____________________________________________________________
No. 15-13738 ____________________________________________________________
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
GRAY FINANCIAL GROUP, INC., LAURENCE O. GRAY, and ROBERT C. HUBBARD, IV,
Plaintiffs/Appellees,
v.
U.S. SECURITIES AND EXCHANGE COMMISSION,
Defendant/Appellant. ___________________________________________________________
On Appeal from the United States District Court Northern District of Georgia, Atlanta Division
District Court Docket No. 1:15-cv-00492-LMM The Honorable Leigh Martin May
___________________________________________________________
PLAINTIFFS-APPELLEES’ CONSENT MOTION FOR APPEAL TO TRAVEL TOGETHER WITH HILL V. S.E.C. TO BE ASSIGNED TO THE
SAME PANEL FOR ARGUMENT AND DISPOSITION ___________________________________________________________
Terry R. Weiss Michael J. King GREENBERG TRAURIG, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305 Tel: (678) 553-2100 Fax: (678) 553-2604
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GRAY FINANCIAL GROUP, INC., ET AL v. US SECURITIES AND EXCHANGE COMMISSION
CASE NO. 15-13738-F
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
Pursuant to 11th Circuit Rule 26.1-1, the undersigned counsel of record for
Plaintiffs-Appellees, Gray Financial Group, Inc., Laurence O. Gray, and Robert C.
Hubbard, IV, certifies that, to the best of my knowledge, the following persons and
entities may have an interest in the outcome of this case or appeal:
1. Adler, Michael J.
2. Aguilar, Luis A.
3. Barbero, Megan
4. Berns, Matthew J.
5. Diskin, Peter J.
6. Elliot, Hon. Cameron, Administrative Law Judge
7. Freeman, Mark R.
8. Gallagher, Daniel M.
9. Gostinger, Kathryn S.
10. Gray Financial Group, Inc.
11. Gray, Laurence O.
12. Greenberg Traurig, LLP
13. Greer, Ernest L.
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GRAY FINANCIAL GROUP, INC., ET AL V. US SECURITIES AND EXCHANGE COMMISSION
CASE NO. 15-13738-F
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
(Continued)
14. Grogg, Adam
15. Hartnett, Kathleen R.
16. Horn, John A.
17. Hubbard, Robert C.
18. King, Michael J.
19. Lin, Jean
20. Loomis, M. Graham
21. May, Hon. Leigh Martin, U.S. District Judge
22. Mizer, Benjamin C.
23. Murnahan, Kristin W.
24. Myers, Steven A.
25. Patterson, Melissa
26. Piwowar, Michael S.
27. Ricketts, Jennifer D.
28. Rudy, Susan K.
29. Sandberg, Justin M.
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GRAY FINANCIAL GROUP, INC., ET AL V. US SECURITIES AND EXCHANGE COMMISSION
CASE NO. 15-13738-F
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
(Continued)
30. Sommerfeld, Lawrence R.
31. Stein, Kara M.
32. Stern, Mark B.
33. U.S. Securities and Exchange Commission
34. Weiss, Terry R.
35. White, Mary Jo
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GRAY FINANCIAL GROUP, INC., ET AL V. US SECURITIES AND EXCHANGE COMMISSION
CASE NO. 15-13738-F
CERTIFICATE OF INTERESTED PERSONS AND CORPORATE DISCLOSURE STATEMENT
(Continued)
CORPORATE DISCLOSURE STATEMENT
Plaintiff-Appellee Gray Financial Group, Inc. certifies that it has no parent
corporation and that no publicly-held corporation owns 10 percent or more of its
stock.
/s/ Terry R. Weiss Terry R. Weiss Georgia Bar No. 746495 Michael J. King Georgia Bar No. 421160 GREENBERG TRAURIG, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305 Telephone: (678) 553-2603 Facsimile: (678) 553-2604 Email: [email protected] [email protected] Counsel for Plaintiffs/Appellees
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THIS APPEAL AND THE VERY SIMILAR HILL V. S.E.C. APPEAL SHOULD BE ASSIGNED TO THE SAME PANEL
FOR ARGUMENT AND DISPOSITION
Pursuant to Federal Rule of Appellate Procedure 27(a)(1), (2), Eleventh
Circuit Rule 27-1(a) and (c)(7), and consistent with Federal Rule of Appellate
Procedure 3(b)(2), Plaintiffs-Appellees respectfully request that this appeal
(“Gray”) travel together with the very similar appeal that is pending before this
Court in Hill v. S.E.C., No. 15-12831, so that the same merits panel is assigned to
both appeals to hear oral argument in each case and dispose of each. Counsel for
the SEC consents to this motion, provided (1) that the parties file their briefs on the
expedited schedule discussed below, and (2) that granting the relief sought in this
motion does not delay the resolution of Hill, in which this Court granted expedition
at the government’s request. Neither Plaintiffs-Appellees nor Defendant-Appellant
are requesting that the Gray and Hill appeals be formally consolidated, either for
briefing or for oral argument such that the allotted time would be split. The
grounds for this motion are as follows:
1. This Court has assigned separate appeals to a single merits panel and
scheduled oral arguments on the same day when the appeals share the same issues.
In re Fisher Island Invs., Inc., 778 F.3d 1172, 1189 (11th Cir. 2015); Bryant v.
Warden, FCC Coleman-Medium, 738 F.3d 1253, 1289 n.20 (11th Cir. 2013); U.S.
v. Mills, 613 F.3d 1070, 1071 n.1 (11th Cir. 2010) (consolidating appeals only for
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oral arguments where cases raised same legal issues but facts of cases were
unrelated); see also Fed. R. App. P. 3(b)(2) (“appeals may be joined or
consolidated by the court of appeals”). Different degrees of consolidation serve
“the interest of judicial economy” and avoid inconsistent outcomes. Mullins v.
Nickel Plate Mining Co., 691 F.2d 971, 972 n.1 (11th Cir. 1982); see also Robinson
v. Tanner, 798 F.2d 1378, 1383 (11th Cir. 1986) (“one panel of this court may not
overrule the decision of a prior panel”) (citing Bonner v. City of Prichard, 661 F.2d
1206, 1209 (11th Cir. 1981) (en banc)).
2. The legal issues on appeal in the Gray and Hill cases are the same: (i)
whether the district court has jurisdiction over identical broad, structural Article II
constitutional challenges brought by the plaintiffs in both cases; (ii) whether SEC
Administrative Law Judges (“ALJs”) who preside over SEC administrative
hearings and issue decisions are “inferior officers” whose appointment violates the
Appointments Clause of the U.S. Constitution; and (iii) whether the Gray and Hill
plaintiffs would suffer irreparable harm by being subjected to an unconstitutional
administrative proceeding. See Addendum (“Add.”) pp. 1-58 (Br. for the
Appellant, Hill, No. 15-12831 (Aug. 4, 2015)); Add. pp. 59-80 (Def.’s Mot. to Stay
Prelim. Inj. Pending Appeal, Gray v. S.E.C., 1:15-cv-00492-LMM, Dkt. 61 (Aug.
19, 2015)).
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3. The proceedings in the District Court demonstrate the relatedness of
Gray and Hill. In the interest of judicial economy, the Gray case was transferred,
sua sponte, to U.S. District Court Judge Leigh Martin May, who was already
assigned to Hill, because the two matters “involve[] identical constitutional
challenges” and the cases were therefore deemed related. See Add. p. 81 (Order,
Gray, 1:15-cv-00492-LMM, Dkt. 38 (June 11, 2015)). Both sides’ briefing in the
Gray matter before the District Court extensively discussed Judge May’s June 8,
2015 decision in Hill. See, e.g., Add. pp. 82-107 (Mem. of Law ISO Pls.’ Mot. for
Prelim. Inj., Gray, 1:15-cv-00492-LMM, Dkt. 41-1 (June 15, 2015)); Add. pp.
108-155 (Def.’s Opp. to Pls.’ Mot. for Prelim. Inj., Gray, 1:15-cv-00492-LMM,
Dkt. 48 (July 2, 2015)). During oral argument on Plaintiffs-Appellees’ motion for
preliminary injunction, the District Court and the parties focused heavily on the
Hill decision. See Add. p. 157:23-25 (Excerpts from Tr. of Proceedings Before
The Honorable Leigh Martin May, U.S. District Judge, Gray, 1:15-cv-00492-
LMM, (July 13, 2015)) (Court: “what I really want to hear, is really the
Government’s response to Hill …”); see also id. at 157-173. The District Court’s
Orders in Gray and in Hill, granting the preliminary injunctions from which the
SEC appeals, are very similar and make the same findings. See Add. pp. 177-182,
184-199, 200-212 (Order, Gray, 1:15-cv-00492-LMM, Dkt. 56 (Aug. 4, 2015));
Add. pp. 217-222, 224-235, 247-257 (Order, Hill v. S.E.C., 1:15-cv-1801-LMM,
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Dkt. 28 (June 8, 2015)). Moreover, the Gray decision frequently references both
the District Court’s Hill decision and the SEC’s arguments in Hill. See Add. pp.
184 n.3, 192, 196, 197 (Order, Gray, 1:15-cv-00492-LMM, Dkt. 56 (Aug. 4,
2015)).
4. The Gray appeal follows closely in time on the heels of the Hill
appeal. The Hill appeal was docketed by this Court on June 25, 2015. See Add.
pp. 259-264 (Appeal Docket, Hill, No. 15-12831). It has not been fully briefed
yet. After the SEC filed its opening brief on August 4, 2015, see id., the Court
ordered the Hill appeal expedited for merits disposition after briefing is concluded.
See Add. p. 265 (Order, Hill, No. 15-12831 (Aug. 10. 2015)). The Gray appeal
was docketed in this Court on August 20, 2015, and the SEC intends to ask the
Eleventh Circuit to expedite the appeal. See Add. pp. 266-270 (Appeal Docket,
Gray, No. 15-13738); Add. pp. 273-274 (Def.’s Consent Mot. to Stay Proceedings,
Gray, 1:15-cv-00492-LMM, Dkt. 62 (Aug. 19, 2015)).
5. To facilitate the Gray appeal being on largely the same schedule as Hill,
and as a condition of the SEC’s consent to this motion, the parties in Gray have
agreed to accelerate the briefing as follows:
September 16, 2015 – Appellant’s opening brief
October 5, 2015 – Appellees’ response brief
October 13, 2015 – Appellant’s reply brief
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The purpose of this expedited briefing schedule is to enable this case to be heard
on the same schedule as Hill without delaying the Court’s consideration or
resolution of Hill. As a result, having the two appeals be heard by the same panel
at the same time will not materially delay the disposition of either appeal.
6. Given the identical legal issues presented in both appeals and the
close timing of the appeals, having them travel together – so that the same merits
panel can hear the separate oral arguments in each appeal and decide both appeals
– would promote the efficient use of judicial and party resources. Each appeal is in
the process of being, or soon will be, fully briefed, and a panel that has digested the
briefs in one of the two appeals will have done much of the necessary preparation
to address the other.
7. Review by the same panel also would obviate the risk of inconsistent
decisions on the identical legal questions – for example, the risk that one panel but
not the other might uphold the District Court’s subject matter jurisdiction, or that
one panel but not the other might hold that SEC ALJs are inferior officers under
Article II.
8. It makes sense to enable one merits panel to hear oral argument in
each appeal and to review both cases. But consolidation for purposes of briefing or
sharing oral argument time would be inefficient because each appeal involves the
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application of legal principles to different facts and contains arguments that will
have to be assessed on a case-by-case basis.
9. Counsel for Plaintiffs-Appellees has contacted counsel for Hill and
the SEC to ask their positions on this motion. SEC’s counsel consent to the relief
sought in this motion, provided (1) that the parties file their briefs on the expedited
schedule discussed above, and (2) that granting the relief sought in this motion
does not delay the resolution of Hill, in which this Court granted expedition at the
government’s request. Hill’s counsel consent to the relief sought in this motion.
For the foregoing reasons, the Court should order that the Gray and Hill
appeals travel together for review, allowing the same merits panel to hear and
dispose of both appeals.
Dated: August 28, 2015.
By:/s/Terry R. Weiss
Terry R. Weiss Georgia Bar No. 746495 Michael J. King Georgia Bar No. 421160 GREENBERG TRAURIG, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305 Telephone: (678) 553-2100 Facsimile: (678) 553-2604 Email: [email protected] [email protected] Counsel for Plaintiffs/Appellees
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CERTIFICATE OF COMPLIANCE
This motion complies with the typeface requirements of Fed. R. App. P.
32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because the
motion has been prepared in Microsoft Office Word using a proportionally spaced
typeface of 14-point Times New Roman font.
This 28th day of August, 2015.
/s/Terry R. Weiss Terry R. Weiss Counsel for Plaintiffs/Appellees
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CERTIFICATE OF SERVICE
I hereby certify that on August 28, 2015, I electronically filed the foregoing
motion with the Clerk of Court for the United States Court of Appeals for the
Eleventh Circuit by using the appellate CM/ECF system. Participants in the case
are registered CM/ECF users, and service will be accomplished by the appellate
CM/ECF system.
Service of the foregoing motion will also be transmitted via e-mail on
August 28, 2015, upon the following:
Stephen E. Hudson Kilpatrick Townsend & Stockton LLP 1100 Peachtree Street, NE, Suite 2800 Atlanta, Georgia 30309 Counsel for Plaintiff-Appellee Charles L. Hill, Jr., Hill v. S.E.C., No. 15-12831, U.S. Court of Appeals for the Eleventh Circuit Mark B. Stern Mark R. Freeman Megan Barbero Melissa Patterson U.S. Department of Justice 950 Pennsylvania Avenue, N.W., Civil Division, Room 7226 Washington, D.C. 20530 Counsel for Defendant-Appellant Securities & Exchange Commission, Hill v. S.E.C., No. 15-12831, U.S. Court of Appeals for the Eleventh Circuit
/s/Terry R. Weiss Terry R. Weiss
Counsel for Plaintiffs/Appellees
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ADDENDUM
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TABLE OF CONTENTS Page
Appellant’s Brief, Charles L. Hill, Jr. v. U.S. Securities and Exchange Commission, No. 15-12831, U.S. Court of Appeals for the Eleventh Circuit (Aug. 4, 2015) ............................................................................... Add. 1-58
Defendant’s Motion to Stay Preliminary Injunction Pending Appeal, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 61 (Aug. 19, 2015) (without Attachments). .................................................. Add. 59-80
Order, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 38 (June 11, 2015). ................................................................................. Add. 81
Memorandum of Law in Support of Plaintiffs’ Motion for Preliminary Injunction, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 41-1 (June 15, 2015). ..................................................................... Add. 82-107
Defendant’s Opposition to Plaintiffs’ Motion for Preliminary Injunction, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 48 (July 2, 2015) (without Attachments). .................................... Add. 108-155
Excerpts from Transcript of Proceedings Before The Honorable Leigh Martin May, U.S. District Judge, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM (July 13, 2015). ............... Add. 156-174
Order, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 56 (Aug. 4, 2015). ........................................................................ Add. 175-213
Order, Hill v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-1801-LMM, Dkt. 28 (June 8, 2015). ......................................................................... Add. 214-258
Appeal Docket, Hill v. SEC, No. 15-12831, U.S. Court of Appeals for the Eleventh Circuit. ....................................................................... Add. 259-264
Order, Hill v. SEC, No. 15-12831, U.S. Court of Appeals for the Eleventh Circuit (Aug. 10. 2015) . ............................................................... Add. 265
Appeal Docket, Gray v. S.E.C., No. 15-13738-F, U.S. Court of Appeals for the Eleventh Circuit .......................................................... Add. 266-270
Defendant’s Consent Motion to Stay Proceedings, Gray v. S.E.C., U.S.D.C., N.D. Ga., 1:15-cv-00492-LMM, Dkt. 62 (Aug. 19, 2015) .................................................................................... Add. 271-276
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
GRAY FINANCIAL GROUP, INC., et al., Plaintiffs, v.
U.S. SECURITIES AND EXCHANGE COMMISSION, Defendant.
No. 15-cv-492-LMM
DEFENDANT’S MOTION TO STAY
PRELIMINARY INJUNCTION PENDING APPEAL
Pursuant to Federal Rule of Civil Procedure 62(c) and consistent with
Federal Rule of Appellate Procedure 8(a)(1), Defendant, the Securities and
Exchange Commission (the “SEC” or the “Commission”), respectfully moves this
Court to stay pending appeal the preliminary injunction issued by this Court on
August 4, 2015, ECF No. 56, enjoining the SEC from proceeding with its
administrative enforcement action against Plaintiffs.
This Court ruled that it has jurisdiction, slip op. at 10-25; that Plaintiffs are
likely to prevail on their claim that the SEC administrative law judge (“ALJ”)
who is presiding over the initial stage of the proceeding is an inferior officer who
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was not appointed in accordance with Article II of the Constitution, id. at 26-36;
and that Plaintiffs’ mere participation in the administrative proceeding would
cause them irreparable harm, id. at 36-37. The Commission has filed a notice of
appeal and respectfully submits that it is likely to prevail before the Eleventh
Circuit and that the balance of harms tilts sharply in favor of the Commission’s
continued ability to proceed administratively in this case to determine whether
Plaintiffs’ conduct warrants barring them from offering investment advice.
To start, this Court lacks jurisdiction over Plaintiffs’ claims. And this
Court’s holding on Plaintiffs’ Appointments Clause challenge is incorrect
because, contrary to the Court’s decision, SEC ALJs are not inferior officers. SEC
ALJs’ powers are not “nearly identical” to those of the Tax Court’s special trial
judges held to be inferior officers in Freytag v. Commissioner, 501 U.S. 868 (1991),
and the Court’s reasoning that ALJs are officers of the United States even though
they “do not have final order authority,” slip op. at 30 n.8, 32, conflicts with the
reasoning of the only court of appeals to consider the constitutional status of any
agency’s ALJs, see id. at 29-32; Landry v. FDIC, 204 F.3d 1125, 1132-34 (D.C. Cir.
2000). The Commission is also likely to prevail on appeal with respect to its
argument that Plaintiffs cannot make the showing of irreparable harm necessary
to sustain an award of preliminary relief.
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All of the other factors also tip in favor of a stay. The preliminary
injunction harms both the SEC and the public interest because it interferes with
the SEC’s ability to enforce the federal securities laws and to deter future
securities violations through its enforcement actions. The harm to the public
interest is particularly acute in this case, which involves a registered investment
advisor that has billions of dollars under management. The SEC has charged
Plaintiffs with conduct that, if proven, would warrant action to protect Plaintiffs’
current and prospective clients—such as barring Plaintiffs from the industry and
revoking the institutional Plaintiff’s registration with the SEC. In addition, the
preliminary injunction permits the SEC to continue its enforcement action
against Plaintiffs only if it modifies its existing enforcement scheme or otherwise
forgoes an important enforcement tool Congress has granted the agency.
Furthermore, because Supreme Court precedent establishes that any cost or
burden to Plaintiffs of participating in the administrative proceeding does not
constitute irreparable harm, there is no countervailing harm to balance against
the injunction’s harm to the SEC and the public.
