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.

In Gray and Hill, investment firm Gray Financial Group and real estate developer Charles Hill, subjects of an SEC proceeding regarding diversifying public pension plans, argued that the SEC’s method of appointing administrative judges violates the Appointments Clause of the Constitution, making proceedings constitutionally illegitimate. The Northern District of Georgia stayed the SEC proceeding to hear the constitutional challenge, finding that a claim that the appointment of SEC ALJs was likely unconstitutional (as we reported here). The Eleventh Circuit reversed, concluding that the district court lacked jurisdiction over the challenge. As did the other three circuit courts that have addressed this issue, the Eleventh Circuit reached its decision by applying the framework from Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) to determine whether a statutory scheme allows a party to seek parallel review of an administrative proceeding in district court. Here, the court concluded that the review scheme created by Congress in the Exchange Act required claims to be resolved first in the administrative forum, with a subsequent right to appeal to federal court only after that process concluded. The Court did not agree with the appellants that a constitutional challenge was exempted from the review scheme. Like the appellant in Tilton, Hill and Gray argued that they should be able to bring this challenge in a federal court rather than before the ALJ because they could not receive meaningful judicial review of a challenge to the constitutionality of an administrative law judge’s appointment from the very judge whose appointment they challenged. However, the Eleventh Circuit held that so long as the constitutional challenges could be raised on appeal at the conclusion of the proceedings, the petitioners would obtain meaningful judicial review of that challenge. The cost and time of defending themselves in the ALJ proceeding did not rise to the level of irreparable harm that could justify a shortcut to the Exchange Act’s procedures in the form of an injunction against the SEC.

As the SEC, unsurprisingly, is significantly more successful in enforcement actions it pursues in-house, the Commission is likely after this favorable decision to continue its increasingly common practice of pursuing fraud cases using administrative proceedings in lieu of civil suits. Although defendants will likely continue to raise constitutional objections to this practice, as a practical matter, in light of the current Circuit Court consensus barring early judicial review of the proceedings’ constitutionality, actual judicial review of the objections may take years to occur. Only if a defendant litigates to judgment in the SEC’s in-house court and then presses two separate rounds of appeals will he or she be able to raise the issue before a federal court. Many defendants will have neither the resources nor the inclination to do so.