A federal appellate court in Illinois ruled that Laurie Bebo, who is currently awaiting an initial decision from an administrative law judge in connection with an enforcement action commenced by the Securities and Exchange Commission, may not at this time challenge the legality of her administrative proceeding in a federal court. Ms. Bebo must first raise her challenge in an appeal to the Securities and Exchange Commission, and then to a US appellate court, said the appellate court considering this matter. Ms. Bebo had previously challenged the constitutionality of the SEC’s administrative proceeding in a federal district court on two grounds. She claimed that the law permitting the SEC to choose to bring an enforcement action in an administrative tribunal or federal court violated her equal protection and due process rights under the US Constitution by giving the SEC “unguided” discretion to decide which defendants would or would not receive the heightened protections of a federal district court. She also claimed that SEC administrative proceedings are unconstitutional because commissioners of the SEC themselves do not appoint the ALJs. This too violates the US Constitution, claimed Ms. Bebo. The US district court rejected these challenges as premature, as did the federal appellate court. Among other things, Ms. Bebo claimed that, if she was required to wait to seek judicial review, “she will already have been subject to an unconstitutional proceeding.” The appellate court rejected this argument, claiming that “[e]very person hoping to enjoin an ongoing administrative proceeding could make this argument, yet courts consistently require plaintiffs to use the administrative review schemes established by Congress.”

My View: Ms. Bebo is irreparably harmed by being required to go through the expense and ordeal of having to raise before the Securities and Exchange Commission her constitutional objection to having an enforcement action brought against her by the SEC in an administrative tribunal. Ms. Bebo’s action is a collateral action to the administrative enforcement proceeding that is properly heard by a federal court. Such a view is consistent with the better view expressed in two recent federal district court cases in New York and Georgia. It defies common sense to believe that the SEC – a securities regulator – has expertise and the requisite impartiality to determine the constitutionality of a law that gives it the choice to determine whether enforcement actions should be heard in a federal court or an administrative tribunal. (Click here for background about the New York and Georgia court decisions in the article “Federal Judges in NY and Georgia Rule Against SEC for Enforcement Action Forum Choice Because of ALJ Selection Process” in the August 14, 2015 edition of Bridging the Week.)