STANDARD OF REVIEW
Federal Rule of Civil Procedure 62(c) provides in relevant part: “When an
appeal is taken from an interlocutory or final judgment granting . . . an
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injunction, the court in its discretion may suspend . . . an injunction” during the
pendency of the appeal. District courts considering a motion for such a stay
pending appeal consider the same factors as a court of appeals would in
considering a similar motion: “(1) whether the stay applicant has made a strong
showing that he is likely to succeed on the merits; (2) whether the applicant will
be irreparably injured absent a stay; (3) whether issuance of the stay will
substantially injure the other parties interested in the proceeding; and (4) where
the public interest lies.” Hilton v. Braunskill, 481 U.S. 770, 776 (1987). Before
seeking a stay from the court of appeals, a party must ordinarily move first in the
district court for an order suspending an injunction pending appeal. Fed. R. App.
P. 8(a).
ARGUMENT
I. The SEC Has A Strong Likelihood Of Success On Appeal
Three legal errors in the Court’s Order, each of which provides sufficient
ground for reversal, establish that the SEC has a strong likelihood of success on
appeal.
1. Jurisdiction
The SEC respectfully submits that in finding jurisdiction to enjoin the
SEC’s administrative proceeding, the Court erroneously conflated the SEC’s
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choice of forum with the review scheme in the securities laws for the
administrative proceedings that are the subject of Plaintiffs’ challenges. See slip
op. at 11-12. This Court concluded that because the SEC can pursue civil
penalties in either a federal court or an administrative proceeding, it follows that
the statutory review provisions governing administrative proceedings—which
require that challenges to such proceedings first be heard by the Commission
and then in an appropriate federal court of appeals, 15 U.S.C. §§ 77i(a), 78y(a)(1),
80a-42(a), 80b-13(a)—do not establish an exclusive avenue for review.
That reasoning is flawed because the fact that Congress gave the SEC a
choice of forum in which to initiate enforcement proceedings by no means shows
that Congress intended to give a respondent in an SEC administrative
enforcement proceeding a similar choice once the SEC has selected its forum.
Indeed, the statutory review provisions are to the contrary, as the Second Circuit
has held in Altman v. SEC, 687 F.3d 44, 46 (2d Cir. 2012) (per curiam) (“Section
25(a) [of the Exchange Act, 15 U.S.C. § 78y(a)] does, under this Circuit’s
precedent, supply the jurisdictional route that Altman must follow to challenge
the SEC action.”). And the Supreme Court in Thunder Basin Coal Co. v. Reich
found the review scheme in that case—which is like the one here—to be
exclusive where the statute permitted the agency to bring enforcement actions in
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district court in certain circumstances. 510 U.S. 200, 207, 209 (1994) (noting that
the agency may bring certain enforcement proceedings in district court but,
when the agency chooses to proceed administratively, “mine operators enjoy no
corresponding right [to proceed in district court] but are to complain to the
Commission and then to the court of appeals” (emphasis added)). This Court
sought to distinguish Thunder Basin based on “the nature of the claims at issue,”
slip op. at 14, but did not identify any material difference between the two
statutory schemes.
This Court also relied on a 1979 Second Circuit decision, Touche Ross & Co.
v. SEC, 609 F.2d 570, 577 (2d Cir.), which found an exception to the
administrative exhaustion requirement in the federal securities laws. See slip op.
at 18. In Altman, however, the Second Circuit specifically held that the “exception
identified in Touche Ross did not apply” in a case where, as here, a litigant sought
to challenge in district court the SEC’s constitutional authority to impose
sanctions against him in an administrative proceeding. 687 F.3d at 46; see also
Altman v. SEC, 768 F. Supp. 2d 554, 562 (S.D.N.Y. 2011) (“Courts have read
Touche Ross narrowly . . . and found its application especially inappropriate when
a litigant invokes it to avoid agency review procedures, or when the agency in
question is not acting plainly beyond its jurisdiction.” (quotation marks
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omitted)), aff’d, 687 F.3d 44. Instead, in Altman, the Second Circuit found that
“none of the factors in Thunder Basin/Free Enterprise militated in favor of district
court jurisdiction.” 687 F.3d at 46. As Defendant has already demonstrated in its
opposition to Plaintiffs’ motion for preliminary injunction, the same is true here.
A related but separate principle likewise precludes a district court from
enjoining proceedings that are subject to direct oversight in the court of appeals.
The Eleventh Circuit and other courts have explained that “[w]here a statute
commits review of agency action to the Court of Appeals, any suit seeking relief
that might affect the Circuit Court’s future jurisdiction is subject to the exclusive
review of the Court of Appeals.” George Kabeller, Inc. v. Busey, 999 F.2d 1417, 1421
(11th Cir. 1983) (quoting Telecomms. Research & Action Ctr. (TRAC) v. FCC, 750
F.2d 70, 78-79 (D.C. Cir. 1984)). Thus, relying on the TRAC analysis, the Ninth
Circuit in Public Utility Commissioner of Oregon v. Bonneville Power Administration,
767 F.2d 622 (9th Cir. 1985) (Kennedy, J.), held that a district court lacked
jurisdiction to consider a constitutional challenge to an agency proceeding based
on the asserted bias of the agency decision maker. The court explained that
because “disposition of petitioners’ claim of bias could affect our future statutory
review authority, we have exclusive jurisdiction to consider it.” Id. at 627. The
Ninth Circuit determined it would consider the challenge to the fairness of the
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proceeding only on review of final action, noting that doing so would “avoid the
disruption, delay, and piecemeal review that accompany interference with
pending administrative proceedings.” Id. at 629. The Eleventh Circuit has
favorably cited the Ninth Circuit’s analysis. See George Kabeller, Inc., 999 F.2d at
1421. The D.C. Circuit reached the same conclusion in Air Line Pilots Ass’n,
International v. Civil Aeronautics Board, 750 F.2d 81 (D.C. Cir. 1984), and declined
to exercise its own mandamus authority to address a claim of agency bias,
observing that “[t]o stay the administrative processes while a court was engaged
in an extended inquiry into the claimed disqualification of members of the
administrative body could lead to a breakdown in the administrative process
which has long been criticized for its slow pace.” Id. at 88 (quoting SEC v. R.A.
Holman & Co., 323 F.2d 284, 287 (D.C. Cir. 1963)).
Likewise here, Plaintiffs’ challenges to the Commission’s authority to
proceed against them through administrative proceedings affect the prospective
jurisdiction of the court of appeals—either the Eleventh Circuit or the D.C.
Circuit—over the Commission’s final order. Under TRAC principles, therefore,
judicial review of plaintiffs’ claims is exclusively vested in the courts of appeals.
Nothing in the federal securities laws contemplates the district court entertaining
collateral challenges to enjoin the Commission’s enforcement proceedings.
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2. Inferior Officer Status
This Court also incorrectly determined that SEC ALJs are likely inferior
officers. Despite finding that SEC ALJs have no final decision-making authority,
the Court concluded that SEC ALJs’ “powers” are “nearly identical” to those of
the Tax Court’s special trial judges, who were held to be inferior officers in
Freytag. See slip op. at 32. The Court noted that both “take testimony, conduct
trial, rule on the admissibility of evidence, and can issue sanctions, up to and
including excluding people (including attorneys) from hearings and entering
default. 17 C.F.R. §§ 200.14 (powers); 201.180 (sanctions).” Slip op. at 29.
The Court’s reasoning, however, fails to account for the fact that an ALJ is
acting merely in aid of his employing agency’s exercise of its power, and solely
because the agency elected to delegate certain powers to the ALJ. In this context,
an employee’s mere performance of judge-like functions does not make him an
inferior officer. In other words, in assessing the SEC ALJ’s authority, it is
inadequate to simply list the tasks SEC ALJs perform. Rather, those duties must
be viewed in the context of the Commission’s plenary authority over the entire
administrative process, under which the SEC ALJ’s initial decision is merely
“advisory in nature,” Attorney General’s Manual on the Administrative Procedure
Act (1947) at 83, and the fact that ALJs are “subordinate” to their employing
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agencies “in matters of policy and interpretation of law,” Nash v. Bowen, 869 F.2d
675, 680 (2d Cir. 1989) (collecting cases). As such, SEC ALJs are mere aides to the
Commission.1
SEC ALJs’ authority pales in comparison to that of special trial judges
because SEC ALJs do not possess the judicial powers associated with judges who
are inferior officers. Special trial judges have the power, for example, to issue
subpoenas, 26 U.S.C. § 7456(a); Tax Court Rule 181, and “to enforce compliance
with discovery orders,” Freytag, 501 U.S. at 881-82. The Commission’s ALJs may
issue subpoenas, but an order from a federal district court is necessary to compel
compliance, see, e.g., 15 U.S.C. § 78u(e). And whereas special trial judges have the
power “to grant certain injunctive relief” and “to order the Secretary of the
Treasury to provide a refund of an overpayment determined by [the special trial
judge],” Freytag, 501 U.S. at 891, SEC ALJs have no power to grant any injunctive
relief. Further, SEC ALJs’ authority to punish contemptuous conduct is limited,
1 This Court sought to distinguish Landry on the ground that SEC ALJs issue “initial decisions” while ALJs of the Federal Deposit Insurance Corporation issue “recommendary decisions.” Slip op. at 31-32. But SEC regulations refer interchangeably to recommended and initial decisions, see 17 C.F.R. § 201.511(d)(4), 201.521(d)(4), and an SEC ALJ’s decision does not ever “become[] the decision of the agency without further proceedings,” 5 U.S.C. § 557(b), because even when there is no petition for review, an ALJ’s decision has no legal force or effect unless the Commission issues a finality order after determining not to grant review on its own initiative, see 17 C.F.R. §§ 201.360(d)(2), 201.411(c).
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see 17 C.F.R. § 201.180 (“Sanctions”) (hearing officer may exclude a person from a
hearing or suspend that person from representing others in the proceeding), and
their entry of default or imposition of sanctions has no force or effect absent
further action by the Commission. In sum, the substantive authority that SEC
ALJs exercise is significantly less weighty than that exercised by special trial
judges.
3. Irreparable Harm
The Court also erred in concluding that Plaintiffs have demonstrated
irreparable harm. This Court credited Plaintiffs’ claim that, without preliminary
relief, they would “be subject to an unconstitutional administrative proceeding”
for which “they would be unable to recover monetary damages,” an injury that a
court of appeals could not redress were Plaintiffs required to adhere to the
federal securities laws’ exclusive remedial scheme. Slip op. at 36. The Court’s
reasoning disregards Supreme Court precedent establishing that “the rules
requiring exhaustion of the administrative remedy cannot be circumvented by
asserting . . . that the mere holding of the prescribed administrative hearing
would result in irreparable damage.” Myers v. Bethlehem Shipbuilding Corp., 303
U.S. 41, 52 (1938); cf. Ticor Title Ins. Co. v. FTC, 814 F.2d 731, 732 (D.C. Cir. 1987)
(holding that plaintiff could not bring facial constitutional challenge to
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administrative proceeding in district court while asserting nonconstitutional
defenses in the ongoing proceeding). The SEC’s sovereign immunity is
irrelevant. Supreme Court and circuit precedent establish as a matter of law that
the costs of participating in an administrative proceeding do not warrant
injunctive relief even if they are “unrecoupable” due to sovereign immunity or
for any other reason. See FTC v. Standard Oil Co. of Cal., 449 U.S. 232, 244 (1980)
(“Mere litigation expense, even substantial and unrecoupable cost, does not
constitute irreparable injury.” (internal quotation marks omitted)); accord Imperial
Carpet Mills, Inc. v. Consumer Prods. Safety Comm’n, 634 F.2d 871, 874 (5th Cir.
1981) (per curiam).
II. The SEC And The Public Will Be Irreparably Harmed Absent A Stay
The SEC will be irreparably harmed unless the preliminary injunction is
stayed. Absent a stay, the Court’s order in this case will result in particularly
acute harm to the SEC and the public, since Plaintiffs include a registered
investment adviser with billions of dollars under management, and the
administrative proceeding is aimed, in part, at determining whether Plaintiffs
should be barred from the industry to protect current and prospective clients.
As a general matter, the preliminary injunction undermines Congress’s
decision to authorize the SEC to conduct administrative proceedings. See
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Maryland v. King, 133 S. Ct. 1, 3 (2012) (Roberts, C.J., in chambers) (“‘[A]ny time a
State is enjoined by a court from effectuating statutes enacted by representatives
of its people, it suffers a form of irreparable injury.’” (quoting New Motor Vehicle
Bd. of Cal. v. Orrin W. Fox Co., 434 U.S. 1345, 1351 (1977) (Rehnquist, J., in
chambers))). The Commission has used administrative proceedings since its early
days, and SEC ALJs have participated in the adjudication of thousands of
enforcement matters over the years, culminating in significant financial penalties
imposed by the Commission. Indeed, in expanding authority for administrative
cease-and-desist proceedings in 1990, Congress recognized the importance of
“enabl[ing] the SEC to move quickly in administrative proceedings, particularly
in those situations where investor funds are at risk.” S. Rep. 101-337 (1990),
reprinted in 1990 WL 263550 (Leg. Hist.); see also, e.g., H.R. Rep. 101-616 (1990),
reprinted in 1990 U.S.C.C.A.N. 1379, 1391-92; The Securities Law Enforcement
Remedies Act of 1989; Hearings on S. 647 Before the Subcomm. on Securities of the S.
Comm. on Banking, Housing, and Urban Affairs, 101st Cong. 34, 56-7 (1990)
(statement of Richard C. Breeden, Chairman, Securities and Exchange
Commission) (explaining the need for “a more streamlined administrative
procedure,” which is “important because of the significant delays that the
Commission often faces in seeking a judicial remedy”—delays that “frustrate”
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“many enforcement objectives”). Congress has thus demonstrated significant
concerns regarding the public interest in the availability of the SEC’s
administrative forum as part of the agency’s administration of the securities
laws.
As the Director of the SEC’s Division of Enforcement explains in the
attached declaration, the preliminary injunction “impedes several of the benefits
of administrative proceedings from the standpoint of deterrence and investor
protection.” Declaration of Andrew Ceresney (“Ceresney Decl.”), dated August
19, 2015, at ¶ 3 (Attachment 1). “In appropriate cases, the administrative forum
facilitates the prompt airing, and in turn notice to the public, of alleged securities
law violations.” Id. An ALJ “generally has a specified number of days to issue an
initial decision, typically following a hearing where evidence is presented by
both sides.” Id. “By contrast, cases in district court often move at a much slower
pace, and can still be at the motion to dismiss stage or in the midst of discovery
during that same time frame, with any trial still far down the road.” Id. Thus,
administrative proceedings “typically result in presentation of evidence when it
is relatively fresh.” Id. ¶ 4. That pacing is important because “[w]ith the passage
of time, witnesses’ memories might fade and some types of evidence can become
stale.” Id. “[B]ecause hearings in administrative proceedings usually occur much
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sooner than trials in district court actions, the evidence is presented closer in time
to the conduct at issue.” Id. As the Director of the Division of Enforcement
further explains, “[t]his, in turn, facilitates the SEC’s strong interests in
deterrence and in protecting investors and the integrity of the securities
markets.” Id. Finally, “pursuing an enforcement proceeding administratively
allows the agency to bring to bear its significant expertise in adjudicating
individual cases,” as “the Commission has developed expert knowledge of the
securities laws, and the types of entities, instruments, and practices that
frequently appear in those cases.” Id.¶ 5.
Moreover, in this case in particular there is a strong public interest in
prompt adjudication on the merits of the SEC’s allegations against Plaintiffs. In
Plaintiffs’ administrative proceeding, the SEC “alleges, among other misconduct,
that [Plaintiff] Gray Financial [Group, Inc.] and its [co-Plaintiff] founder
knowingly and/or recklessly recommended and sold to Georgia-based public
pension clients certain investment funds that were unsuitable because they did
not comply with the restrictions in Georgia law governing such investments;
made specific material misrepresentations in recommending these investments;
and thereby breached their fiduciary duty to their clients.” Id. ¶ 6. Meanwhile,
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Plaintiffs “continue to advise clients and hold client assets.” Id. ¶ 7. Indeed, Gray
Financial “currently has $6.4 billion in assets under management.” Id.
One issue to be determined in Plaintiffs’ administrative proceeding is
whether limiting Plaintiffs’ advising activities, including potentially imposing an
industry bar on them, is appropriate to prevent future misconduct by Plaintiffs—
a remedy that Congress has specifically authorized the SEC to seek only in
administrative proceedings and not in district court. See id. ¶ 8. The SEC and
Plaintiffs’ current and prospective clients all share a strong interest in a prompt
determination—in the SEC’s chosen forum of an administrative proceeding—of
“whether [Plaintiffs] here violated the securities laws and, if so, whether any
such limitations are warranted to protect both [Plaintiffs’] current clients as well
as future clients. The Court’s injunction delays the ultimate resolution of the
charges against [Plaintiffs] and, should unlawful conduct be found, significantly
impairs the Commission’s ability to place appropriate limitations on [their]
future activities.” Id. ¶ 9.2
2 For the reasons discussed above, the SEC believes that this Court should have granted its motion to stay the injunction pending appeal in Hill v. SEC. See Order, 15-cv-1801 (N.D. Ga. Aug. 4, 2015), ECF No. 44 (denying motion). But even assuming that the stay motion was properly denied in Hill, the case-specific facts discussed above—including the possibility of public harm due to Plaintiffs’ ongoing market activities—provide additional grounds for granting a stay here.
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This Court’s judgment that “there is no evidence the SEC would be
prejudiced by a brief delay to allow this Court to fully address Plaintiffs’ claims,”
slip op. at 37, thus conflicts with both that of Congress and of the expert
Commission that Congress charged with enforcing securities laws. In this case,
the Division of Enforcement began its investigation in 2013, received over
150,000 documents, and took 16 days of testimony, and Division staff were
actively preparing for a one-week hearing set to begin in October 2015 when this
Court issued the preliminary injunction. See Ceresney Decl. ¶ 10. Thus, the
Commission has already invested considerable time and effort to seek to enforce
the securities laws in the administrative process. The injunction in this collateral
proceeding interferes with the Commission’s significant enforcement efforts and
results in precisely the substantial delay that Congress and the Commission have
sought to avoid. Moreover, in addition to expressly authorizing administrative
proceedings, Congress also determined that the public interest would be served
by allowing the SEC to pursue a process in which legal issues—including
constitutional issues—would be resolved on direct review by the court of appeals
and not by a district court.
The Court erred, moreover, in viewing this case in isolation, rather than as
one of many enforcement proceedings brought each year, when it minimized the
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impact of its ruling by declaring that “the SEC is not foreclosed from pursuing
Plaintiff[s] in federal court or in an administrative proceeding before an SEC
Commissioner.” Slip op. at 37-38. The SEC’s interest in enforcing the securities
laws through administrative proceedings more broadly does not make its
interest in “each individual one negligible.” Nken v. Holder, 556 U.S. 418, 435
(2009). Nor can the impact of the Court’s decision be viewed as limited to one
case when several other challenges to SEC ALJs’ appointments are pending
before this Court, and more are pending elsewhere.
The Court’s suggestion that the SEC abandon the administrative process
and pursue Plaintiffs in federal court merely restates its rejection of Congress’s
judgment that the administrative process has advantages for the enforcement of
securities laws and should be an option. And the Court was on no firmer ground
in suggesting that the SEC conduct the proceeding before a Commissioner.
