the 2010 Dodd-Frank Act enabled the Commission to file actions against unregulated entities or persons in its in-house forum, rather than in federal courts, as it had traditionally been required to do.
In SEC v. Tilton, the SEC brought administrative proceedings for fraud and breach of fiduciary duty against Tilton, an investment adviser, and her New York-based firms, for allegedly misrepresenting their funds’ investment methodology, hiding the poor performance of the firms’ managed assets, making misstatements and false certifications in financial statements, and collecting almost $200 million in improper fees and payments. Tilton and her firms subsequently filed Tilton v. SEC, arguing that the SEC’s administrative proceeding against them must be enjoined because the scheme for appointment and removal of the SEC’s ALJs violates the Appointment Clause of the U.S. Constitution.
In Judge Abrams’ June 30, 2015 ruling, she declined to address Tilton and her firms’ constitutional challenge to the SEC’s administrative proceedings, holding that the Court lacked subject matter jurisdiction to do so. The Court found that Congress had established a scheme for review of Commission actions that assigned distinct roles to the SEC and the courts, pursuant to which ALJ’s decisions were reviewed through the administrative proceedings, with subsequent review by the United States Court of Appeals, if appropriate. Congress also endowed the Commission with complete discretion to bring an action in whatever forum it chose. Since the Commission selected an administrative forum for the action against Tilton and her firms, the ALJ and the Commission had jurisdiction to rule on the constitutional challenges, not the District Court. Tilton and her firms could appeal to the Court of Appeals if they disagreed with the ALJ’s ruling. Holding that the statutory scheme allowed for “meaningful” judicial review of Commission decisions and that the enforcement of the scheme would not cause “irreparable injury” in the case at hand, Judge Abrams found no reason to “bypass this congressionally created remedial scheme” and thus no basis to exercise jurisdiction.
Judge Abrams’ decision stands in contrast to a defense bar victory merely a few weeks ago. On June 8, 2015, Judge Leigh Martin May of the Northern District of Georgia found that the SEC’s administrative proceedings against Defendant Charles Hill were likely a violation of the Appointments Clause of the Federal Constitution because the ALJ was not appointed by the President, a department Head, or the judiciary. As the first successful challenge to the constitutionality of the Agency’s administrative proceedings, the Northern District of Georgia decision was a step forward in the defense bar’s battle to limit the SEC’s home-court advantage in administrative proceedings. Judge Abrams’ decision calls the implications of that defense victory into question. Nor does her decision appear to be an outlier. On June 26, 2015, in Spring Hill Capital Partners LLC v. SEC, Judge Edgardo Ramos of the Southern District of New York also refused to grant a motion to enjoin the SEC’s administrative proceedings brought by defendants, a former Lehman Brothers Inc. managing director and the brokerage firm he founded after Lehman’s collapse. Like Judge Abrams, Judge Ramos did not reach the legal question at issue – the constitutionality of the SEC’s in-house forum – because he found that the court lacked jurisdiction over the matter and that defendants had failed to show the requisite irreparable harm. More challenges to the SEC’s home-court advantage are no doubt on the horizon. In light of the divergent Northern District of Georgia and Southern District of New York decisions, it seems likely that a split among the circuits may be brewing. One can only wonder when the Supreme Court will decide to step in.