D.C. Circuit Court “Tunes In” To SEC Administrative Court Debate

Chairs Around a Table

On September 29, 2015, the D.C. Circuit, the second federal appellate court to recently weigh in on the ongoing debate over SEC administrative actions, ruled in favor of the SEC in Jarkesy v. SEC, holding that federal courts do not have subject matter jurisdiction over challenges to ongoing SEC administrative enforcement proceedings.  Notably, and in accord with the Seventh Circuit’s recent decision in Bebo v. SEC, the D.C. Circuit’s decision was narrowly tailored – focusing only on the issue of subject-matter jurisdiction – but not the substantive viability of Jarkesy’s constitutional challenges.  The three-judge panel unanimously held that a party to a pending administrative proceeding must first defend against that proceeding, and only once the SEC proceeding concludes may the party seek review by a federal court.

In Jarkesy, the SEC initiated an administrative proceeding against radio host and Hedge Fund Manager George Jarkesy, in March 2013, claiming that his firm had misled investors by overstating the value of two funds Jarkesy controlled.  In January 2014, Jarkesy brought suit in federal district court to block the administrative proceeding.  His claims focused on constitutional attacks, including (1) that the SEC’s use of an administrative proceeding deprived him of his right to equal protection by denying him a jury trial; (2) that the SEC’s proceeding was an equal protection violation because he was unfairly treated as a “class of one” largely due to the SEC’s “animus” and (3) that such proceedings violated the “nondelegation doctrine” and “separation of powers” principles.”  The district court dismissed the case, holding that it lacked subject-matter jurisdiction to review the challenge.  In so doing, the district court did not address any of Jarkesy’s constitutional arguments.

Jarkesy appealed and the D.C. Circuit agreed with the district court, expressing concern that holding otherwise would allow a defendant like Jarkesy to countersue the SEC in district court and result in parallel litigation of the same issues “with two courts of appeals possibly being confronted with two different sets of rulings down the road.”  The D.C. Circuit also relied upon the U.S. Supreme Court’s decision in Thunder Basin Coal Co. v. Reich to decide when a statutory scheme for administrative and judicial review of a matter eliminates party’s ability to seek a parallel review in district court.  Thunder Basin held  that courts must assume that Congress intended litigants to proceed exclusively through statutory review schemes when its intent is fairly discernable and the claims are the type Congress sought to have reviewed in that scheme.

Despite the results in Jarkesy v. SEC and Bobo v. SEC, the SEC appears to be reacting to increasing criticism and scrutiny over its decisions to go the route of administrative proceedings.  Last week, the SEC announced proposals to add additional litigation tools to its proceedings, including depositions, and to provide more time to prepare for hearings.  In the meantime, additional appeals involving challenges to SEC administrative proceedings are pending in the Second and Eleventh Circuits so stay tuned as this topic continues to develop.