Under that reasoning, every respondent in an SEC enforcement proceeding
might insist that a Commissioner personally preside over the hearing. Thus,
whether limited to a single case or expanded across all pending administrative
proceedings, the Court’s decision marks a significant breach of inter-branch
comity. See INS v. Legalization Assistance Project, 510 U.S. 1301, 1306 (1993)
(O’Connor, J. in chambers) (staying district court injunction interfering with the
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government’s execution of the Immigration Reform and Control Act and noting
injunction was “not merely an erroneous adjudication of a lawsuit between
private litigants but an improper intrusion of the court into the workings of a
coordinate branch of Government”); Schweiker v. McClure, 452 U.S. 1301, 1302-03
(1981) (Rehnquist, J., in chambers) (staying order enjoining the Department of
Health and Human Services from utilizing an administrative process in which
private insurance carriers, rather than the agency’s ALJs, finally resolved certain
Medicare benefits claims, explaining that the order would “cause hardship” to
the agency because it “involve[d] a drastic restructuring of the appeals procedure
carefully designed by Congress,” and would require the agency to add to the
workflow of its “already overloaded” ALJs). Nor is it reasonable at this juncture
for the Court to expect that the Commission change its ALJ scheme. A stay is
warranted to prevent irreparable harm to the SEC’s enforcement of the securities
laws.
III. Plaintiffs’ Interest In Delaying SEC Enforcement Action Cannot Outweigh The Harm Caused By The Preliminary Injunction
The balance of equities also supports issuance of a stay. As discussed
above, the harm that the Court concluded Plaintiffs would suffer without
preliminary relief—that they will have to participate in an administrative
proceeding that they consider unlawful—is not a valid consideration for
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purposes of evaluating preliminary relief. Accordingly, there is no cognizable
harm to Plaintiffs from a stay to balance against the harm to the SEC from the
preliminary injunction.
IV. The Public Interest Favors A Stay
The stay factors addressing the public interest and harm to the SEC merge
because the SEC is a government agency that represents the public interest. See
Nken, 556 U.S. at 435 (stay factors “addressing the harm to the opposing party
and weighing the public interest . . . merge when the Government is the
opposing party”). As discussed above, see Part II, the circumstances of this case
make the preliminary injunction’s harm to the SEC and the public substantial.
And notwithstanding the public interest in enforcement of the Constitution
generally, slip op. at 37, that interest is not implicated where, as here, there is no
constitutional violation.
CONCLUSION
For these reasons, the SEC respectfully requests that the Court stay
pending appeal the preliminary injunction issued on August 4, 2015.
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Dated: August 19, 2015 Respectfully submitted,
BENJAMIN C. MIZER Principal Deputy Assistant Attorney
General JOHN A. HORN Acting United States Attorney KATHLEEN R. HARTNETT Deputy Assistant Attorney General JENNIFER D. RICKETTS Director, Federal Programs Branch SUSAN K. RUDY Assistant Director, Federal Programs
Branch /s/ Jean Lin . JEAN LIN MATTHEW J. BERNS JUSTIN M. SANDBERG ADAM GROGG STEVEN A. MYERS U.S. Department of Justice Civil Division, Federal Programs
Branch 20 Massachusetts Ave. NW Washington, DC 20530 Phone: (202) 514-3716 Fax: (202) 616-8202 Email: [email protected]
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CERTIFICATE OF COMPLIANCE
I hereby certify, pursuant to Local Rule 7.1(D), that the foregoing has been
prepared with one of the font and point selections approved by the Court in
Local Rule 5.1(C).
/s/ Jean Lin JEAN LIN
CERTIFICATE OF SERVICE
I hereby certify that on August 19, 2015, I electronically filed a copy of the
foregoing. Notice of this filing will be sent via email to all parties by operation of
the Court’s electronic filing system. Parties may access this filing through the
Court’s CM/ECF System.
/s/ Jean Lin JEAN LIN
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GRAY FINANCIAL GROUP, INC., LAURENCE O. GRAY, and ROBERT C. HUBBARD, IV,
: : :
: Plaintiffs, :
: v. : : UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
: :
CIVIL ACTION NO. 1:15-cv-0492-AT
: Defendant. :
This matter involves identical constitutional challenges raised against the
Securities and Exchange Commission (“SEC”) regarding the appointment of SEC
Administrative Law Judges that has been addressed on a motion for preliminary
injunction by the Hon. Leigh Martin May in a case captioned Hill v. SEC, 1:15-cv-
1801-LMM. The Court therefore deems the case related. As a matter of judicial
economy, this Court ORDERS that the instant civil action be TRANSFERRED
to the Hon. Leigh Martin May. The Clerk is further DIRECTED to assign the
undersigned the next case assignment in the rotation for Judge May.
ORDER
IT IS SO ORDERED this 10th day of June, 2015.
_____________________________ Amy Totenberg
United States District Judge
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GRAY FINANCIAL GROUP, INC., ) LAURENCE O. GRAY, and ROBERT C. HUBBARD, IV,
))
) Plaintiffs, )
) Civil Action File v. ) No. 1:15-cv-0492-LMM ) UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
))
) Defendant. )
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFFS’ MOTION FOR A PRELIMINARY INJUNCTION
Terry R. Weiss Michael J. King Greenberg Traurig, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305 Telephone: (678) 553-2603 Facsimile: (678) 553-2604
Attorneys for Plaintiffs
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TABLE OF CONTENTS Page
PRELIMINARY STATEMENT ............................................................................... 1
ARGUMENT ............................................................................................................. 3
I. THIS COURT HAS SUBJECT MATTER JURISDICTION UNDER 28 U.S.C. §1331 BECAUSE CONGRESS HAS NEITHER EXPLICITLY NOR IMPLICITLY PRECLUDED JUDICIAL REVIEW .......................................................................................................... 3
II. PLAINTIFFS ARE ENTITLED TO A PRELIMINARY INJUNCTION TO ENJOIN THE SEC’S ADMINISTRATIVE PROCEEDING AGAINST THEM ................................................................. 5
A. Plaintiffs are Likely to Succeed on the Merits that the SEC Administrative Proceeding is Unconstitutional Because the Appointment of SEC ALJs Violates Article II’s Appointments Clause and Statutory Law, and SEC ALJs’ Dual For-Cause Removal Scheme Violates Article II ..................................................... 6
1. This Court Correctly Held in Hill that SEC ALJs are Inferior Officers .......................................................................... 6
2. This Court Found, Under the Same Circumstances, that there is a Substantial Likelihood of Success on the Appointments Clause Violation. ................................................. 7
3. SEC ALJs were Appointed in Violation of Statutory Requirements ............................................................................ 10
4. The Administrative Proceeding is Unconstitutional Under Article II Because It is Presided Over by an Executive Inferior Officer Shielded from Removal by at Least Two Layers of Tenure Protection. ..................................................... 11
B. The Court Already Found that There is Irreparable Harm if the SEC’s Administrative Proceeding Is Not Enjoined. ........................... 15
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C. The Court Also Found that the Remaining Preliminary Injunction Factors Weigh in Favor of Granting the Motion. .............. 17
CONCLUSION ........................................................................................................ 17
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TABLE OF AUTHORITIES
Page(s)
Cases
Buckley v. Valeo, 424 U.S. 1 (1976) .......................................................................... 9
Four Seasons Hotels & Resorts, B.V. v. Consorcio Barr, S.A., 320 F.3d 1205 (11th Cir. 2003) ............................................................................ 5
Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010) ............................................................................ 7, 11, 13, 15
Freytag v. Comm’r of Internal Revenue, 501 U.S. 868 (1991) ............... 1, 6, 7, 9, 12
Hill v. SEC, 1:15-cv-1801-LMM, at 35-42 (N.D. Ga. June 8, 2015) ...............passim
Intercollegiate Broad. Sys. Inc. v. Copyright Royalty Bd., 684 F.3d 1332 (D.C. Cir. 2012) .......................................................................... 13
Kuretski v. Comm’r, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 2015 WL 2340860 (May 18, 2015) .................................................................... 13
Morrison v. Olson, 487 U.S. 654 (1988) ................................................................. 12
NLRB v. Bell Aerospace Co., 416 U.S. 267 (1974) ................................................. 14
Odebrecht Const., Inc. v. Sec’y, Fla. Dep’t of Transp., 715 F.3d 1268 (11th Cir. 2013) .......................................................................... 16
Ryder v. United States, 515 U.S. 177 (1995) ......................................................... 2, 9
SEC v. Chenery Corp., 332 U.S. 194 (1947) ........................................................... 13
Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) ............................................ 4
Touche Ross & Co. v. SEC, 609 F.2d 570 (2nd Cir. 1979) ....................................... 4
United States v. Lane, 64 M.J. 1 (2006) .................................................................... 9
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U.S. Constitution
U.S. Const. art. II, § 1, cl. 1 ..................................................................................... 11
U.S. Const. art. II, § 2, cl. 2 ....................................................................................... 7
U.S. Const. art. II, § 3 .............................................................................................. 11
Statutes
5 U.S.C. § 1202(d) ................................................................................................... 11
5 U.S.C. § 3105 ........................................................................................................ 10
5 U.S.C. § 7521(a)-(b) ............................................................................................. 11
15 U.S.C. § 78d(a) ................................................................................................... 10
15 U.S.C. § 78d(b)(l) ............................................................................................... 10
15 U.S.C. § 78u-2 ....................................................................................................... 4
28 U.S.C. § 1331 .................................................................................................... 3, 4
Other Authorities
17 C.F.R. § 201.360(a)(2) ........................................................................................ 16
Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797 (2013) .................................................................................................................. 15
Sarah N. Lynch, SEC Judge Who Took on the ‘Big Four’ Known for Bold Moves, Reuters, Feb. 2, 2014 ....................................................................... 2
Sec. of Ed. Review of Admin. Law Judge Decisions, 15 U.S. Op. Off. Legal Counsel 8, 1991 WL 499882 (Jan. 31, 1991) ................................................................................................................... 15
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Plaintiffs Gray Financial Group, Inc., Laurence O. Gray, and Robert C.
Hubbard, IV respectfully submit this Memorandum of Law in support of their
motion to preliminarily enjoin the United States Securities and Exchange
Commission from prosecuting the administrative proceeding brought against them
(the “Administrative Proceeding”), captioned In the Matter of Gray Financial Group,
Inc., Laurence O. Gray and Robert C. Hubbard, IV, Administrative Proceeding File No.
3-16554, including the pre-hearing conference scheduled for June 30, 2015 and the
final hearing to be scheduled.
PRELIMINARY STATEMENT
Plaintiffs challenge the authority of the SEC ALJ to preside over the
Administrative Proceeding on constitutional grounds, under the Appointments
Clause of Article II and Article II’s vesting of executive power in the President, as
well as on statutory grounds. It is difficult to imagine a more basic defect in a
hearing than a presiding judge without lawful authority. For this reason, the
United States Supreme Court has held that where a judge serves in violation of the
Appointments Clause of the U.S. Constitution, the error is “structural,” in part
because the role of judge – particularly one acting as finder of both fact and law –
is too profoundly essential to be treated otherwise. See Freytag v. Comm’r of
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Internal Revenue, 501 U.S. 868, 878-80 (1991); see also Ryder v. United States,
515 U.S. 177, 182-83 (1995).
Last week, this Court preliminarily enjoined the SEC administrative
proceeding in Hill, finding that SEC ALJs are inferior officers and their
appointment is likely in violation of Article II. Hill v. SEC, 1:15-cv-1801-LMM, at
35-42 (N.D. Ga. June 8, 2015) (“Hill Order”). Your Honor also found that the Hill
plaintiff satisfied the other three criteria for granting a preliminary injunction, a
finding that is equally applicable to Plaintiffs here. See id. at 42-43. Plaintiffs ask
for the same relief as the Court granted in Hill.
The SEC instituted the Administrative Proceeding against Plaintiffs, to be
presided over by SEC ALJ Cameron Elliot, who began working for the SEC in
2011 and has issued 51 straight wins for the SEC and none for a respondent. See
Declaration of Terry R. Weiss (“Weiss Decl.”), ¶¶ 3-5, Ex. 1, Order Instituting
Admin. Proceedings (May 21, 2015); Ex. 2, Order Scheduling Hearing and
Designating Presiding Judge (May 22, 2015); Ex. 3, Sarah N. Lynch, SEC Judge
Who Took on the ‘Big Four’ Known for Bold Moves, Reuters, Feb. 2, 2014. This
Administrative Proceeding violates Article II of the U.S. Constitution. In
contravention of the Appointments Clause and of statutory requirements, SEC
ALJs, including the one presiding over Plaintiffs’ administrative process, have not
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been appointed by the SEC Commissioners. And, contrary to the Supreme Court’s
holding in Free Enterprise, SEC ALJs enjoy at least two layers of tenure
protection. Accordingly, the Administrative Proceeding against Plaintiffs is
unconstitutional and should be enjoined.
ARGUMENT I. THIS COURT HAS SUBJECT MATTER JURISDICTION UNDER 28
U.S.C. §1331 BECAUSE CONGRESS HAS NEITHER EXPLICITLY NOR IMPLICITLY PRECLUDED JUDICIAL REVIEW.
This matter presents the same subject matter jurisdiction question as in Hill,
where Your Honor correctly analyzed the question and properly found that this
Court has original subject matter jurisdiction under 28 U.S.C. § 1331 to resolve the
plaintiff’s constitutional challenges. See 28 U.S.C. § 1331; Hill Order at 11-22.
Both the Hill plaintiff and Plaintiffs in this case bring the very same claims under
Article II of the Constitution: 1) that the appointment process for SEC ALJs,
including the ALJ presiding in Plaintiffs’ Administrative Proceeding, violates the
Appointments Clause of Article II because the ALJs were not appointed by the
SEC Commissioners; and 2) that the SEC ALJs’ two-layer tenure protection
violates Article II’s vesting of executive power in the President. See Second Am.
Compl. ¶¶ 1-5, 41-54; 60-70 (June 3, 2015) (Dkt. No. 28); Hill Order at 34.
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In Hill, this Court found that “because Congress created a statutory scheme
which expressly included the district court as a permissible forum for the SEC’s
claims, Congress did not intend to limit § 1331 and prevent [p]laintiff from raising
his collateral constitutional claims in the district court.” Hill Order at 14; see also
id. at 3 (citing 15 U.S.C. § 78u-2); cf. Thunder Basin Coal Co. v. Reich, 510 U.S.
200, 209 (1994) (Mine Act authorized district court forum only for two specific
claims). Your Honor also found that even in the absence of Congress’s express
choice not to restrict district court jurisdiction, “jurisdiction would be proper as
Congress’s intent can be presumed based on the [three-factor] standard articulated
in Thunder Basin, Free Enterprise, and Elgin.” Hill Order at 14; see also Touche
Ross & Co. v. SEC, 609 F.2d 570, 575, 577 (2nd Cir. 1979) (where plaintiffs
challenge the authority of the agency to act and there is no need for agency
expertise, they need not “submit to the very procedures which they are attacking”).
For the reasons stated in the Hill Order and for the reasons in Plaintiffs’
Opposition to Defendant’s Motion to Dismiss in this case, this Court should assert
subject matter jurisdiction over Plaintiffs’ claims. See Hill Order at 11-22; Pls.’
Opp. to Def.’s MTD at 4-24 (June 3, 2015) (Dkt. No. 24) (“Pls.’ MTD Opp.”).
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II. PLAINTIFFS ARE ENTITLED TO A PRELIMINARY INJUNCTION TO ENJOIN THE SEC’S ADMINISTRATIVE PROCEEDING AGAINST THEM.
To obtain a preliminary injunction, Plaintiffs must demonstrate: “(1) a
substantial likelihood of success on the merits; (2) a substantial threat of
irreparable injury if the injunction is not granted; (3) the threatened injury to the
movant outweighs the damage to the opposing party; and (4) granting the
injunction would not be adverse to the public interest.” Hill Order at 22 (citing
Four Seasons Hotels & Resorts, B.V. v. Consorcio Barr, S.A., 320 F.3d 1205, 1210
(11th Cir. 2003)). Plaintiffs meet each of the elements for a preliminary injunction
and are thus entitled to preliminary injunctive relief against the SEC on the basis of
the same Article II Appointments Clause challenge that the plaintiff in Hill
successfully raised under identical circumstances. See Hill Order at 34-45; Second
Am. Compl. ¶¶ 41-47. Moreover, Plaintiffs herein make a similar multi-layer
tenure protection argument as in Hill, and Plaintiffs respectfully request the
opportunity to develop those arguments more thoroughly through discovery, as the
Court correctly permitted in Hill. See Hill Order at 45.
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A. Plaintiffs are Likely to Succeed on the Merits that the SEC Administrative Proceeding is Unconstitutional Because the Appointment of SEC ALJs Violates Article II’s Appointments Clause and Statutory Law, and SEC ALJs’ Dual For-Cause Removal Scheme Violates Article II.
The Hill plaintiff and these Plaintiffs present identical Article II challenges
based on SEC ALJs being inferior officers and not mere employees. See Hill
Order at 34-35. Because SEC ALJs are inferior officers under the Constitution, the
SEC Commissioners themselves, as “Head of Department” under the
Appointments Clause, must appoint the ALJs, and the ALJs cannot be insulated
from presidential control by two levels of tenure protection.
1. This Court Correctly Held in Hill that SEC ALJs are Inferior Officers.
In Hill, Your Honor thoroughly analyzed the question of whether SEC ALJs
are inferior officers, including the arguments of the SEC, and found that “Freytag
mandates a finding that the SEC ALJs exercise ‘significant authority’ and are thus
inferior officers.” Hill Order at 41; see Freytag, 501 U.S. 868 (considering the
types of tasks performed by STJs, which the Supreme Court found were “more
than ministerial tasks,” and evidence of the significant discretion STJs exercised,
thus making them inferior officers and not lesser functionaries). For the reasons
stated in the Hill Order and for the reasons in Plaintiffs’ Opposition to Defendant’s
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Motion to Dismiss in this case, this Court should find that SEC ALJs are inferior
officers. See Hill Order at 35-41; Pls.’ Opp. to MTD at 22-31.
2. This Court Found, Under the Same Circumstances, that there is a Substantial Likelihood of Success on the Appointments Clause Violation.
In Hill, Your Honor found that the plaintiff “has established a likelihood of
success on the merits on his Appointments Clause claim.” Hill Order at 41.
Plaintiffs make the same Appointments Clause challenge herein.
The Appointments Clause of the Constitution provides that as to “inferior
officers,” “Congress may by Law vest the Appointment of such inferior Officers … in the
President alone, in the Court of Law, or in the Heads of Department.” U.S. Const. art. II, §
2, cl. 2. Embedded in these express limitations is a structural goal of guarding
against “the diffusion of the appointment power.” Freytag, 501 U.S. at 878. In so
limiting the power of appointment, the Constitution ensures that those who wield it
remain “accountable to political force and the will of the people.” Id. at 884.
The Supreme Court, in Free Enterprise Fund v. Public Co. Accounting
Oversight Bd. (“Free Enterprise”) held that the SEC Commissioners jointly hold
the power to appoint inferior officers under the Appointments Clause. 561 U.S.
477, 512-13 (2010). The Supreme Court specifically held that the Commission is
a “Department” for purposes of the Appointments Clause and that the
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Commissioners jointly constitute the “Head” of that “Department.” See id. at 511-
13.
The SEC has conceded that its Commissioners did not appoint the ALJ
presiding over Plaintiffs’ Administrative Proceeding. See Notice of Filing Suppl.
