The SEC and Administrative Proceedings (Part 5)

We are discussing some of the issues raised by Peter Henning in his DealBook column, The S.E.C.’s Use of the ‘Rocket Docket’ Is Challenged. The article examines concerns that have been raised about the use of administrative proceedings by the SEC.  

As the DealBook article notes, the challenges to the use of administrative proceedings ("APs") have continued.

The SEC charged George Jarkesy with violations of the securities laws back in 2013 and issued an order instituting administrative proceedings. Sometime before the AP, the SEC entered into a settlement with some of the parties involved in the alleged wrongdoing. See In re John Thomas Capital, Exchange Act Release No. 70989 (admin proc Dec. 5, 2013).  

Shortly before the administrative proceeding was set to begin in February 2014, Jarkesy (the "Plaintiff") filed suit in federal district court seeking emergency injunctive and declaratory relief to prevent the SEC from going forward with the AP.  

Plaintiffs alleged that they were "denied their fundamental rights of due process, jury trial, equal protection." The complaint also asserted that the SEC had prejudged the case and could not, therefore, act as a neutral decision maker. According to the complaint:  

  • The fundamental precept of due process--fully applicable to agency adjudications--is a fair hearing before an objective and fair tribunal. By numerous of its actions, the SEC has stripped the AP process of minimum standards of fairness, thereby eliminating all possibility of a fair hearing. Then by publishing its extensive findings and conclusions against Plaintiffs, finding them guilty--in advance of the adjudication and without permitting plaintiffs to present any evidence or defenses--the SEC has removed all doubt about its ability to serve as a fair tribunal.    

The district court, however, declined to issue the relief sought and ultimately dismissed the action. The court found that, as a district court, it lacked jurisdiction. As the opinion reasoned:  

  • The statutory and regulatory regime under which the SEC’s Enforcement Division brought the instant matter against the plaintiffs precludes this Court from exercising subject matter jurisdiction to hear the plaintiffs’ claims. The Exchange Act, which the plaintiffs are accused of violating, provides that “[a] person aggrieved by a final order of the [SEC] . . . may obtain review of the order in the United States Court of Appeals.” 15 U.S.C. § 78y(a)(1). This statute presents two insurmountable obstacles for the plaintiffs’ case in this Court: first, no final order has yet been entered by the SEC, which raises substantial questions about the ripeness of this action for review; and, second, even were this action ripe, federal court review must take place in one of the courts of appeals.  

After discussing the absence of a final agency action (and the relevant exceptions), the court noted that, in general, trial courts lacked jurisdiction to hear cases where the statute vested jurisdiction in the court of appeals. See Id. ("Courts interpreting Free Enterprise have similarly found that where a statute provides an agency the first opportunity to review a claim before appeal to a Court of Appeals, the statute deprives the District Court of jurisdiction.").  

Thus, the claim of prejudgment had to be raised at the court of appeals. Id. ("In sum, the statutory regime embodied in the Securities Act sets forth an exclusive mechanism for the plaintiffs to pursue their claims: first, before an ALJ, then before the SEC’s Commissioners, and finally, if necessary, before a Court of Appeals. To the extent that the plaintiffs believe their cause has been prejudged by the SEC’s Commissioners, they may seek review, if necessary, before the Court of Appeals, but the statute leaves no room for this Court to provide them the relief they seek.").   

As for the precedent set by the Gupta decision, the court had this to say: 

  • As the Court indicated at the TRO hearing, the plaintiffs’ reliance on Gupta is questionable in the wake of Altman v. SEC, 687 F.3d 44, 45 (2d Cir. 2012), which applied Thunder Basin in affirming a District Court’s decision that it did not have subject matter jurisdiction over a constitutional challenge to an ongoing SEC administrative proceeding. In any event, the Court finds the controlling precedent in this Circuit to support only one outcome in this case: namely, dismissal. 

The AP with respect to Jarkesy did take place. The ALJ hearing the case has requested additional time to issue the opinion. See ORDER EXTENDING DEADLINE FOR FILING INITIAL DECISION, In re John Thomas Capital Management, Exchange Act Release No. 72841 (admin proc. August 13, 2014). Jarkesy, in the meantime, has lodged an appeal.  

The appeal has the potential to provide very strong guidance in this area. To the extent that the court of appeals reverses, the SEC will likely be challenged more frequently for the choice of forum. On the other hand, to the extent the D.C. Circuit affirms the district court opinion it will likely dampen the incentive to file these actions.  

J Robert Brown Jr.