On March 28, 2016, the Supreme Court denied a petition for certiorari review brought by Laurie Bebo, the former CEO of Assisted Living Concepts Inc., who challenged the constitutionality of proceedings conducted in an SEC administrative tribunal. Although the Court denied review, there are many more cases like it winding their way through the federal system, and in the likely event a split develops among the circuits, the Supreme Court may be inclined to address the issue, especially given the amount of attention the issue has received. Indeed, Bebo’s petition itself attracted the notice of celebrity entrepreneur Mark Cuban, who filed an amicus brief in her case arguing that the SEC’s administrative tribunal is a “farce” and unconstitutional.

The underlying issue in Bebo is a relatively new one: Before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the SEC was forced to bring enforcement actions in district court. But section 929P(a) of Dodd-Frank gave the SEC power to seek enforcement penalties in its own administrative proceedings. As did Bebo, targets of SEC administrative actions have challenged section 929P(a)’s constitutionality, alleging that it violates the Appointments Clause in Article II of the Constitution because the administrative law judges who preside over such proceedings are not appointed by the President or the SEC Commissioners, but are instead hired by the SEC.

In Bebo, an SEC administrative law judge ordered the defendant to pay $4.2 million for violating certain securities laws. Before the judge issued that order though, Bebo brought her constitutional challenge in the United States District Court for the Eastern District of Wisconsin, seeking a declaration that the SEC’s administrative law judges lack constitutional authority to issue such orders. The district court dismissed Bebo’s suit for lack of subject matter jurisdiction, holding that Bebo was first required to exhaust SEC administrative proceedings, and then appeal to federal court. The Seventh Circuit affirmed, relying on two Supreme Court cases: Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994), and Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010).

So far, the lower courts have decided these constitutional challenges inconsistently. The D.C. Circuit has affirmed a dismissal for lack of jurisdiction just like the Seventh Circuit did in Bebo. See Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015). A few courts in the Southern District of New York have done the same. See Tilton v. S.E.C., No. 15-2472 (S.D.N.Y. June 30, 2015); Chau v. SEC, No. 14-1903 (S.D.N.Y. Dec. 11, 2014). However, one Southern District of New York judge went the other way, holding that the court had subject matter jurisdiction to hear the case, and then also finding in favor of the petitioner and granting a preliminary injunction against the SEC enjoining the administrative tribunal proceedings. See Duka v. SEC, No. 15-357 (S.D.N.Y. Aug. 12, 2015). District courts in Georgia have also granted preliminary injunctions halting SEC administrative proceedings. See Hill v. SEC, No. 15-1801 (N.D. Ga. June 8, 2015); Gray Fin. Grp. Inc. v. SEC, No. 15-492 (N.D. Ga. Aug. 4, 2015); Ironridge Global IV, Ltd. v. SEC, No. 15-2512 (N.D. Ga. Nov. 17, 2015). All of those district court cases are now pending on appeal in the Second or Eleventh Circuits, respectively.

Notably though, not every case involves the jurisdictional question. In two other D.C. Circuit cases, the jurisdictional issue was not presented because the petitioner appealed directly from a final order of the SEC administrative tribunal to the D.C. Circuit. In one, the petitioner did not raise the issue until after the D.C. Circuit had issued an opinion affirming the SEC’s ruling, seeking rehearing from the court. See Pierce v. SEC, No. 14-1079 (D.C. Cir.). The D.C. Circuit rejected that petition on August 3, 2015, and a petition for certiorari is currently pending in the Supreme Court. In the other, Raymond J. Lucia Companies v. SEC, No. 15-1345 (D.C. Cir.), the argument was squarely presented from the outset, but the D.C. Circuit has not yet ruled.

With all of these divergent outcomes, the issue very well may wind its way to the Supreme Court. However, the Supreme Court will probably let most of these cases play out in the lower courts before weighing in, or at least will allow a circuit split to develop before taking up the issue. The earliest that could happen would be when either the Second Circuit or the Eleventh Circuit decides the appeals pending before them.

The consequences of being subject to an SEC administrative review process are significant. In federal court, a defendant is entitled to full civil discovery, complete application of the Federal Rules of Civil Procedure and Evidence, in most cases, a jury trial, and adjudication by a neutral arbiter, while a respondent in a SEC proceeding is entitled to none of these protections. The results of that incongruity speak for themselves. Whereas the SEC prevailed against 90% of defendants before administrative law judges during a recent five year stretch, its success rate in federal court was only 69% during the same time period. Jean Eaglesham, SEC Wins With In-House Judges, Wall St. J., (May 6, 2015). It is therefore no surprise that there has been an uptick in the number of enforcement actions as in-house administrative proceedings in recent years. Id.

For now, anyone who is subject to an SEC administrative enforcement proceeding should take steps to halt the proceeding and pursue a constitutional challenge in federal court. That includes bringing an action for a preliminary injunction, as did the litigants in many of the above-referenced cases.