Evidence, at 1-2 & Exhibit 1 (June 9, 2015) (Dkt. No. 35) (“ALJ Elliot was not hired
through a process involving the approval of the individual members of the
Commission”). The same is true of the other SEC ALJs. See Hill Order at 41
(SEC concedes that ALJ Grimes was not appointed by SEC Commissioner);
Second Am. Compl. ¶ 51 (SEC acknowledges Commissioners did not appoint ALJ
Foelk). There is no reason to believe the remaining two SEC ALJs were appointed
in a different manner.
In fact, the U.S. Department of Justice, as counsel for the SEC, recently
conceded that if SEC ALJs are “inferior officers,” administrative proceedings like
the one involving Plaintiffs would probably violate Article II:
THE COURT: Let me just back up for a minute and ask you a question. If I find that the ALJs are inferior officers, do you necessarily lose?
MS. LIN: We acknowledge that, your Honor, if this Court were to find ALJ Foelk to be an inferior officer, that that would make it more likely that the plaintiffs can succeed on the merits for the Article II challenge, at least with respect to the appointments clause challenge.
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Second Am. Compl. ¶ 51 & Exhibit A thereto, Hearing Transcript, Tilton v. S.E.C.,
15 CV 2472(RA) (S.D.N.Y.), at 29:10-17 (May 11, 2015).
By abdicating its constitutionally allocated responsibility, the Commission
has impermissibly delegated the appointment power to others. This has created a
defect that goes to the very core of the administrative proceeding. That is, the
SEC ALJ presiding over Plaintiffs’ Administrative Proceeding lacks the lawful
authority to do so. See Buckley v. Valeo, 424 U.S. 1, 126 (1976) (stating that any
“‘Officer of the United States’ … must ... be appointed in the manner prescribed
by” the Appointments Clause); Freytag, 501 U.S. at 879 (“The alleged defect in the
appointment of the Special Trial Judge goes to the validity of the Tax Court
proceeding that is the basis for this litigation.”); see also Ryder, 515 U.S. at 188
(holding that Appointments Clause violation involving two of three judges sitting
on an intermediate military appellate court panel entitled petitioner to a hearing
before a properly appointed panel of that court); United States v. Lane, 64 M.J. 1, 7
(2006) (concluding that the unconstitutional assignment of a Member of Congress
to serve as a judge on a military court of appeals rendered the petitioner’s
proceeding before that court invalid and void). What is more, by not appointing
the SEC ALJs, the Commission remains unaccountable for the ALJs’ actions.
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These are structural infirmities of the first order that render Plaintiffs’
Administrative Proceeding unconstitutional.
Because the SEC has admitted that it did not appoint the presiding SEC ALJ,
this Court’s previous findings that SEC ALJs are inferior officers and that the
manner of ALJ appointment is “likely unconstitutional in violation of the
Appointments Clause” apply equally to this case. See Hill Order at 42.
3. SEC ALJs were Appointed in Violation of Statutory Requirements.
Although not raised as an argument in Hill, the manner of appointment of
the SEC ALJs is also a violation of statutory law. Unlike the constitutional
Appointments Clause claim, the statutory challenge does not depend on a finding
that ALJs are constitutional officers. Congress has mandated that the
“Commission,” defined in 15 U.S.C. § 78d(a) as the SEC Commissioners, “shall
appoint and compensate officers, attorneys, economists, examiners, and other
employees.” 15 U.S.C. § 78d(b)(l). Further, by statute the SEC “shall appoint as
many administrative law judges as are necessary.” See 5 U.S.C. § 3105. Because
the SEC has admitted that the Commissioners did not appoint the SEC ALJs,
Plaintiffs have established a substantial likelihood of success on the merits of their
statutory claim.
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4. The Administrative Proceeding is Unconstitutional Under Article II Because It is Presided Over by an Executive Inferior Officer Shielded from Removal by at Least Two Layers of Tenure Protection.
In Free Enterprise, the Supreme Court held that if, like here, an inferior
officer can only be removed from office upon a showing of good cause, then the
decision to remove that officer cannot be made by another official who is also
shielded from removal by good-cause tenure protection. 561 U.S. at 484. This
arrangement violates Article II because it impairs the President’s ability to “take
Care that the Laws be faithfully executed.” U.S. Const. art. II § 1, cl. 1; id. § 3.
Free Enterprise is dispositive on this issue.
SEC ALJs, including the presiding ALJ, are insulated from presidential
removal by at least two layers of good-cause tenure protection. First, an SEC ALJ
may be removed by the SEC only upon a finding of good cause by the Merit
Systems Protection Board (“MSPB”). 5 U.S.C. § 7521(a)-(b). Second, both SEC
Commissioners and members of the MSPB can be removed by the President only
for “inefficiency, neglect of duty, or malfeasance in office.” Free Enterprise, 561
U.S. at 487; 5 U.S.C. § 1202(d). Thus, an SEC ALJ is protected from removal by
at least two layers of good-cause tenure protection, possibly three.
In Hill, Your Honor did not decide whether there was a likelihood of
success on the merits that the SEC ALJs’ dual for-cause removal provisions
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violate Article II. Hill Order at 42 n.12. Although the Court raised doubts about
this challenge, Your Honor likewise permitted the plaintiff in Hill the
opportunity to develop the factual record supporting this argument through
discovery. Id. at 45. Plaintiffs believe that upon a factual examination of the
scope of SEC ALJs’ roles and uses within the Commission, the Court will find
that the ALJs’ multi-layer tenure protection interferes with the President’s
constitutional obligation to ensure the faithful execution of the laws.
Indeed, even if SEC ALJs perform primarily adjudicatory functions, the
constitutional infirmity is not eliminated. The Supreme Court in Morrison v.
Olson rejected the theory that the President’s removal authority operates less
stringently for quasi-judicial and quasi-legislative officers, than for officers with
“purely executive” functions: “[O]ur present considered view is that the
determination of whether the Constitution allows Congress to impose a ‘good
cause’-type restriction on the President’s power to remove an official cannot be
made to turn on whether or not that official is classified as ‘purely executive.’”
487 U.S. 654, 689 (1988). Similarly, in Freytag, the concurring opinion noted
that ALJs, “whose principal statutory function is the conduct of adjudication . . .
are all executive officers” and that “‘[a]djudication,’ in other words, is no more an
‘inherently’ judicial function than the promulgation of rules governing primary
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conduct is an ‘inherently’ legislative one.” 501 U.S. at 910 (Scalia, J., concurring
in part and concurring in judgment, joined by O’Connor, Kennedy & Souter, JJ)
(emphasis in original); see also Kuretski v. Comm’r, 755 F.3d 929, 936 (D.C. Cir.
2014) (even though Tax Court Judges exercise quasi-judicial power, they are
officers of the Executive Branch and their removal at will by the President
creates no separation of powers problem), cert. denied, 2015 WL 2340860 (May
18, 2015); Intercollegiate Broad. Sys. Inc. v. Copyright Royalty Bd., 684 F.3d
1332, 1340-42 (D.C. Cir. 2012) (tenure protections of Copyright Royalty Judges
found unconstitutional). It follows that Congress may not create a class of
executive adjudicators for the SEC operating outside the constraints of executive
authority over other Commission officers. The board members in Free
Enterprise had quasi-judicial authority over certain matters, but this fact did not
justify their exemption from presidential oversight. See Free Enterprise, 561
U.S. at 485.
Further, the Supreme Court has held that the SEC can make policy – an
undoubtedly core executive function – through adjudication. SEC v. Chenery
Corp., 332 U.S. 194, 201-04 (1947). Addressing an SEC order, the Supreme Court
ruled: “There is thus a very definite place for the case-by-case evolution of
statutory standards. And the choice made between proceeding by general rule or
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by individual, ad hoc litigation is one that lies primarily in the informed discretion
of the administrative agency.” Id. at 203; see also NLRB v. Bell Aerospace Co.,
416 U.S. 267, 293 (1974) (choice between announcing policy through rulemaking
or adjudication is in agency’s discretion).
Thus, it is not surprising that the SEC does develop policy through
administrative adjudications. The SEC recently acknowledged the critical policy-
making and enforcement roles that SEC ALJs play in the Division of Enforcement
Approach to Forum Selection in Contested Actions (the “SEC Memo”). Weiss
Decl. ¶ 6, Ex. 4, Division of Enforcement Approach to Forum Selection in
Contested Actions. In the SEC Memo, the SEC emphasized that SEC ALJs
“develop extensive knowledge and expertise concerning the federal securities laws
and complex or technical securities industry practices or products.” Id. at 3. The
SEC also acknowledged that if a matter “is likely to raise unsettled and complex
legal issues under the federal securities laws, or interpretation of the Commission’s
rules,” the agency is more likely to proceed through the administrative process,
before an SEC ALJ, in order to “facilitate development of the law.” Id. Thus, the
SEC has demonstrated that the nature of its ALJs’ authority is solidly executive.
Moreover, the Department of Justice, whose counsel represent the SEC in
this case, concluded that Department of Education ALJs are inferior officers
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because of their executive policy-making role. See Sec. of Ed. Review of Admin.
Law Judge Decisions, 15 U.S. Op. Off. Legal Counsel 8, 14, 1991 WL 499882
(Jan. 31, 1991). “By deciding a series of cases, the ALJ presumably would
develop interpretations of the statute and regulations and fill statutory and
regulatory interstices comprehensively with his own policy judgments.” Id. This
analysis applies equally to SEC ALJs, who also “decid[e] a series of cases,” and
likewise have tremendous opportunity to formulate executive policy.
In sum, as an inferior officer in the Executive Branch, an SEC ALJ wields
executive power when presiding over enforcement actions brought by the
Commission. Exercising this power, an ALJ’s protection from removal by dual
layers of tenure impairs the President’s ability to ensure that the laws are faithfully
executed. Free Enterprise, 561 U.S. at 484, 498. While a dual-layer removal
regime protecting ALJs was not before the Supreme Court in Free Enterprise, the
Court’s holding necessarily reaches such a scheme. See id. at 507 n. 10; 542-43
(Breyer, J., dissenting); Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L.
Rev. 797, 800 (2013). This dual-layer removal scheme is thus unconstitutional.
B. The Court Already Found that There is Irreparable Harm if the SEC’s Administrative Proceeding Is Not Enjoined.
In Hill, this Court determined that the plaintiff “will be irreparably harmed if
this injunction does not issue because if the SEC is not enjoined, [p]laintiff will be
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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.” Hill Order at 42 (citing Odebrecht Const., Inc. v. Sec’y, Fla. Dep’t of
Transp., 715 F.3d 1268, 1289 (11th Cir. 2013) (“In the context of preliminary
injunctions, numerous courts have held that the inability to recover monetary
damages because of sovereign immunity renders the harm suffered irreparable”).
Your Honor also found that in the absence of a preliminary injunction, the
requested relief of enjoining the SEC administrative proceeding would be “moot as
the Court of Appeals would not be able to enjoin a proceeding which has already
occurred.” Id. at 42-43. The Court’s finding of irreparable harm applies equally to
Plaintiffs here.
Plaintiffs are in the same position as the Hill plaintiff. Plaintiffs must file an
Answer to the SEC’s Order Instituting Proceedings by June 17, 2015, and a pre-
hearing conference is scheduled for June 30, 2015. Weiss Decl. ¶¶ 7-8, Ex. 5,
Order on Consent Motion (June 9, 2015); Ex. 6, Order Postponing Hearing and
Scheduling Pre-Hearing Conference (June 5, 2015). The final hearing must take
place no later than September 21, 2015, but may occur earlier. See 17 C.F.R. §
201.360(a)(2). Absent injunctive relief, Plaintiffs will be subjected to the very
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proceeding that they claim is unconstitutional. Plaintiffs have thus shown that they
will suffer irreparable injury if the injunction does not issue.
C. The Court Also Found that the Remaining Preliminary Injunction Factors Weigh in Favor of Granting the Motion.
Your Honor’s findings in Hill “that the public interest and the balance of
equities” are in favor of granting a preliminary injunction govern Plaintiffs’
Motion as well. See Hill Order at 43. For the reasons stated in the Hill Order,
Plaintiffs have met these preliminary injunction factors, and the Court should halt
the SEC’s Administrative Proceeding.
CONCLUSION
For all of the foregoing reasons, Plaintiffs respectfully request that this
Court issue a preliminary injunction enjoining the SEC from continuing the
Administrative Proceeding against them.
Dated: June 15, 2015. Respectfully submitted,
/s/ Terry R. Weiss Terry R. Weiss Georgia Bar No. 746495 Michael J. King Georgia Bar No. 421160 GREENBERG TRAURIG, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305
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Telephone: (678) 553-2603 Facsimile: (678) 553-2604 Email: [email protected] [email protected] Attorneys for Plaintiffs
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Font Certification Pursuant to Local Rule 7.1(D), I hereby certify that the foregoing document
was prepared using Times New Roman 14 point type as provided in Local Rule
5.1.
/s/ Terry R. Weiss
Terry R. Weiss
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GRAY FINANCIAL GROUP, INC., ) LAURENCE O. GRAY and ROBERT C. HUBBARD, IV,
))
) Plaintiffs, )
) Civil Action File v. ) No. 1:15-cv-0492-LMM ) UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
))
) Defendant. )
CERTIFICATE OF SERVICE
This is to certify that I have this day served a copy of the foregoing
MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFFS’ MOTION
FOR A PRELIMINARY INJUNCTION via the Court’s ECF electronic filing
system which will automatically send email notification of such filing to all
counsel of record, as follows:
Justin M. Sandberg Jean Lin Adam Grogg Steven A. Myers Matthew J. Berns U.S. Department of Justice, Civil Division Federal Programs Branch 20 Massachusetts Ave., N.W., Room 7302 Washington, DC 20530
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[email protected] [email protected]
[email protected] [email protected] [email protected]
This 15th day of June, 2015.
/s/ Terry R. Weiss Terry R. Weiss Georgia Bar No. 746495 Michael J. King Georgia Bar No. 421160 GREENBERG TRAURIG, LLP 3333 Piedmont Road, NE Terminus 200, Suite 2500 Atlanta, Georgia 30305 Telephone: (678) 553-2603 Facsimile: (678) 553-2604 Email: [email protected] [email protected] Attorneys for Plaintiffs
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
GRAY FINANCIAL GROUP, INC., et al., Plaintiffs, v.
U.S. SECURITIES AND EXCHANGE COMMISSION, Defendant.
