In several recent decisions we have covered (here and here), Federal Circuit Courts have unanimously ruled that respondents in an SEC enforcement action cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds. However, those prior opinions all were based on the narrow ground that district courts did not have jurisdiction to hear collateral challenges, and did not reach the merits of the constitutional challenge. In Raymond James Lucia Cos. Inc. v. SEC, No. 15-1345 (D.C. Cir. Aug. 9, 2016), the D.C. Circuit became the first federal appellate court to consider the merits and ruled in favor of the SEC. The court held that SEC administrative law judges are merely employees, rather than officers of the United States, and thus need not be appointed pursuant to the Appointments Clause of the Constitution. Their appointment satisfied constitutional scrutiny and could not provide grounds to throw out the results of the proceedings before them.
Posts by: Bronwyn James
After four failed attempts at persuading federal appellate courts to hear constitutional challenges to SEC administrative courts, it is increasingly clear that defendants in SEC in-house proceedings will not be able to pursue an early out because of the manner in which SEC administrative judges are appointed. The latest loss came on June 17, when the Eleventh Circuit in consolidated cases Gray Financial Group Inc. et al. v. SEC, No. 15-13738 (11th Cir. Jun. 17, 2016), and Charles L. Hill v. SEC, No. 15-12831 (11th Cir. Jun. 17, 2016), agreed with the Second Circuit’s decision of three weeks ago in Tilton v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016) (which we covered here) in ruling that respondents in an SEC administrative enforcement cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds. A different decision from the Eleventh Circuit would have created a circuit split and a heightened possibility of Supreme Court review, but instead it joined the Second, Seventh, and D.C. Circuits in an approach that is unanimous among the circuit courts to have considered the question. The constitutional legitimacy of SEC administrative law judges is thus likely to continue unchallenged, at least for now.
On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).