In Tilton et al. v. Securities and Exchange Commission, No. 15-2103 (2d Cir. June 1, 2016), the Court of Appeals for the Second Circuit held that the administrative law process created by the SEC provides a meaningful opportunity for judicial review of an Appointments Clause claim in the event of an adverse ruling for a defendant. The Second Circuit decided in favor of the SEC with a 2-1 majority. The decision follows similar decisions in the Seventh and D.C. Circuits. The Second Circuit used three factors to determine whether Congress intended the administrative scheme to preclude federal district court jurisdiction over the appellant’s lawsuit. The Second Circuit concluded the district court did not have jurisdiction to hear parallel claims while the administrative process was pending. This decision was based mainly on the meaningful review available in the administrative scheme.

In March 2015, the SEC filed an administrative claim against Tilton and her firm alleging that Tilton concealed the poor performance of investments. The claim alleged the poor performance was hidden because Tilton failed to follow the valuation methodology established in the investment documents and that she and her firms profited over $200 million in unearned fees. In response to the administrative claim, Tilton filed a federal suit in the Southern District of New York. She claimed the procedure for appointing and removing SEC Administrative Law Judges (ALJs) is unconstitutional because it violates the Appointments Clause of the U.S. Constitution.

In June 2015, the district court dismissed Tilton’s suit based on a lack of jurisdiction. In September 2015, the Second Circuit stayed the SEC’s administrative proceedings while it considered Tilton’s appeal. However, the Second Circuit affirmed the district court’s decision, finding that Tilton must raise the question of constitutionality first in the administrative proceedings and then will have the right to appeal to the federal circuit court if the ALJ’s decision does not come out in her favor.

The Second Circuit looked to a 1994 case—Thunder Basin Coal Co. v. Reich—for guidance in analyzing whether the SEC’s administrative scheme precludes a party from seeking parallel review in federal district court. Thunder Basin established three factors to consider when making this decision: (1) whether the party can obtain meaningful review in the administrative court, (2) whether the claim is outside the administrative agency’s area of expertise, and (3) whether the issue is wholly collateral to the scheme’s review provisions.

The Second Circuit identified the ability to obtain meaningful judicial review through the administrative process as the most important of these factors and as the factor with the most definitive conclusion. The administrative process allows for an appeal to federal courts after a final judgment has been rendered. The Second Circuit reasoned that this, along with the review process within the scheme itself, established meaningful review. The court concluded that allowing an appeal before final judgment conflicts with established judicial practices.

The majority opinion allowed that it was a close call as to whether the constitutionality of the administrative proceeding was within the SEC’s area of expertise, but ultimately concluded that because the administrative process could moot the constitutionality question it was within the SEC’s purview. The final factor of whether the subject of the parallel claim was “wholly collateral” to the SEC’s case was also decided in favor of the SEC. The Second Circuit reasoned that because the question of constitutionality “arose directly” from the SEC’s enforcement action it was not “wholly collateral.”

Though the Tilton decision is consistent with decisions in the Seventh and D.C. Circuits, the lengthy dissent in this case demonstrates that questions remain about the constitutionality of the SEC’s use of administrative proceedings in securities fraud cases. The dissent argued that the Thunder Basin factors were applied incorrectly and that the final two factors were not analyzed in a meaningful way. Although Tilton was not allowed to bring a parallel action addressing the violation of the Appointments Clause, an adverse ruling by the ALJ could result in a question which the U.S. Supreme Court will certify at some point in the future.