No. 15-cv-492 (LMM)
DEFENDANT’S OPPOSITION TO PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
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TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................................. ii
INTRODUCTION ............................................................................................................. 1
BACKGROUND................................................................................................................ 3
I. THE PENDING SEC ADMINISTRATIVE PROCEEDING .................................. 3
II. THE SEC’S ADMINISTRATIVE LAW JUDGES ................................................... 5
ARGUMENT ..................................................................................................................... 7
I. STANDARD OF REVIEW ........................................................................................ 7
II. PLAINTIFFS ARE UNLIKELY TO SUCCEED ON THE MERITS...................... 7
A. This Court Lacks Jurisdiction .............................................................................. 7
1. The Federal Securities Laws Establish The Exclusive Remedial Scheme For Challenges To SEC Administrative Proceedings ................................. 8
2. Plaintiffs Will Have Meaningful Judicial Review Of Their Claims, Which Are Of The Type Congress Intended To Be Reviewed Within The Statutory Scheme .................................................................................... 10
B. Plaintiffs Are Not Likely To Succeed On Their Article II Claims ................ 15
1. SEC ALJs Do Not Exercise “Significant Authority” ................................. 16
2. The History Of The ALJ System And The Statutory Provisions Regarding ALJs’ Appointments And Placement Within The Competitive Service Confirm That Congress Intended ALJs To Be Employees ....................................................................................................... 23
3. Even If SEC ALJs Are Officers, There Is No Separation of Powers Violation .......................................................................................................... 27
C. Plaintiffs Are Not Likely To Succeed On Their Statutory Claim ................. 31
III. PLAINTIFFS HAVE NOT ESTABLISHED IRREPARABLE HARM ................. 32
IV. THE BALANCE OF EQUITIES AND THE PUBLIC INTEREST ARE IN THE GOVERNMENT’S FAVOR ............................................................................. 34
CONCLUSION ................................................................................................................ 35
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TABLE OF AUTHORITIES CASES PAGE(S) In re al-Nashiri,
No. 14-1203, 2015 WL 3851966 (D.C. Cir. June 23, 2015)....................................... 33 Altman v. SEC,
687 F.3d 44 (2d Cir. 2012) ............................................................................................. 8 Bebo v. SEC, No. 15-c-3, 2015 WL 905349 (E.D. Wis. Mar. 3, 2015) ....................................passim Brennan v. HHS,
787 F.2d 1559 (Fed. Cir. 1986) .................................................................................... 26 Brock v. Cathedral Bluffs Shale Oil Co.,
796 F.2d 533 (D.C. Cir. 1986) ..................................................................................... 18 Buckley v. Valeo,
424 U.S. 1 (1976) ..................................................................................................passim Burnap v. United States,
252 U.S. 512 (1920) ...................................................................................................... 15 Cannon v. Univ. of Chicago,
441 U.S. 677 (1979) ...................................................................................................... 23 Charles Hughes & Co. v. SEC,
139 F.2d 434 (2d Cir. 1943) ........................................................................................... 5 Chau v. SEC,
No. 14–cv–1903, 2014 WL 6984236 (S.D.N.Y. Dec. 11, 2014) ...................... 8, 13, 15 CleanTech Innovations v. NASDAQ,
No. 11-cv-9358, 2012 WL 345902 (S.D.N.Y. Jan. 31, 2012) ....................................... 8
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Dames & Moore v. Regan, 453 U.S. 654 (1981) ...................................................................................................... 30
Duka v. S.E.C.,
2015 WL 1943245 (S.D.N.Y. Apr. 15, 2015) .............................................................. 28 Edmond v. United States,
520 U.S. 651 (1997) ...................................................................................................... 31 Elgin v. Dep't of Treasury,
132 S. Ct. 2126 (2012) ..........................................................................................passim Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd.,
561 U.S. 477 (2010) ..............................................................................................passim Freytag v. Comm’r, 501 U.S. 868 (1991) ..............................................................................................passim FTC v. Standard Oil Co.,
449 U.S. 232 (1980) ............................................................................................ 2, 14, 33 Gray v. Office of Pers. Mgmt.,
771 F.2d 1504 (D.C. Cir. 1985) .................................................................................... 26 Hare v. Hurwitz,
248 F.2d 458 (2d Cir. 1957) ......................................................................................... 24 Hill v. SEC, 1:15-cv-1801-LMM (N.D. Ga. June 8, 2015), ECF No. 28 ...............................passim Humphrey's Executor v. United States,
295 U.S. 602 (1935) ................................................................................................ 28, 30 Imperial Carpet Mills, Inc. v. Consumer Prod. Safety Comm'n,
634 F.2d 871 (5th Cir. 1981) .............................................................................. 2, 12, 33 Jarkesy v. SEC,
48 F. Supp. 3d 32 (D.D.C. 2014) .................................................................................. 8
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JCC, Inc. v. CFTC,
63 F.3d 1557 (11th Cir. 1995) ...................................................................................... 18 LabMD, Inc. v. FTC,
776 F3d 1275 (11th Cir. 2015) ................................................................................. 1, 10 Landry v. FDIC,
204 F.3d 1125 (D.C. Cir. 2000) ...........................................................................passim Mahoney v. Donovan,
721 F.3d 633 (D.C. Cir. 2013) ................................................................................. 5, 26 Maryland v. King,
133 S. Ct. 1 (2012) ........................................................................................................ 34 McGrath v. United States,
275 F. 294 (2d Cir. 1921) ............................................................................................. 24 Medimmune, Inc. v. Genentech, Inc.,
No. 03-cv-2567, 2008 WL 616250 (C.D. Cal. Mar. 6, 2008) .................................... 33 Mohawk Indus., Inc. v. Carpenter,
558 U.S. 100 (2009) ................................................................................................ 11, 12 Morrison v. Olson,
487 U.S. 654 (1988) .......................................................................................... 21, 28, 31 Myers v. United States,
272 U.S. 52 (1926) .................................................................................................. 24, 27 Nash v. Bowen,
869 F.2d 675 (2d Cir. 1989) ............................................................................. 18, 21, 29 Nat'l Taxpayers Union v. U.S. Soc. Sec. Admin.,
376 F.3d 239 (4th Cir. 2004) ........................................................................................ 10
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Pine v. City of West Palm Beach, 762 F.3d 1262 (11th Cir. 2014) ...................................................................................... 7
Ramspeck v. Fed. Trial Exam'rs Conference,
345 U.S. 128 (1953) .......................................................................................... 21, 24, 25 Ryder v. United States,
515 U.S. 177 (1995) ...................................................................................................... 22 Sampson v. Murray,
415 U.S. 61 (1974) ........................................................................................................ 32 Samuels, Kramer & Co. v. Comm'r,
930 F.2d 975 (2d Cir. 1991) ............................................................................. 16, 19, 21 In re Sandahl,
980 F.2d 1118 (7th Cir. 1992) ...................................................................................... 34 In re Sealed Case,
838 F.2d 476 (D.C. Cir. 1988) ............................................................................... 21, 23 Shalala v. Ill. Council on Long Term Care, Inc.,
529 U.S. 1 (2000) .......................................................................................................... 11 Siegel v. Lepore,
234 F. 3d 1163 (11th Cir. 2000) ................................................................................... 33 Spring Hill Capital Partners, LLC v. SEC, 15-cv-4542 (S.D.N.Y. June 26, 2015) ............................................................ 1, 8, 11, 15 Starrett v. Special Counsel,
792 F.2d 1246 (4th Cir. 1986) ...................................................................................... 18 Sturm, Ruger & Co., Inc. v. Chao,
300 F.3d 867 (D.C. Cir. 2002) ..................................................................................... 10 Thunder Basin Coal Co. v. Reich,
510 U.S. 200 (1994) ..............................................................................................passim
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Ticor Title Ins. Co. v. FTC,
814 F.2d 731 (D.C. Cir. 1987) ..................................................................................... 13 Tilton v. SEC, 15-cv-2472 (S.D.N.Y. June 30, 2015), ECF No. 24 ...........................................passim Tucker v. Comm'r,
676 F.3d 1129 (D.C. Cir. 2012) ................................................................................... 15 United States v. Germaine,
99 U.S. 508 (1878) ........................................................................................................ 16 United States v. L.A. Tucker Truck Lines, Inc.,
344 U.S. 33 (1952) .................................................................................................. 11, 31 United States v. Mouat,
124 U.S. 303 (1888) ...................................................................................................... 24 United States v. Perkins,
116 U.S. 483 (1886) ...................................................................................................... 27 USAA Fed. Sav. Bank v. McLaughlin,
849 F.2d 1505 (D.C. Cir. 1988) ................................................................................... 11 Vermont Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc.,
435 U.S. 519 (1978) ...................................................................................................... 18 Weinberger v. Salfi,
422 U.S. 749 (1975) ...................................................................................................... 14 Weiss v. United States,
510 U.S. 163 (1994) ...................................................................................................... 23 STATUTES
5 U.S.C. § 556(b) .............................................................................................................. 17
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5 U.S.C. § 557(b) .............................................................................................................. 18
5 U.S.C. § 704 ................................................................................................................... 31
5 U.S.C. §§ 1101 et seq ...................................................................................................... 6
5 U.S.C. § 1204 ................................................................................................................... 6
5 U.S.C. § 1212 ................................................................................................................... 6
5 U.S.C. § 1214 ................................................................................................................... 6
5 U.S.C. § 1215 ................................................................................................................... 6
5 U.S.C. § 1221 ................................................................................................................... 6
5 U.S.C. § 2102 ............................................................................................................. 5, 24
5 U.S.C. § 2301 ................................................................................................................... 6
5 U.S.C. § 3105 ................................................................................................. 5, 16, 24, 32
5 U.S.C. § 3313 ................................................................................................................... 6
5 U.S.C. § 3317 ................................................................................................................... 6
5 U.S.C. § 3318 ................................................................................................................... 6
5 U.S.C. § 7511(b)(2) ........................................................................................................ 26
5 U.S.C. § 7521 ................................................................................................. 6, 25, 26, 30
5 U.S.C. App. 1 Reorg. Plan 10 1950 § 1, 64 Stat. 1265 ............................................... 32
15 U.S.C. §§ 77a et seq. ...................................................................................................... 3
15 U.S.C. § 77i(a) ............................................................................................................... 4
15 U.S.C. §§ 78a et seq. ...................................................................................................... 3
15 U.S.C. § 78d ................................................................................................................. 31
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15 U.S.C. § 78d-1 .....................................................................................................passim
15 U.S.C. § 78u(c) ........................................................................................................ 9, 22
15 U.S.C. § 78y(a) .......................................................................................................... 4, 5
15 U.S.C. § 78y(c)(2) .......................................................................................................... 5
15 U.S.C. §§ 80a-1 et seq. . ................................................................................................. 3
15 U.S.C. § 80a-9(f)(4) ....................................................................................................... 9
15 U.S.C. § 80a-42(a) ..................................................................................................... 4, 7
15 U.S.C. §§ 80b-1 et seq. ................................................................................................... 3
15 U.S.C. § 80b-13(a) ..................................................................................................... 4, 7
28 U.S.C. § 1331 ................................................................................................................. 7
Administrative Procedure Act, Pub. L. No. 79-404, 60 Stat. 237 (1946) .................. 24
REGULATIONS
5 C.F.R. § 212.101 .............................................................................................................. 5
5 C.F.R. § 332.401 .............................................................................................................. 6
5 C.F.R. § 332.402 .............................................................................................................. 6
5 C.F.R. § 332.404 .............................................................................................................. 6
5 C.F.R. § 930.201 .......................................................................................................... 5, 6
5 C.F.R. § 930.203 .............................................................................................................. 6
5 C.F.R. § 930.204 ............................................................................................................ 26
5 C.F.R. § 930.210 ............................................................................................................ 25
5 C.F.R. § 930.211 .............................................................................................................. 6
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5 C.F.R. §§ 1201.137 et seq. ............................................................................................ 26
5 C.F.R. § 1201.137 ............................................................................................................ 6
17 C.F.R. § 201.110 .......................................................................................................... 17
17 C.F.R. § 201.180 .......................................................................................................... 22
17 C.F.R. § 201.360 ................................................................................................ 4, 17, 18
17 C.F.R. § 201.400(a) ...................................................................................................... 17
17 C.F.R. § 201.410(e) .................................................................................................. 4, 19
17 C.F.R. § 201.411 .......................................................................................... 4, 17, 18, 20
17 C.F.R. § 201.452 .................................................................................................... 20, 24
UNITED STATES CONSTITUTION
U.S. Const., art. II, § 2, cl. 2 ...................................................................................... 15, 24
LEGISLATIVE MATERIAL
H.R. Rep. No. 101-616 (1990) ........................................................................................... 9
S. Rep. No. 101-337 (1990) reprinted in 1990 WL 263550 (Leg. Hist.). .................. 9, 34
MISCELLANEOUS
11A C. Wright & A. Miller, Fed. Practice & Proc. § 2949 (3d ed. 2014) ................. 32 In re Bebo & Buono,
(SEC ALJ April 7, 2015), http://www.sec.gov/alj/aljorders/2015/ ap-2510.pdf .................................................................................................................. 19
In re Charles L. Hill, Jr.,
(SEC ALJ May 14, 2015), http://www.sec.gov/alj/aljorders/2015/ ap-2675.pdf .................................................................................................................. 19
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In re Dian Min Ma, et al. 2015 WL 2088438 (SEC May 6, 2015) ........................................................................ 18
In re Kenneth R. Ward,
2003 WL 1447865 (SEC Mar. 19, 2003) ..................................................................... 20 In re Michael Lee Mendenhall,
2015 WL 1247374 (SEC Mar. 19, 2015) ............................................................... 17, 18
Sec. of Ed. Review of Admin Law Judge Decisions, 15 U.S. Op. Off. Legal Counsel, 1991 WL 499882 (Jan. 31, 1991) ........................ 27 Attorney General’s Manual on the Administrative Procedure Act (1947) ..................... 18
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INTRODUCTION
On June 15, 2015—nearly four months after Plaintiffs filed suit and one
month after the Securities and Exchange Commission (“SEC” or “Commission”)
commenced an administrative proceeding against Plaintiffs—Plaintiffs moved
for a preliminary injunction. Citing this Court’s recent ruling in Hill v. SEC, No.
1:15-cv-1801-LMM (N.D. Ga. June 8, 2015), ECF No. 23 (“Hill slip op.”), Plaintiffs
contend that the presiding Administrative Law Judge (“ALJ”) for their
administrative hearing is an inferior officer who has not been properly appointed
and is unconstitutionally shielded from presidential removal. This Court should
deny Plaintiffs’ belated request for such extraordinary relief.
As a threshold matter, this Court lacks jurisdiction because the federal
securities laws channel review of claims like Plaintiffs’ through the SEC and then
directly to the court of appeals. Supreme Court and Eleventh Circuit precedent
establishes that such channeling requirements preclude district court jurisdiction.
See, e.g., Elgin v. Dep’t of Treasury, 132 S. Ct. 2126 (2012); LabMD, Inc. v. FTC, 776
F.3d 1275 (11th Cir. 2015). Indeed, both before and after this Court’s decision in
Hill, other district courts have concluded that they lack jurisdiction over claims
indistinguishable from Plaintiffs’. See Tilton v. SEC, 15-cv-2472 (S.D.N.Y. June 30,
2015), ECF No. 24 (“Tilton slip op.”) (Attachment 1), appeal pending (2d Cir.);
Spring Hill Capital Partners, LLC v. SEC, 15-cv-4542 (S.D.N.Y. June 26, 2015) (order
and bench ruling annexed as Attachment 2); Bebo v. SEC, No. 15-c-3, 2015 WL
905349 (E.D. Wis. Mar. 3, 2015), appeal pending, No. 15-1511 (7th Cir.).
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Even if this Court had jurisdiction, Plaintiffs have failed to establish that
preliminary relief is necessary to prevent irreparable harm. Under controlling
Supreme Court and circuit precedent, the harms Plaintiffs claim—the expense,
burden, and reputational consequences of participating in an allegedly unlawful
agency proceeding—do not constitute irreparable injuries that warrant
interfering with ongoing administrative proceedings. See FTC v. Standard Oil Co.,
449 U.S. 232, 244 (1980); Imperial Carpet Mills, Inc. v. Consumer Prod. Safety
Comm’n, 634 F.2d 871, 874 (5th Cir. 1981). Nor do the constitutional violations
that Plaintiffs allege establish irreparable harm. In any event, the lack of
irreparable harm is underscored by Plaintiffs’ delay in seeking preliminary relief.
Finally, Plaintiffs cannot demonstrate a likelihood of success on the merits.
Plaintiffs’ Article II claims depend on SEC ALJs qualifying as officers of the
United States under the Appointments Clause, but SEC ALJs are mere agency
employees, subject to the Commission’s plenary authority and subordinate on
matters of law and policy. Their functions are limited and do not include issuing
final decisions. They plainly lack the powers of judges who are officers of the
United States. Moreover, Congress has long treated ALJs as mere employees by
establishing a method for appointing them that does not track the requirements
for appointing constitutional officers and by placing them within the competitive
service, the most basic category of the civil service system. It is therefore
unsurprising that the only court of appeals to have addressed the constitutional
status of any agency’s ALJs decided that they were employees, not officers.
Landry v. FDIC, 204 F.3d 1125, 1132-34 (D.C. Cir. 2000). Moreover, even if SEC
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ALJs were constitutional officers, Plaintiffs are unlikely to show that their tenure
protections violate the separation of powers, as this Court has already
recognized. See Hill slip op. at 42 n.12.
For these reasons, Plaintiffs’ motion should be denied.
BACKGROUND
I. THE PENDING SEC ADMINISTRATIVE PROCEEDING
As part of its mission to protect investors and maintain fair, orderly, and
efficient markets, the SEC investigates possible violations of the federal securities
laws and enforces those laws in civil actions and administrative proceedings.
Plaintiffs are Gray Financial (an investment advisory firm registered with the
SEC), its founder and principal, and its co-chief executive officer. 2d Am. Compl.
¶¶ 10-12, 14, ECF No. 28. On May 21, 2015, pursuant to the Securities Act of 1933,
15 U.S.C. §§ 77a et seq.; the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a et
seq.; the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 et seq.; and the
Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq., the SEC issued an
Order Instituting Administrative and Cease-and-Desist Proceedings (“OIP”)
against Plaintiffs, alleging violations of the anti-fraud provisions of the federal
securities laws. Id. ¶ 6. The OIP alleges, among other misconduct, that Gray
Financial and its founder fraudulently recommended and sold to Georgia-based
public pension clients certain investment funds that were unsuitable because
they violated Georgia law governing such investments. The SEC has directed
ALJ Cameron Elliot to preside over the initial stages of the proceeding.1
1 See Gray Financial administrative proceeding docket, available at
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At the conclusion of the proceedings before him, ALJ Elliot will issue an
initial decision, 17 C.F.R. § 201.360(a)(1), which Plaintiffs or the SEC’s Division of
Enforcement may appeal to the Commission, id. § 201.410, or which the
Commission may review on its own initiative, id. § 201.411(c). If no petition for
review is filed and the Commission does not undertake review on its own
initiative, “the Commission will issue an order” making the ALJ’s initial
“decision . . . final.” Id. § 201.360(d)(2). The finality order will specify the date on
which sanctions, if any, take effect. Id. There are no circumstances under which
an ALJ’s initial decision becomes final without further Commission action.
The Commission reviews its ALJs’ initial decisions de novo. Id.
§§ 201.411(a), 201.452. The Commission “may affirm, reverse, modify, [or] set
aside” an initial decision “in whole or in part” and “may make any findings or
conclusions that in its judgment are proper and on the basis of the record.” Id.
§ 201.411(a). The Commission may also “remand for further proceedings,” id.,
“remand . . . for the taking of additional evidence,” or “hear additional evidence”
itself, id. § 201.452. If a majority of participating Commissioners does not agree to
a disposition, the ALJ’s “initial decision shall be of no effect, and an order will be
issued [by the Commission] in accordance with this result.” Id. § 201.411(f).
In similarly worded provisions, the federal securities laws provide for
review of final orders of the Commission in the courts of appeals. 15 U.S.C.
§§ 77i(a), 78y(a)(1), 80a-42(a), 80b-13(a). The court of appeals has “exclusive”
http://www.sec.gov/litigation/apdocuments/ap-3-16554.xml (“Gray AP Docket”).
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jurisdiction to affirm, modify, or set aside the Commission’s order in whole or in
part. E.g., id. § 78y(a)(3). The comprehensive review scheme in the federal
securities laws also establishes what constitutes the agency record, id. § 78y(a)(2);
the standard of review of the Commission’s factual findings, id. § 78y(a)(4); the
process for seeking a stay of the Commission order either before the Commission
or in the court of appeals, id. § 78y(c)(2); and the process for seeking leave from
the court of appeals to adduce additional evidence or requesting that the court of
appeals remand the matter to the Commission, id. § 78y(a)(5).
II. THE SEC’S ADMINISTRATIVE LAW JUDGES
The SEC has used ALJs since the Commission’s early days. See Charles
Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943). The SEC may appoint as many
ALJs as needed, see 5 U.S.C. § 3105, and delegate any of its functions to an ALJ,
provided that the agency “retain[s] a discretionary right to review” any action
taken pursuant to such delegation. 15 U.S.C. § 78d-1(a), (b). At the SEC, as
throughout the federal government, ALJs are civil service employees in the
“competitive service,” 5 C.F.R. § 930.201(b), the most basic category within the
civil service that includes positions such as corrections officers, human resources
specialists, and paralegals, among others. See 5 U.S.C. § 2102; 5 C.F.R. § 212.101.
The Civil Service Reform Act of 1978 (the “CSRA”), 5 U.S.C. §§ 1101 et seq.,
governs federal civil service employment, including SEC ALJs’ employment. See,
e.g., Mahoney v. Donovan, 721 F.3d 633, 634-35 (D.C. Cir. 2013). The CSRA
regulates SEC ALJs’ employment as it does that of other federal employees by,
inter alia: setting merit systems principles to guide agency personnel
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management, 5 U.S.C. § 2301; describing the bases on which personnel actions
against employees, including ALJs, are prohibited, id. § 2302; and specifying the
administrative and judicial remedies available in response to such prohibited
personnel practices, id. §§ 1204, 1212, 1214, 1215, 1221.
The Office of Personnel Management (“OPM”), which oversees federal
employment for ALJs and other civil servants, administers a detailed civil service
system for selecting ALJs, including conducting examinations for ALJ
candidates, see id. §§ 1104, 1302; 5 C.F.R. §§ 930.201(d)-(e), 930.203; ranking ALJ
applicants for placement on a register of eligible candidates according to their
qualifications and numerical ratings, 5 U.S.C. § 3313; 5 C.F.R. § 332.401; and
issuing “certificate[s] of eligibles” from which federal agencies—including the
SEC—may select individuals to fill ALJ vacancies, 5 U.S.C. §§ 3317, 3318; 5 C.F.R.
§§ 332.402, 332.404. OPM oversees each agency’s “decisions concerning the
appointment, pay, and tenure” of ALJs, id. § 930.201(e)(2), and establishes
classification and qualification standards for the ALJ positions, id. § 930.201(e)(3).
Like other employees, an ALJ who believes that his employing agency has
engaged in a prohibited personnel practice can seek redress either through the
Office of Special Counsel or the Merit Systems Protection Board (“MSPB”). See 5
U.S.C. §§ 1204, 1212, 1214, 1215, 1221. The agency, on the other hand, may
propose certain specified personnel actions (i.e., removal, suspension, etc.)
against an ALJ. Id. § 7521; 5 C.F.R. §§ 930.211, 1201.137. The MSPB then decides,
after an opportunity for a hearing, whether “good cause” exists to take the
proposed personnel action. 5 U.S.C. § 7521(a).
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ARGUMENT
I. STANDARD OF REVIEW
A party seeking a preliminary injunction must establish “a substantial
likelihood of success on the merits,” that “irreparable injury will be suffered
unless the injunction issues,” that his “threatened injury . . . outweighs whatever
damage the proposed injunction may cause the opposing party,” and that, “if
issued, the injunction would not be adverse to the public interest.” Pine v. City of
W. Palm Beach, 762 F.3d 1262, 1268 (11th Cir. 2014) (quotations omitted). “A
preliminary injunction is an extraordinary and drastic remedy not to be granted
unless the movant clearly establishe[s] the burden of persuasion for each prong
of the analysis.” Id. (quotation omitted).
