Why it matters: Since we reported on the constitutional challenges to SEC administrative proceedings in our April newsletter (“Wherefore Art Thou Due Process? SEC Administrative Hearings Under Attack”), things have heated up and may soon reach the boiling point with one district court judge in Atlanta granting an injunction on June 8, 2015, on the grounds that SEC administrative proceedings are “likely unconstitutional” and the Seventh Circuit, D.C. Circuit and even the SEC Commissioners recently hearing oral argument on the issue. We update you here.
Detailed discussion: The attacks on the SEC’s administrative proceedings continue and, at least in one recent case, are making headway. Some notable recent developments:
Hill v. SEC, 15-cv-01801 (N.D. Ga.): On June 8, 2015, District Court Judge Leigh Martin May of the Northern District of Georgia (Atlanta Division) granted plaintiff Charles L. Hill, Jr.’s (Hill) motion for preliminary injunction in connection with his complaint challenging the constitutionality of the SEC administrative proceeding initiated against him in an insider trading case. The injunction halted the administrative proceeding “to allow the court sufficient time to consider this matter on the merits.” This is the first case where a district court sided with the plaintiff and appeared to embrace the argument that SEC administrative proceedings are unconstitutional.
A brief background: On February 17, 2015, the SEC served Hill with an Order Instituting Cease-And-Desist Proceedings after a nearly two-year investigation, from March 2013 to February 2015, into Hill’s alleged insider trading activities that earned him illegal profits of approximately $744,000. Hill immediately moved for summary disposition before James E. Grimes, the administrative law judge (ALJ) that had been assigned to his proceeding. In his motion, Hill argued, among other things, that the proceeding violated Article II of the Constitution (Appointments Clause) because ALJs are “inferior officers” that had not been constitutionally appointed as dictated by Article II and could not be easily removed because they were protected by at least two layers of tenure protection. When denying Hill’s motion on May 14, 2015, ALJ Grimes specifically denied Hill’s Appointments Clause claim on the merits (after, however, noting his doubts that he even had the authority to address the issue or, for that matter, Hill’s entire motion). Hill then filed a complaint and motion for preliminary injunction in the Northern District of Georgia on May 19, 2015, once again challenging the constitutionality of SEC administrative proceedings based, among other things, on the same Appointments Clause argument.
Judge May heard oral argument on May 27, 2015, and on June 8 granted Hill’s motion for preliminary injunction, finding that “SEC ALJs are inferior officers” for purposes of Article II of the Constitution and, because of this, Hill “established a likelihood of success on the merits on his Appointments Clause claim.” Noting that ALJ Grimes was not appointed by the President or an SEC Commissioner as required by Article II, “his appointment is likely unconstitutional in violation of the Appointments Clause.” Judge May found that Hill had satisfied the two remaining factors justifying the preliminary injunction, noting that if it were not granted, Hill would be irreparably harmed because he “will be subject to an unconstitutional administrative proceeding, and he would not be able to recover monetary damages for this harm because the SEC has sovereign immunity.” Moreover, Judge May found that the public interest and balance of equities favored her granting the preliminary injunction because “[t]he public has an interest in assuring that citizens are not subject to unconstitutional treatment by the Government, and there is no evidence the SEC would be prejudiced by a brief delay to allow this Court to fully address Plaintiff’s claims.”
Another case challenging the constitutionality of SEC administrative proceedings that we previously reported on, Gray Financial Group, Inc. v. SEC, No. 1:15-cv-0492, is also pending in the Northern District of Georgia. The SEC filed a motion to dismiss for lack of subject matter jurisdiction in Gray on April 20, 2015, that the court has not yet ruled on. Query whether Judge May’s June 8 decision in Hill will affect that outcome.
In the Matter of Timbervest LLC, et al., No. 3-15519: Also on June 8, 2015, Reuters reported that the SEC Commissioners heard oral argument before a standing-room-only crowd about the constitutionality of administrative hearings in In the Matter of Timbervest LLC. The oral argument “for and against” by Enforcement Division prosecutors, on the one hand, and attorneys for Timbervest LLC (Timbervest), on the other, was in connection with the appeal by Timbervest of an “Initial Decision” by ALJ Cameron Elliot on August 20, 2014, that found the Georgia-based investment firm and its executives liable for fraud and conflict of interest violations under the Advisers Act and ordered them to disgorge nearly $2 million. Timbervest filed a Petition for Review of the Initial Decision with the SEC on September 10, 2014, arguing, among other things, that the administrative procedure was unconstitutional and also that ALJ Elliot was biased with a proven track record of ruling against defendants. The SEC called for additional briefing of the constitutionality issue on January 20, 2015, and oral argument was scheduled before the SEC Commissioners and heard on June 8. Interestingly, in connection with Timbervest’s argument that ALJ Elliot is biased, Reuters reported that the Enforcement Division issued an “unusual” order on June 4, 2015, inviting ALJ Elliot to file an affidavit under seal saying whether he feels pressure from the Enforcement Division to rule in favor of the SEC in administrative proceedings before him (he politely declined on June 9). The SEC has, of late, been doing its part to limit damage control and mollify its critics. In response to SEC Enforcement Chief Andrew Ceresney’s grilling before a House subcommittee on March 19, 2015, regarding the due process fairness of SEC administrative proceedings and the lack of transparency in the SEC’s venue selection (previously reported on in our April newsletter), the SEC released guidelines titled “Division of Enforcement Approach to Forum Selection in Contested Actions” on May 8, 2015.
Oral arguments on appeal in Bebo v. SEC, No. 15-1511 (7th Cir.) and Jarkesy et al. v. SEC, No. 14-cv5196 (D.C. Cir.): On June 4, 2015, the Seventh Circuit heard oral argument in Bebo, and on April 13, the D.C. Circuit heard oral argument in Jarkesy. No decisions yet. As we previously reported, both cases raise constitutional challenges to SEC administrative proceedings and both were dismissed by the lower courts for lack of subject matter jurisdiction.
We will continue to monitor all of these cases with avid interest and report back on new developments.
See here to read the decision in Charles L. Hill, JR. v. SEC, No. 1:15-CV-1801-LLM (N.D. Ga.) (6/8/15).
See here to read the Reuters article titled “U.S. SEC Weighs Constitutional Challenge to Its In-House Courts” by Sarah N. Lynch (6/8/15).