II. PLAINTIFFS ARE UNLIKELY TO SUCCEED ON THE MERITS
A. This Court Lacks Jurisdiction
This Court lacks jurisdiction because the federal securities laws establish a
“statutory scheme of administrative and judicial review,” Elgin, 132 S. Ct. at 2132,
that channels claims like Plaintiffs’ through the SEC’s administrative process and
then directly to an appropriate court of appeals, whose jurisdiction is
“exclusive.” E.g., 15 U.S.C. §§ 80a-42(a), 80b-13(a). This scheme displaces this
Court’s jurisdiction under 28 U.S.C. § 1331 because it “displays a ‘fairly
discernible’ intent to limit jurisdiction, and [because] the claims at issue ‘are of
the type Congress intended to be reviewed within th[e] statutory structure.’” Free
Enterprise Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 489 (2010)
(quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 207, 212 (1994)). In its Order
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in Hill v. SEC, No. 15-cv-1801 (N.D. Ga. June 8, 2015), this Court held that it had
jurisdiction over constitutional challenges to another SEC administrative
proceeding. Defendant respectfully submits that this Court’s holding in Hill was
in error.
1. The Federal Securities Laws Establish The Exclusive Remedial Scheme For Challenges To SEC Administrative Proceedings
The securities laws “mandate[]” a “four-step process” whereby
(1) charges are brought by the SEC’s Enforcement Division before an ALJ; (2) the [respondents] have the opportunity to be heard and present evidence challenging the charges; (3) the [respondents] may appeal an adverse ALJ decision to the SEC Commissioners; and (4) if the [respondents] are aggrieved by the resulting final order, [they] may appeal to a federal Court of Appeals.
Jarkesy v. SEC, 48 F. Supp. 3d 32, 37-38 (D.D.C. 2014), appeal pending, No. 14-5196
(D.C. Cir.). This process is “virtually identical” to the Mine Act’s, id. at 37, which
the Supreme Court held in Thunder Basin provides the only path to challenge the
constitutionality of the Mine Administration’s actions, see 510 U.S. at 205, 207-16.
Thus, the Second Circuit and numerous other courts have held that this process
establishes “the jurisdictional route that [plaintiffs] must follow” to raise
constitutional challenges to SEC enforcement proceedings.2
2 See, e.g., Altman v. SEC, 687 F.3d 44, 45-46 (2d Cir. 2012) (per curiam), aff’g, 768 F. Supp. 2d 554 (S.D.N.Y. 2011); see, e.g., Tilton slip op. at 7-18; Spring Hill, Tr. at 63-73; Bebo, 2015 WL 905349, at *4; Chau v. SEC, 2014 WL 6984236, at *6 (S.D.N.Y. Dec. 11, 2014), appeal pending, No. 15-461 (2d Cir. 2015); Jarkesy, 48 F. Supp. 3d at 37-38; CleanTech Innovations v. NASDAQ, 11-cv-9358, 2012 WL 345902, at *1 (S.D.N.Y. Jan. 31, 2012).
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That conclusion is reinforced by statutory provisions that allow
respondents in SEC administrative proceedings to obtain district court review in
only one circumstance: review of temporary cease-and-desist orders, a form of
preliminary relief not relevant here. See 15 U.S.C. §§ 77h-1(d); 78u-3(d); 80a-
9(f)(4); see also S. Rep. No. 101-337 at 14-15 (1990) (differentiating between district
court review of temporary cease-and-desist orders and the review procedure that
applies to the Commission’s issuance of a “permanent cease-and-desist order”
that “may be appealed to a U.S. Court of Appeals in the same way as any other SEC
order entered under the securities laws” (emphasis added)); H.R. Rep. No. 101-616 at
26 (1990). Only in challenges to such orders does the ordinary administrative and
judicial review process “not apply.” 15 U.S.C. §§ 77h-1(d)(4); 78u-3(d)(4); 80a-
9(f)(4)(D); see Elgin, 132 S. Ct. at 2134 (explaining that an exception to the
ordinary review process that permits district court jurisdiction “[i]n only one
situation” “demonstrates that Congress knew how to provide alternative forums
for judicial review based on the nature of [a plaintiff’s] claim”).
In Hill, the Court observed that the SEC may initiate enforcement actions
in district court or in administrative proceedings, slip op. at 11-14, and held that
“[t]here can be no ‘fairly discernible’ Congressional intent to limit jurisdiction
away from district courts when the text of the statute provides the district court
as a viable forum,” id. at 13. Respectfully, this reasoning conflates whether the
SEC has a choice of forum for initiating enforcement actions with whether a
party defending itself in an enforcement action has a similar choice once the SEC
has made its selection. Thunder Basin illustrates the error. The Mine Act
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“expressly . . . empower[ed] the Secretary . . . to coerce payment of civil penalties”
by filing actions in district court but offered regulated entities “no corresponding
right.” 510 U.S. at 209. The Court inferred from this statutory structure that pre-
enforcement claims by regulated entities are subject to the exclusive jurisdiction
of the agency and the court of appeals. See id. at 207-16. Thus, numerous courts
have cited statutes authorizing district court jurisdiction over actions filed by an
agency as supporting the conclusion that district courts lack jurisdiction over
actions filed by private parties. See, e.g., Nat’l Taxpayers Union v. U.S. Soc. Sec.
Admin., 376 F.3d 239, 243 (4th Cir. 2004); Sturm, Ruger & Co. v. Chao, 300 F.3d 867,
873 (D.C. Cir. 2002). This Court erred in drawing the opposite inference. Indeed,
permitting respondents in administrative proceedings to file district court actions
challenging the SEC’s authority to initiate the administrative proceedings would
vitiate the very choice of forum that Congress granted to the agency.
2. Plaintiffs Will Have Meaningful Judicial Review Of Their Claims, Which Are Of The Type Congress Intended To Be Reviewed Within The Statutory Scheme
In general, “all constitutional claims must be funneled through the direct-
appeal process after a final agency action if that is the scheme created by
Congress.” LabMD, 776 F.3d at 1279. Plaintiffs nonetheless argue (at 4) that the
Court should not require them to follow the exclusive review scheme because
their case allegedly falls within a narrow exception permitting district court
jurisdiction where (1) “a finding of preclusion [would] foreclose all meaningful
judicial review”; (2) the plaintiff’s suit “is wholly collateral to a statute’s review
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provisions”; and (3) the plaintiff’s “claims are outside the agency’s expertise.”
Free Enterprise, 561 U.S. at 489. Plaintiffs cannot establish any of these factors.
First, the statutory scheme permits meaningful judicial review in the court
of appeals if Plaintiffs are aggrieved by the Commission’s final order. See Tilton
slip op. at 7-18 (Article II challenges to SEC ALJ); Spring Hill, Tr. at 67-69
(Appointments Clause to SEC ALJ); Bebo, 2015 WL 905349, at *4 (separation of
powers challenge to SEC ALJ); see also, e.g., United States v. L.A. Tucker Truck
Lines, Inc., 344 U.S. 33, 38 (1952) (invalidity of hearing officer’s appointment may
be basis for vacating final order); Landry, 204 F.3d 1125 (addressing
Appointments Clause challenge on direct review of final agency order). That is
all that is required. See Elgin, 132 S. Ct. at 2136-37; Thunder Basin, 510 U.S. at 215.
The Hill opinion suggests that court of appeals review comes too late to be
“meaningful.” See Hill, slip op. at 15. But just as “postjudgment appeals generally
suffice to protect the rights of litigants,” Mohawk Indus., Inc. v. Carpenter, 558 U.S.
100, 108-09 (2009), a court of appeals decision vacating a final order of the
Commission because the ALJ was improperly appointed would fully “vindicate
Plaintiffs’ claim to a constitutionally sound proceeding.” Tilton slip op. at 12; see
also Part III below. Thus, where, as here, the ‘injury’ inflicted on the party seeking
review is the burden of going through an agency proceeding, . . . the party must
patiently await the denouement of proceedings within the Article II branch.”
USAA Fed. Sav. Bank v. McLaughlin, 849 F.2d 1505, 1510 (D.C. Cir. 1988); see also
Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 12-13, 22-23 (2000)
(allowing circumvention of channeling requirement “simply because [a] party
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shows that postponement would mean added inconvenience or cost in an
isolated, particular case” would undermine the purpose of such a requirement);
Imperial Carpet, 634 F.2d at 874 (holding that “the burden of defending against the
Complaint, the expense of complying with the Commission’s anticipated final
order; the resulting bad publicity; and the potential for a dangerous loss of
credit” do not justify intervention into pending agency proceedings).
Moreover, as explained in Tilton, creating an exception to statutory review
schemes for cases in which the plaintiffs claim that they are being subjected to an
unconstitutional proceeding “could swallow the schemes themselves; indeed,
any arguably plausible claim in district court that an administrative proceeding
should be enjoined as unconstitutional could confer jurisdiction and thus thwart
Congress’ intent to the contrary.” Tilton slip op. at 8. Although Plaintiffs may be
frustrated that they cannot challenge the constitutionality of the administrative
proceeding “prior to ‘endur[ing]’ those very proceedings, this posture is not
uncommon in our judicial system, nor a burden peculiar to this case. Oftentimes
in our system, a party challenging the legality of the very proceeding or forum in
which she is litigating must ‘endure’ those proceedings before obtaining
vindication.” Id. at 8-9; see, e.g., Mohawk Indus., 558 U.S. at 108-09 (“We routinely
require litigants to wait until after final judgment to vindicate valuable rights,
including rights central to our adversarial system.”).
Significantly, Plaintiffs do not claim to be similarly situated to the plaintiffs
in Free Enterprise, in which the Supreme Court found that the plaintiffs lacked
access to meaningful judicial review because they would have needed either to
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challenge a “random” rule or induce an enforcement proceeding in order to
obtain review of their claim. 561 U.S. at 490-91; see Tilton slip op. at 15.
Second, Plaintiffs’ suit is not “wholly collateral” to the statutory review
scheme; it is an effort to short-circuit the appeals process. The Hill decision’s
characterization of similar claims as “facial,” see slip op. at 18 n.5, does not help
Plaintiffs because the Supreme Court has explicitly rejected the argument that
“facial constitutional challenges” should be “carve[d] out for district court
adjudication” when Congress has created an exclusive review scheme. Elgin, 132
S. Ct. at 2135; accord Tilton slip op. at 24 (“Plaintiffs’ characterization of their
challenge as facial rather than as applied does not alter the Court’s conclusion.”).
Likewise, the D.C. Circuit has held that plaintiffs seeking to raise “a facial
constitutional challenge” under Article II “must exhaust their nonconstitutional
defenses in the ongoing administrative proceeding before bringing their
constitutional challenge to the agency’s authority in federal court.” Ticor Title Ins.
Co. v. FTC, 814 F.2d 731, 732 (D.C. Cir. 1987) (emphasis in original).3
3 In Hill, this Court cited dicta from Chau v. SEC for the proposition that “‘courts are more likely to sustain pre-enforcement jurisdiction over broad facial and systematic challenges.’” Hill, slip op. at 18 n.5. But the Supreme Court rejected the premise of that argument in Thunder Basin, noting that the plaintiff’s “claims [we]re ‘pre-enforcement’ only because the company sued before a citation was issued,” and holding that a plaintiff may not “evade the statutory-review process by enjoining the Secretary from commencing enforcement proceedings,” 510 U.S. at 216. Indeed, “[t]he opposite holding would seem to defeat Congressional intent, as any litigant subject to an administrative proceeding would be invited to escape agency adjudication by fashioning an incidental constitutional challenge and claiming that it is wholly collateral to the proceeding.” Tilton slip op. at 21.
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Third, the Commission can bring its expertise to bear on Plaintiffs’ claims,
as can the court of appeals. The Commission may entertain constitutional claims,
and indeed is presently considering claims identical to Plaintiffs’ in another
administrative proceeding.4 Moreover, as the Supreme Court recognized in Elgin,
there are “many threshold questions that may accompany a constitutional claim
and to which [an agency] can apply its expertise.” 132 S. Ct. at 2140. Here,
Plaintiffs’ own brief demonstrates that whether SEC ALJs are inferior officers
turns in part on antecedent questions about ALJs’ powers under the securities
laws and regulations, which the SEC is expert at interpreting. See Thunder Basin,
510 U.S. at 214-15; Weinberger v. Salfi, 422 U.S. 749, 762 (1975). The SEC’s
interpretation “could alleviate constitutional concerns” about SEC ALJs’ status,
or the Commission could resolve the proceeding in Plaintiffs’ favor, thus
avoiding the constitutional issues altogether. See Elgin, 132 S. Ct. at 2140; see also
Standard Oil, 449 U.S. at 244 n.11 (“[T]he possibility that [the] challenge may be
mooted in adjudication warrants the requirement that [the plaintiff] pursue
adjudication, not shortcut it.”). In any event, regardless of the Commission’s
expertise, review is available in the courts of appeals, which is fully competent to
decide Plaintiffs’ claims. See Elgin, 132 S. Ct. at 2136-37; Thunder Basin, 510 U.S. at
215; Tilton slip op. at 22.
In sum, “district court jurisdiction ‘is not an escape hatch for litigants to
delay or derail an administrative action when statutory channels of review are
4 See Order Requesting Additional Submissions, In re Timbervest, LLC, et al. (SEC May 27, 2015), http://www.sec.gov/litigation/opinions/2015/ia-4096.pdf.
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entirely adequate.’” Bebo, 2015 WL 905349, at *4 (quoting Chau, 2014 WL 6984236,
at *6); Spring Hill, Tr. at 67. The Court should reject Plaintiffs’ efforts to derail
their administrative proceeding.
B. Plaintiffs Are Not Likely To Succeed On Their Article II Claims
Even if this Court had jurisdiction to proceed, it should still deny
Plaintiffs’ motion for preliminary injunctive relief. Plaintiffs allege (at 15) that
SEC ALJs have not been properly appointed under the Appointments Clause and
that their tenure protections violate the Constitution’s separation of powers. The
Appointments Clause, U.S. Const. art. II, § 2, cl. 2, governs the appointments of
principal and inferior officers, but does not speak to government employees
falling below the officer threshold. See Buckley v. Valeo, 424 U.S. 1, 126 & n.162
(1976); Tucker v. Comm’r, 676 F.3d 1129, 1132 (D.C. Cir. 2012). Similarly, while the
Constitution’s separation of powers limits Congress’s ability to restrict the
President’s authority to remove constitutional officers, e.g., Free Enterprise, 561
U.S. at 492, Congress’s ability to provide tenure protections for employees is not
similarly restricted. Thus, Plaintiffs can succeed on their Article II claims only if
SEC ALJs are officers. Because SEC ALJs are mere employees, Plaintiffs’ Article II
claims should be dismissed for failure to state a claim.
The Supreme Court has said that whether government personnel are
officers or employees is determined by “the manner in which Congress has
specifically provided for the creation of the . . . positions, their duties and
appointment thereto.” Burnap v. United States, 252 U.S. 512, 516 (1920); see Freytag
v. Comm’r, 501 U.S. 868, 881 (1991). The Court has also held that government
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personnel qualify as officers only if they “exercis[e] significant authority
pursuant to the laws of the United States.” Buckley, 424 U.S. at 125-26. Although
few cases address the line between officers and employees, the Court has
emphasized that the vast majority of government personnel are the latter, or
“lesser functionaries subordinate to officers of the United States.” Id. at 126 &
n.162; see Free Enterprise, 561 U.S. at 506 n.9; United States v. Germaine, 99 U.S. 508,
509 (1878). As discussed below, the SEC’s discretion whether and how to use
ALJs, the ALJs’ role within the SEC’s decision-making scheme, and Congress’s
creation and placement of the ALJ position within the competitive service system
all reflect that SEC ALJs are “mere aids” to the SEC, Samuels, Kramer & Co. v.
Comm’r, 930 F.2d 975, 985-86 (2d Cir. 1991), and that Congress intended ALJs to
be employees—a judgment that is entitled to significant deference. Indeed, the
only court of appeals to have addressed the status of any agency’s ALJs
concluded that they are employees. Landry, 204 F.3d at 1132-34.
1. SEC ALJs Do Not Exercise “Significant Authority” Of The United States
A review of the SEC’s regulatory scheme shows that SEC ALJs are “lesser
functionaries subordinate to officers of the United States.” Buckley, 424 U.S. at 126
n.162. As an initial matter, SEC ALJs’ powers are contingent on Commission
action. While Congress has authorized agencies to use ALJs, it has not required
it. Rather, agencies decide whether to use ALJs, see 5 U.S.C. § 3105, and what
functions to delegate to them, see, e.g., 15 U.S.C. § 78d-1. Consistent with the
APA, which provides that a “presiding employee[]” for a hearing on the record
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need not be an ALJ, see 5 U.S.C. § 556(b), the Commission need not involve ALJs
in its administrative proceedings. The SEC’s Rules of Practice specify that each
proceeding will be presided over by the Commission itself or, if the Commission
so decides, by a “hearing officer.” 17 C.F.R. § 201.110. The hearing officers may
be an ALJ, a panel of Commissioners, an individual Commissioner, or any other
duly authorized person. Id.; see also id. § 201.101(a)(5). In instituting an
administrative proceeding, the Commission thus also decides whether an ALJ is
to be the hearing officer. Id. § 201.110.
The Commission has plenary power to review matters before its ALJs, see
15 U.S.C. § 78d-1, and is not bound by anything an ALJ decides. As the
Commission has stated, it “retains plenary authority over the course of its
administrative proceedings and the rulings of its law judges—both before and
after the issuance of the initial decision and irrespective of whether any party has
sought relief.” In re Michael Lee Mendenhall, 2015 WL 1247374, at *1 (SEC Mar. 19,
2015). The Commission may grant a party’s request for interlocutory review of
an ALJ ruling or “at any time, on its own motion, direct that any matter be
submitted to it for review.” 17 C.F.R. § 201.400(a). Furthermore, an ALJ prepares
only an “initial decision” subject to the Commission’s de novo review. Id.
§ 201.360(a)(1). The Commission “may affirm, reverse, modify, [or] set aside” the
initial decision “in whole or in part” and “may make any findings or conclusions
that in its judgment are proper and on the basis of the record.” 17 C.F.R.
§ 201.411(a). The Commission may also “remand for further proceedings,” id.,
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“remand . . . for the taking of additional evidence,” or “hear additional evidence”
itself. Id. § 201.452.
Indeed, in enacting the APA, Congress envisioned that an ALJ’s “initial
decision” would be “advisory in nature” and would merely “sharpen[] . . . the
issues for subsequent proceedings.” Attorney General’s Manual on the
Administrative Procedure Act at 83-84 (1947).5 Because an “agency is in no way
bound by the [initial] decision,” id. at 83; see also JCC, Inc. v. CFTC, 63 F.3d 1557,
1566 (11th Cir. 1995); Starrett v. Special Counsel, 792 F.2d 1246, 1252 (4th Cir. 1986),
the APA provides that in reviewing an ALJ’s initial decision the agency “retains
‘all the powers which it would have in making the initial decision.’” Nash v.
Bowen, 869 F.2d 675, 680 (2d Cir. 1989) (quoting 5 U.S.C. § 557(b)).
That conclusion finds support in the regulations that implement 15 U.S.C.
§ 78d-1(c), the provision of the SEC’s organic statute that authorizes the
Commission to delegate functions to ALJs. Those regulations make clear that
even when there is no petition for review, an ALJ’s initial decision has no legal
force or effect unless the Commission issues a finality order after determining
not to grant review on its own initiative. See 17 C.F.R. §§ 201.360(d)(2),
201.411(c).6 An SEC ALJ “is powerless to cause his or her initial decision to
5 The Manual, as “a contemporaneous interpretation [of the APA],” Vermont Yankee Nuclear Power Corp. v. Nat. Res. Def. Council, Inc., 435 U.S. 519, 546 (1978), is “give[n] ‘considerable weight,’” Brock v. Cathedral Bluffs Shale Oil Co., 796 F.2d 533, 537 (D.C. Cir. 1986) (citation omitted). 6 See, e.g., In re Dian Min Ma, et al., 2015 WL 2088438 (SEC May 6, 2015) (sua sponte vacating the initial decision and remanding); In re Michael Lee Mendenhall, 2015 WL 1247374 (SEC Mar 19, 2015) (same).
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become a final decision,”7 and there is no judicial review of ALJs’ initial
decisions. 17 C.F.R. § 201.410(e).
Because all final agency determinations are those of the Commission, not
of its ALJs, under Landry, SEC ALJs are not inferior officers. 204 F.3d at 1133-34.
In Landry, the D.C. Circuit found that the ALJs of the Federal Deposit Insurance
Corporation (“FDIC”) are not constitutional officers because they issue only
recommended decisions and “can never render the decision of the FDIC”;
“[f]inal decisions are issued only by the FDIC Board of Directors.” Id. at 1133; see
id. at 1132 (FDIC ALJs possess “purely recommendatory power, i.e., one followed
. . . by de novo review”); see also Free Enterprise, 561 U.S. at 507 n.10 (unlike
PCAOB, many ALJs “possess purely recommendatory powers” or “perform
adjudicative rather than enforcement or policymaking functions”).
Freytag is not to the contrary. There, the Supreme Court, following the
Second Circuit’s similar ruling in Samuels, Kramer, 930 F.2d at 985-86, held that
special trial judges of the Tax Court—who exercise “a portion of the judicial
power of the United States,” as the Court recognized elsewhere in the opinion—
are inferior officers. Freytag, 501 U.S. at 880, 891. As the D.C. Circuit found in
Landry, special trial judges are distinguishable from FDIC ALJs because they are
able to issue final decisions in certain categories of cases—a fact that “was critical
to the [Freytag] Court’s decision” that they were inferior officers. Landry, 204 F.3d
7 Order at 7 n.8, In re Charles L. Hill, Jr. (SEC ALJ May 14, 2015), http://www.sec.gov/alj/aljorders/2015/ap-2675.pdf; accord In re Bebo & Buono (SEC ALJ April 7, 2015), http://www.sec.gov/alj/aljorders/2015/ap-2510.pdf.
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at 1134; see Freytag, 501 U.S. at 882 (noting that IRS Commissioner had conceded
that special trial judges “act as inferior officers”). Additionally, special trial
judges have significant discretion in cases over which they do not have final
decision-making authority, including the authority to make factual and
credibility findings to which the Tax Court is required to defer. Landry, 204 F.3d
at 1133. By contrast, neither the FDIC Board nor the Commission defers to ALJs’
factual findings. Id.; 17 C.F.R. 201.411(a).8
In Hill, despite finding that SEC ALJs have no final decisionmaking
authority, see slip op. at 38 n.10, this Court concluded that SEC ALJs’ “powers”
are “nearly identical” to those of the Tax Court’s special trial judges. Slip op. at
40. The court noted that both positions are established by law and both ALJs and
special trial judges “take testimony, conduct trial, rule on the admissibility of
evidence, and can issue sanctions, up to and including excluding people
(including attorneys) from hearings and entering default.” Id. at 38. Respectfully,
the SEC submits that Hill was wrongly decided.
First, that both positions are created by law is immaterial. Congress had
very different goals in creating the positions. The special trial judge operates
within an Article I tribunal where Congress has “knowingly expanded the
8 The Commission could make a factual finding partially based on an ALJ’s credibility determination, but the Commission does not accept an ALJ’s credibility determinations “blindly,” In re Kenneth R. Ward, 2003 WL 1447865, at *10 (SEC Mar. 19, 2003), and is not bound by such determinations, see id. (“[T]here are circumstances where, in the exercise of our review function, we must disregard explicit determinations of credibility.”). The Commission can also choose to hear the witnesses’ testimony itself. 17 C.F.R. § 201.452.
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authority of special trial judges,” Samuels, Kramer & Co., 930 F.2d at 982. Congress
created the ALJ position in the APA, on the other hand, to address complaints
about hearing examiners’ perceived partiality by “separat[ing] adjudicatory
functions and personnel from investigative and prosecution personnel in the
agencies.” Ramspeck v. Fed. Trial Exam’rs Conference, 345 U.S. 128, 131 (1953). In
thus creating the ALJ position, there is no indication that Congress intended to
elevate ALJs’ constitutional status.
Second, the Hill decision failed to take account of a fundamental
distinction when comparing the tasks of ALJs and special trial judges: a special
trial judge is “exercis[ing] a portion of the judicial power of the United States”
when performing those tasks, Freytag, 501 U.S. at 891, whereas an ALJ performs
those tasks merely in aid of its employing agency’s exercise of executive power.
In assessing SEC ALJs’ authority, therefore, it is inadequate to simply list the
tasks SEC ALJs perform. Those duties must be viewed in the context of the
Commission’s plenary authority over the entire administrative process—namely,
that the Commission is not bound by any decision an SEC ALJ makes; that the
SEC ALJ’s role within the agency’s decision-making scheme is to sharpen the
issues for subsequent proceedings; and that SEC ALJs are “subordinate” to the
agency “in matters of policy and interpretation of law,” Nash, 869 F.2d at 680,
which is consistent with the concept that “civil servants are not thought to be the
President’s policymakers.” In re Sealed Case, 838 F.2d 476, 497 (D.C. Cir.), rev’d sub
nom. Morrison v. Olson, 487 U.S. 654 (1988).
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SEC ALJs’ authority pales in comparison to that of special trial judges
because they do not possess the judicial powers associated with judges who are
inferior officers. Special trial judges, like federal district court judges, have the
powers “to punish contempts by fines or imprisonments,” “to grant certain
injunctive relief,” and “to order the Secretary of the Treasury to provide a refund
of an overpayment determined by [the special trial judge].” Freytag, 501 U.S. at
891. By contrast, SEC ALJs have no power to grant any injunctive relief. Nor does
the entry of default or imposition of sanctions by an SEC ALJ have any
independent force or effect absent further action by the Commission. Further,
SEC ALJs’ power to punish contemptuous conduct is limited and does not
include any ability to impose fines or imprisonment. See 17 C.F.R. § 201.180
(“Sanctions”) (hearing officer may exclude a person from a hearing or suspend
that person from representing others in the proceeding). And while SEC ALJs,
like special trial judges, may issue subpoenas, the Commission itself needs to
seek an order from a federal district court to compel compliance. See 15 U.S.C.
§ 78u(c). In sum, the substantive authority SEC ALJs exercise is significantly less
weighty than that exercised by special trial judges.9
9 Plaintiffs’ reliance on a case concerning Article I military appellate judges is similarly misplaced. See Pls.’ Mot. at 9 (citing Ryder v. United States, 515 U.S. 177 (1995)). Not all judges possess the same stature or exercise the same powers. In Ryder, the Court also did not hold that the individuals in question were inferior officers of the United States.
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2. The History Of The ALJ System And The Statutory Provisions Regarding ALJs’ Appointments And Placement Within The Competitive Service Confirm That Congress Intended ALJs To Be Employees
To the extent there is any doubt that SEC ALJs are mere employees, this
Court should defer to Congress’s long-standing judgment that ALJs are
employees. See Weiss v. United States, 510 U.S. 163, 194 (1994) (Souter, J.,
concurring) (“in the presence of doubt” whether military judges are principal or
inferior officers, “deference to the political branches’ judgment is appropriate”).
The Constitution assigns to Congress the authority to determine, in the first
instance, whether a position it creates is that of an officer or of an employee, see
U.S. Const. art. II, § 2, cl. 2, and “[t]hat constitutional assignment to Congress
counsels judicial deference,” In re Sealed Case, 838 F.2d at 532 (R.B. Ginsburg, J.,
dissenting). Congress’s judgment “is owed a large measure of respect—deference
of the kind courts accord to myriad constitutional judgments” made by the
Legislative Branch. Id.10
Congress is presumed to know the requirements of the Appointments
Clause. E.g., Cannon v. Univ. of Chicago, 441 U.S. 677, 697-98 (1979). In fact, when
Congress created the modern ALJ in 1946, the method of appointment generally
determined the status—employee or officer—of the position. At that time, the
10 Of course, as then-Judge Ruth Bader Ginsburg noted in her dissenting opinion in In re Sealed Case, Congress’s “intention [as reflected in the chosen mode of appointment] alone is not dispositive of the constitutional issue, for it is common ground that Congress does not have the final say.” 838 F.2d at 532 (quotation omitted). But “judicial review must fit the occasion,” and in a “debatable” case, “the fully rational congressional determination” merits acceptance. Id.
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Supreme Court had long characterized appointments pursuant to the methods
prescribed in the Appointments Clause as a “well established definition of what
it is that constitutes [an officer of the United States].” United States v. Mouat, 124
U.S. 303, 307 (1888). Lower courts, including the Second Circuit, adhered to this
precedent. See McGrath v. United States, 275 F. 294, 300-01 (2d Cir. 1921); Hare v.
Hurwitz, 248 F.2d 458, 461 (2d Cir. 1957). Yet Congress specified in the APA that
it is the “agency”—not the President, the department head, or the Judiciary—that
appoints ALJs. Pub. L. No. 79-404, 60 Stat. 237, 244 (1946); see 5 U.S.C. § 3105.
With rare exceptions for particular agencies, in the seven decades since creating
the position of ALJ, Congress has not changed their method of appointment.
Congress’s judgment that ALJs are not officers is also reflected in its
placement of ALJs—along with tens of thousands of other federal employees—in
the competitive service, which is the most basic category within the civil service
system. See Myers v. United States, 272 U.S. 52, 173 (1926); 5 U.S.C. § 2102. The
Supreme Court’s examination of the Civil Service Commission’s regulations of
hearing examiners—the precursor of ALJs—was also consistent with the view
that ALJs are not constitutional officers. See Ramspeck, 345 U.S. at 130.
Hearing examiners, like other government employees of that period, were
originally subject to the Classification Act of 1923 and dependent on their
agency’s ratings for compensation and promotion. Id. In 1946, as a result of
complaints about hearing examiners’ perceived partiality, Congress enacted the
APA and “separat[ed] adjudicatory functions and personnel from investigative
and prosecution personnel in the agencies,” by placing hearing examiners under
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the jurisdiction of the Civil Service Commission in a merit-based civil service
system for federal employees, and by vesting the Civil Service Commission with
control of the ALJs’ compensation, promotion, and tenure. See id. at 131. Section
11 of the APA specified, for example, that hearing examiners were removable by
the employing agency only for “good cause” established and determined by the
Civil Service Commission. 60 Stat. at 244.
In enacting these measures, Congress gave no indication that it meant to
elevate ALJs’ status above that of the investigative and prosecution personnel of
the agency. To the contrary, Congress explicitly “retained the examiners as
classified Civil Service employees.” Ramspeck, 345 U.S. at 133. Thus, on the
question of whether hearing examiners’ tenure protection precluded an agency
from removing them due to a reduction in force, the Supreme Court said that
“Congress intended to provide tenure for the examiners in the tradition of the
Civil Service Commission,” namely that “[t]hey were not to be paid, promoted,
or discharged at the whim or caprice of the agency or for political reasons.” Id. at
142. This meant that hearing examiners could be subject to the agency’s
reduction in force, like other employees. Id. at 140-41; see also 5 U.S.C. § 7521(b); 5
C.F.R. § 930.210 (ALJs are subject to reduction in force). The Court also found
that the Civil Service Commission could set various salary grades to reflect the
competence and experience of the examiners in each grade—again, like others in
the civil service. Ramspeck, 345 U.S. at 136.
Today, OPM is responsible for promulgating rules relating to ALJs and for
administering the process by which ALJs are screened for positions across
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federal agencies. An agency may appoint an individual as an ALJ only with prior
approval of OPM, except when it makes its selection from OPM’s list of eligibles.
5 C.F.R. § 930.204. The MSPB has jurisdiction over major personnel actions
against ALJs. See 5 U.S.C. § 7521; 5 C.F.R. §§ 1201.137 et seq. The MSPB process is
part of the CSRA’s comprehensive remedial scheme for federal personnel
disputes. Gray v. Office of Pers. Mgmt., 771 F.2d 1504, 1510 (D.C. Cir. 1985)
(refusing “to confer special status on ALJs beyond that expressly provided by
Congress”). Congress provided no special remedial routes for ALJs to raise most
personnel disputes, even when the ALJ alleges interference with his decisional
independence. See, e.g., Mahoney, 721 F.3d at 636-37; Brennan v. HHS, 787 F.2d
1559, 1562-63 (Fed. Cir. 1986). Congress required that an ALJ’s removal,
suspension, reductions in grade or pay, and furlough of certain length be based
on “good cause” established and determined by the MSPB, 5 U.S.C. § 7521, the
same adjudicative body that handles employment disputes for other employees.
By contrast, employees who occupy confidential, policy-determining, or policy-
making positions in the “excepted service” may be removed without cause. 5
U.S.C. § 7511(b)(2); see also id. § 2302(a)(2)(B)(i).
In sum, SEC ALJs are not constitutional officers. And, at a minimum,
Congress views them as standing on a different constitutional footing than
inferior officers, who “determine[] the policy and enforce[] the laws of the United
States.” Free Enterprise, 561 U.S. at 484; see id. at 506-07 (noting that “[s]enior or
policymaking positions in government may be excepted from the competitive
service to ensure Presidential control,” and emphasizing that “nothing in [the
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Court’s] opinion, therefore, should be read to cast doubt on the use of what is
colloquially known as the civil service system within independent agencies”).
Because SEC ALJs are employees whose appointment and removal are not
governed by Article II of the Constitution, Plaintiffs’ Article II challenges fail to
state a claim upon which relief can be granted.11
3. Even If SEC ALJs Are Officers, There Is No Separation of Powers Violation
Even if SEC ALJs are officers, their tenure protections do not violate the
separation of powers. Though this Court did not decide the issue in Hill, it
expressed “serious doubts” that ALJ’s tenure protections violate Article II, “as
ALJs likely occupy quasijudicial or adjudicatory positions, and thus [their] two-
layer protections likely do not interfere with the President’s ability to perform his
duties.” Slip op. at 42 n.12 (quotation omitted). This Court was correct.
The Constitution permits Congress to place restrictions on the removal of
inferior officers so long as the restrictions do not unduly interfere with the
President’s exercise of the Executive power. See, e.g., Myers, 272 U.S. at 161;
United States v. Perkins, 116 U.S. 483, 485 (1886). Relying on Free Enterprise, 561
11 Plaintiffs’ reliance upon an Office of Legal Counsel (“OLC”) opinion addressing ALJs at the Department of Education, see Pls.’ Mot. at 14-15 (citing Sec. of Ed. Review of Admin Law Judge Decisions, 15 U.S. Op. Off. Legal Counsel, 1991 WL 499882 (Jan. 31, 1991)), misses the mark. The constitutional status of ALJs must be analyzed based on the ALJs’ duties and functions as well their roles within their employing agency. Moreover, the Education ALJs are clearly distinguishable because (1) the statutory regime permitted Education ALJs to issue final agency decisions, 1991 WL 499882, at *9, and (2) by statute, the Education ALJs are additionally required to be appointed by the Head of the Department, the Secretary, id. at *13.
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U.S. at 485, 504-08, Plaintiffs nonetheless argue that SEC ALJs’ tenure protections
deprive the President of the ability to execute the laws. Mot. at 11-15. But Free
Enterprise did not announce a blanket rule that a removal framework is per se
unconstitutional if more than one layer of tenure protection separates the
President from an inferior officer. See id. at 506; Duka, 2015 WL 1943245, at *8.
Indeed, the Free Enterprise Court explicitly excluded ALJs from its holding. 561
U.S. at 507 n.10. And as the Duka court held in rejecting an identical Article II
challenge to SEC ALJs, 2015 WL 1943245, at *8-10, the President retains adequate
control here.
First, the constitutionality of limits on the President’s removal power
“depend[s] upon the character of the office” at issue, Humphrey’s Executor v.
United States, 295 U.S. 602, 631 (1935); here, the adjudicative functions that the
Commission has assigned to SEC ALJs are limited in scope and fall outside core
executive authority. They involve the application of the law to a discrete set of
facts in a particular case. Unlike the PCAOB in Free Enterprise, the ALJ here will
not promulgate standards applicable to an entire sector of the economy, cf. 561
U.S. at 508, or make policy-laden decisions about enforcement priorities, cf. id. at
484. Rather, the SEC ALJ will issue an initial decision, subject to review by the
Commission, about whether Plaintiffs violated the securities laws. See Free
Enterprise, 561 U.S. at 507 n.10.12
12 Plaintiffs also cite Morrison v. Olson, 487 U.S. 654 (1988) for the proposition that limitations on the President’s removal authority do not turn on the character of the office at issue. See Pls’ Mot. at 12. This is a nonsequitur. Morrison holds that the “analysis contained in our removal cases is designed not to define rigid
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Second, the Supreme Court’s “removal cases [are] designed . . . to ensure
that Congress does not interfere with the President’s exercise of the ‘executive
power,’” Morrison, 487 U.S. at 689-90 (footnote omitted), but there has been no
encroachment by Congress here. Congress has not imposed ALJs on the
Executive Branch. Rather, it is the Commission that has elected to hire ALJs, and
it is the Commission that has empowered ALJs to carry out certain limited
functions – and the Commission can disempower them. That Congress has
permitted executive agencies to use, or not to use, ALJs as the agencies see fit is
not an encroachment on executive authority.
Third, because the Commission retains ultimate authority over
administrative proceedings, the Commission exercises sufficient control over
SEC ALJs regardless of the limitations placed upon their removal. SEC ALJs do
not choose the cases that they adjudicate; the Commission—over which the
categories of those officials who may or may not be removed at will by the President,” based on whether they perform, e.g., “purely executive” or “quasi-legislative” duties. Morrison, 487 U.S. at 689. But the SEC has not argued otherwise. And this principle, of course, does not mean that the scope of power exercised by an official is irrelevant, as the Supreme Court’s removal cases are meant “to ensure that Congress does not interfere with the President’s exercise of the ‘executive power’ and his constitutionally appointed duty to ‘take care that the laws be faithfully executed’ under Article II.’” Id. at 689-90. Free Enterprise makes clear that the Court must consider the functions performed by the individuals in question to determine whether limitations on their removal interfere with the President’s constitutional obligations. Moreover, while the Plaintiffs are correct that the Commission itself may make policy through adjudication, Pls’ Mot. at 13, that is a role for the Commission itself, and not its ALJs, who are subordinate to the Commission on questions of policy and interpretation of law. See Nash, 869 F.2d at 680.
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President exercises constitutionally adequate control, see Humphrey’s Executor,
295 U.S. at 602—decides whether a matter will initially be heard before an ALJ.
And, as already discussed, the Commission has plenary authority over its ALJs.
In Free Enterprise, by contrast, the Supreme Court concluded that the SEC lacked
such power over the PCAOB’s activities, certain of which were for all practical
purposes entirely outside of the SEC’s control. 561 U.S. at 504-05. Moreover, the
tenure protections applicable to SEC ALJs are less robust than those that were
applicable to the PCAOB. ALJs enjoy ordinary “good cause” tenure protection, 5
U.S.C. § 7521, whereas the standard for removing a member of the PCAOB was
“unusually high” and thus more threatening to the President’s authority. See Free
Enterprise, 561 U.S. at 502-03.
Fourth, the Executive Branch’s use of tenure-protected ALJs for nearly
seventy years establishes a gloss on the Constitution that supports the current
removal framework. See Dames & Moore v. Regan, 453 U.S. 654, 686 (1981). Unlike
the PCAOB, which was only a few years old when first challenged, SEC ALJs
have operated under a removal framework similar to that which currently
applies for almost seven decades. “[A] systematic, unbroken, executive practice,
long pursued . . . may be treated as a gloss on Executive Power vested in the
President,” Dames & Moore, 453 U.S. at 686 (quotation omitted).
Finally, Plaintiffs contend that a “factual examination” would reveal that
“ALJs’ multi-layer tenure protection interferes with the President’s constitutional
obligation to ensure the faithful execution of the laws.” Pls’ Mot. at 12. Yet the
fundamental issues underlying Plaintiffs’ constitutional challenge are
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determined by statutes, rules, and regulations, and thus are legal in nature, as
this Court already held. See Order at 2, ECF No. 40 (“[T]he Court finds that these
are likely legal—not factual—issues.”); Edmond v. United States, 520 U.S. 651, 662
(1997) (looking to legal sources to determine duties for Appointment Clause
purposes); Morrison, 487 U.S. at 671-72 (same). Plaintiffs cite (at 12) this Court’s
Hill decision for the proposition that the Court “permitted the plaintiff in Hill the
opportunity to develop the factual record supporting this argument through
discovery.” While the Hill plaintiffs have requested discovery, the Court has not
granted the request for discovery, and in any event, the Court found the Hill
plaintiff unlikely to succeed on the merits of this claim.
C. Plaintiffs Are Not Likely To Succeed On Their Statutory Claim
Plaintiffs further contend (at 10) that the SEC ALJs have been appointed in
violation of statutory law. As an initial matter, regardless of whether Plaintiffs’
constitutional claims are properly before the Court, their statutory claim under
the APA must be litigated (if at all) pursuant to the securities’ laws exclusive
remedial scheme discussed above. Cf. L.A. Tucker, 344 U.S. at 38. Even if judicial
review is available under the APA in the district court, review is available only
after Plaintiffs have exhausted their administrative remedies and the
Commission has taken “final agency action,” 5 U.S.C. § 704 (“final agency action
for which there is no other adequate remedy in a court are subject to judicial
review”). No such action has been taken here.
Plaintiffs’ claim also fails on the merits. First, Plaintiffs’ argument (at 10)
that 15 U.S.C. § 78d requires the Commission to appoint ALJs ignores that
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Congress has expressly “transferred from the . . . Commission . . . to the
Chairman of the Commission . . . the executive and administrative functions of
the Commission, including functions of the Commission with respect to . . . the
appointment and supervision of personnel employed under the Commission.” 5
U.S.C. App. 1 Reorg. Plan 10 1950 § 1, 64 Stat. 1265. Congress also provided the
Chairman authority to further delegate this hiring authority. See id. § 2. Plaintiffs’
reliance on 5 U.S.C. § 3105 is also misplaced. That statute authorizes“[e]ach
agency [to] appoint as many [ALJs] as are necessary” but does not limit such
authority to department heads. Thus, that the SEC hired its ALJs without the
direct involvement of the Commission is consistent with all applicable statutes.
III. PLAINTIFFS HAVE NOT ESTABLISHED IRREPARABLE HARM
Relying entirely on this Court’s decision in Hill, Plaintiffs argue (at 16-17)
that they are at risk of irreparable harm because, absent injunctive relief, they
“will be subjected to the very proceeding that they claim is unconstitutional.”
Plaintiffs offer no evidence to establish these harms (i.e., they have attached no
declarations attesting to such harms), and naked factual assertions do not suffice
to establish irreparable harm. Sampson v. Murray, 415 U.S. 61, 88-89 (1974); 11A C.
Wright & A. Miller, Fed. Practice & Proc. § 2949 (3d ed. 2014). That is reason
enough to deny Plaintiffs’ motion.
In any event, in Hill, this Court concluded that the plaintiff had established
irreparable harm because “if the SEC is not enjoined, Plaintiff 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
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immunity.” Slip op. at 42. The SEC respectfully submits that this aspect of the
Hill decision was erroneous. The unavailability of monetary damages is simply
not relevant because Supreme Court and circuit precedents establish that the
burdens of participating in administrative enforcement proceedings, including
even “unrecoupable cost[s],” do not justify judicial intervention. Standard Oil, 449
U.S. at 244; accord Imperial Carpet, 634 F.2d at 874.
Hill also suggests that Plaintiffs could establish irreparable harm by
showing that their claim would become moot prior to review in the court of
appeals. By that reasoning, every litigant who challenges the lawfulness of an
agency proceeding would demonstrate irreparable harm that might support an
injunction. That is not correct. “[T]he possibility that [the] challenge may be
mooted in adjudication warrants the requirement that [Plaintiffs] pursue
adjudication, not shortcut it.” Standard Oil, 449 U.S. 232 at n.11 (explaining that
“one of the principal reasons to await the termination of agency proceedings is to
obviate all occasion for judicial review” (quotation marks omitted).
Finally, Hill indicates that the constitutional violation alleged in that case,
which is also raised here, established irreparable harm. Slip Op. at 42. But the
Eleventh Circuit has rejected the proposition that a “violation of constitutional
rights always constitutes irreparable harm.” Siegel v. Lepore, 234 F. 3d 1163, 1177-
78 (11th Cir. 2000). Indeed, courts have routinely reasoned that comparable
constitutional violations do not cause irreparable harm. See, e.g., In re al-Nashiri,
No. 14-1203, 2015 WL 3851966, at *7 (D.C. Cir. June 23, 2015) (separation-of-
powers challenge to adjudicator does not cause irreparable harm); Medimmune,
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Inc. v. Genentech, Inc., No. 03-cv-2567, 2008 WL 616250, at *3 (C.D. Cal. March 6,
2008) (Seventh Amendment violation not irreparable); In re Sandahl, 980 F.2d
1118, 1120 (7th Cir. 1992) (same). In these circumstances, any harm that might be
imposed can be remedied through standard appellate proceedings.
IV. THE BALANCE OF EQUITIES AND THE PUBLIC INTEREST ARE IN THE GOVERNMENT’S FAVOR
Both the public interest and balance of equities support denying Plaintiffs’
motion. Entering the preliminary injunction sought by plaintiffs would
undermine Congress’s decision to grant the SEC authority to conduct
administrative proceedings. See Maryland v. King, 133 S. Ct. 1, 3 (2012) (Roberts,
C.J., in chambers) (“[A]ny time a State is enjoined by a court from effectuating
statutes enacted by representatives of its people, it suffers a form of irreparable
injury.” (quotation marks omitted)). Congress has recognized the importance of
“enabl[ing] the SEC to move quickly in administrative proceedings, particularly
in those situations where investor funds are at risk.” S. Rep. 101-337 (1990),
reprinted in 1990 WL 263550 (Leg. Hist.). Here, the Commission has already
invested a considerable amount of resources to seek to enforce the securities laws
in the administrative process. The injunction sought would allow the collateral
proceeding in this Court to interfere with the Commission’s significant
enforcement efforts and results in the type of delay that Congress has sought to
avoid by empowering the SEC to use administrative proceedings in a wider
variety of cases.
In this case, such interference, would delay the public airing—and ultimate
resolution—of the Commission’s charges against a registered investment adviser
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and associated individuals who the Commission believes continue to maintain
client relationships with public pension funds. Thus, the Commission would be
impeded in considering appropriate remedial action for any securities law
violations that it finds in the proceeding, including potential limitations on
future advisory work by Plaintiffs.13
Finally, Congress also made a determination that the public interest would
be served by allowing the SEC to pursue a process in which legal issues—
including constitutional issues—would be resolved on direct review by the court
of appeals, and not by a district court. That determination is entitled to this
Court’s respect.
Because there is no irreparable harm to Plaintiffs that could outweigh the
interests of the SEC and the public in permitting the administrative proceeding
to continue, the public interest and balance of harms weigh against Plaintiffs.
CONCLUSION
Defendant respectfully requests that the Court deny Plaintiffs’ motion.
13 The OIP directs a determination of, among other issues, what (if any) remedial action is appropriate in the public interest against Plaintiffs under Section 203(e) or Section 203(f) of the Advisers Act, 15 U.S.C. §§ 80b-3(e), (f). Those provisions authorize the Commission to place limitations on, or bar, the future activities of investment advisers and their associated persons based on the circumstances of certain wrongful conduct.
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Dated: July 2, 2015 Respectfully submitted,
BENJAMIN C. MIZER Principal Deputy Assistant Attorney
General JOHN A. HORN Acting United States Attorney KATHLEEN R. HARTNETT Deputy Assistant Attorney General JENNIFER D. RICKETTS Director, Federal Programs Branch SUSAN K. RUDY Assistant Director, Federal Programs
Branch /s/ Jean Lin JEAN LIN JUSTIN SANDBERG ADAM GROGG STEVEN A. MYERS MATTHEW J. BERNS U.S. Department of Justice Civil Division, Federal Programs
Branch 20 Massachusetts Ave. NW Washington, DC 20530 Phone: (202) 514-3716 Fax: (202) 616-8202 Email: [email protected]
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CERTIFICATE OF COMPLIANCE
I hereby certify, pursuant to Local Rule 7.1(D), that the foregoing has been
prepared with one of the font and point selections approved by the Court in
Local Rule 5.1(C).
/s/ Jean Lin Jean Lin
CERTIFICATE OF SERVICE
I hereby certify that on July 2, 2015, I electronically filed a copy of the
foregoing. Notice of this filing will be sent via email to all parties by operation of
the Court’s electronic filing system. Parties may access this filing through the
Court’s CM/ECF System.
/s/ Jean Lin Jean Lin
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UNITED STATES DISTRICT COURT OFFICIAL CERTIFIED TRANSCRIPT
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GRAY FINANCIAL GROUP ) INC., ET AL., )
PLAINTIFFS, ) ) VS. ) ) DOCKET NUMBER UNITED STATES SECURITIES ) 1:15-CV-492-LMM AND EXCHANGE COMMISSION, ) ) ATLANTA, GEORGIA DEFENDANT. ) JULY 13, 2015 ) _____________________________)
TRANSCRIPT OF PROCEEDINGS BEFORE THE HONORABLE LEIGH MARTIN MAY,
UNITED STATES DISTRICT JUDGE
APPEARANCES:
FOR THE PLAINTIFF: TERRY WEISS & MICHAEL KING GREENBERG TRAURIG, LLP ATLANTA, GEORGIA 30305
FOR THE DEFENDANT: JEAN LIN
UNITED STATES DEPARTMENT OF JUSTICE WASHINGTON, DC 20530
MECHANICAL STENOGRAPHY OF PROCEEDINGS AND COMPUTER-AIDED TRANSCRIPT PRODUCED BY
OFFICIAL COURT REPORTER: MONTRELL VANN, RPR, RMR, CRR
2160 UNITED STATES COURTHOUSE 75 SPRING STREET, SOUTHWEST ATLANTA, GEORGIA 30303 (404)215-1549
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UNITED STATES DISTRICT COURT OFFICIAL CERTIFIED TRANSCRIPT
(IN ATLANTA, FULTON COUNTY, GEORGIA, JULY 13, 2015, IN OPEN
COURT.)
THE COURT: OKAY. GOOD MORNING. Y'ALL CAN BE SEATED.
OKAY. WE ARE HERE IN CIVIL ACTION 15-CV-492, GRAY FINANCIAL
CORP, INC., ET AL. VS. UNITED STATES SECURITIES AND EXCHANGE
COMMISSION. AND IF COUNSEL CAN JUST START WITH INTRODUCING
THEMSELVES ON THE RECORD, PLEASE.
MR. WEISS: GOOD MORNING, YOUR HONOR. MY NAME IS
TERRY WEISS. I AM WITH THE LAW FIRM OF GREENBERG TRAURIG, AND I
REPRESENT THE PLAINTIFF. WITH ME IS MY COLLEAGUE, JEANETTE
BROWN AND MIKE KING.
THE COURT: OKAY. THANK YOU.
MS. LIN: GOOD MORNING, YOUR HONOR. JEAN LIN ON
BEHALF OF THE SECURITIES AND EXCHANGE COMMISSION.
THE COURT: OKAY. GREAT. THANK YOU.
NOW, WE ARE HERE IN PLAINTIFF'S MOTION FOR A PRELIMINARY
INJUNCTION. AND PRIOR TO TODAY I SENT THE PARTIES AN E-MAIL
JUST REQUESTING A DIFFERENT ORDER FOR ORAL ARGUMENT, AND THE
REASON BEHIND THAT WAS THAT THE MAJORITY OF PLAINTIFF'S INITIAL
BRIEF DEALT WITH THE HILL DECISION AND RELIED ON THAT, NOT
WHOLLY, BUT IN MOST PART. SO IT DIDN'T SEEM TO MAKE SENSE TO
START OUT WITH A RECITATION OF THE HILL ORDER AND THEN HAVING
THE GOVERNMENT RESPOND, AND THEN I'D MISS WHAT I REALLY WANT TO
HEAR, IS REALLY THE GOVERNMENT'S RESPONSE TO HILL AND THEN THE
PLAINTIFF'S REPLY TO THAT.
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UNITED STATES DISTRICT COURT OFFICIAL CERTIFIED TRANSCRIPT
SO WITH THAT, I GUESS WE'LL GO AHEAD AND START WITH YOU,
MS. LIN, AND JUST AN INITIAL QUESTION. DO WE HAVE A DATE YET
FOR THE A.L.J. HEARING?
MS. LIN: I BELIEVE IT'S OCTOBER 26TH FOR THE GRAY
CASE.
THE COURT: OKAY. THANK YOU.
MR. WEISS: THAT'S CORRECT.
MS. LIN: MAY IT PLEASE THE COURT. THE FIRST AND MOST
IMPORTANT QUESTION BEFORE THIS COURT IS WHETHER THE COURT HAS
JURISDICTION TO HEAR PLAINTIFF'S ARTICLE TWO CHALLENGES TO THE
ADMINISTRATIVE PROCEEDING THAT HAS BEEN INSTITUTED BY THE S.E.C.
YOUR HONOR FOUND IN HILL VS. S.E.C. THAT THE FEDERAL SECURITIES
LAWS ADMINISTRATIVE AND JUDICIAL REVIEW SCHEME DID NOT PRECLUDE
THIS COURT'S JURISDICTION. WE RESPECTFULLY SUBMIT THAT UNDER
THE SUPREME COURT'S CLEAR GUIDANCE IN THUNDER BASIN, FREE
ENTERPRISE, AND ELGIN, ON HOW TO EVALUATE WHETHER A STATUTORY
SCHEME CREATED BY CONGRESS DISPLACES THIS COURT'S JURISDICTION
UNDER 28 U.S.C., THAT THE COURT HAS NO JURISDICTION. SINCE YOUR
HONOR'S DECISION IN HILL, TWO DISTRICT COURT JUDGES IN THE
SOUTHERN DISTRICT OF NEW YORK IN TILTON VS. S.E.C. AND SPRING
HILL VS. S.E.C. APPLIED THUNDER BASIN, FREE ENTERPRISE, AND
ELGIN TO CONCLUDE THAT THEY LACK JURISDICTION TO HEAR ARTICLE
TWO CHALLENGES TO S.E.C. PROCEEDINGS LIKE THE ONE BEFORE THIS
COURT TODAY. WE, THEREFORE, RESPECTFULLY REQUEST THAT THIS
COURT RECONSIDER IT'S PRIOR RATIONALE IN LIGHT OF THOSE TWO
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DECISIONS.
AND I'LL FIRST ADDRESS THE COURT'S RULING IN HILL, THAT
FEDERAL SECURITIES LAWS STATUTORY SCHEME IS NOT EXCLUSIVE
BECAUSE THE STATUTE PROVIDES THE DISTRICT COURT AS A VIABLE
FORUM FOR THE S.E.C. TO PURSUE ENFORCEMENT ACTIONS. WE
RESPECTFULLY SUBMIT THAT THAT REASONING CONFLATES TWO DISTINCT
CONCEPTS. ONE, IS CONGRESS' GRANT OF AUTHORITY TO AN
ENFORCEMENT AGENCY THE CHOICE TO CHOOSE A FORUM AT THE OUTSET OF
AN ENFORCEMENT PROCEEDING. AND THE OTHER ONE IS, ONCE THE
AGENCY HAS CHOSEN THE FORUM, THE JUDICIAL REVIEW AVAILABLE TO
THE RESPONDENT IN THAT ENFORCEMENT ACTION. AND WE BELIEVE THAT
THESE TWO DISTINCT CONCEPTS DO NOT -- SHOULD NOT BE CONFLATED TO
OFFER A RESPONDENT THE KIND OF REVIEW THAT IS NOT CONTEMPLATED
BY CONGRESS. AND WE KNOW THIS IN TWO DIFFERENT WAYS.
FIRST, IS THAT CASE LAW ESTABLISHED THAT WHERE A STATUTORY
SCHEME PROVIDES AN ENFORCEMENT AGENCY A CHOICE OF FORUM, BUT
DOES NOT GIVE A PRIVATE PARTY A CORRESPONDING CHOICE, THAT'S
ACTUAL EVIDENCE THAT THE PRIVATE PARTY DOES NOT HAVE THE SIMILAR
CHOICE. AND WE CITED THUNDER BASIN FOR THIS PROPOSITION.
THE COURT: BUT IN THUNDER BASIN WE HAD A DIFFERENT
SITUATION BECAUSE IT DIDN'T HAVE THE STATUTE THAT HAD THE CHOICE
AT THE OUTSET. SO IN THUNDER BASIN IT SEEMED TO ME THAT
CONGRESS WAS CLEAR THAT REGULATED PERSONS WENT ONE DIRECTION,
UNREGULATED PEOPLE WENT ANOTHER DIRECTION. SO CONGRESS ITSELF
MADE THE DECISION ABOUT WHICH FORUM THAT THE PARTIES WENT TO.
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COURT. AND SO IN THE COMPLIANCE ORDER IN THAT CASE, THE
COMPLIANCE ORDER -- THE ARGUMENT WAS THAT THEY WERE NOT ABLE TO
CHALLENGE IT IN DISTRICT COURT OR ANY OTHER -- ANY OTHER
CONTEXT. AND THE SUPREME COURT SAID, UNDER THE A.P.A., THEY --
ITS PRESUMPTION KICKS IN AND SO JUDICIAL REVIEW IS AVAILABLE.
IN FACT, THERE, ONLY IF THE -- THE COMPLIANCE ORDER COULD BE
CHALLENGED ONLY WHEN THE AGENCY BRINGS AN ENFORCEMENT ACTION.
BUT IT WAS NOT CLEAR WHAT THE AGENCY WOULD DO SO. BUT WHAT WE
HAVE HERE IS A SITUATION WHERE THERE'S NO FINAL AGENCY ORDER.
IN FACT, THE RESPONDENTS OR THE PLAINTIFFS IN THIS CASE ARE
TRYING TO CUT OFF THE ISSUANCE OF A FINAL AGENCY ORDER. AND WE
ALSO -- THERE'S NO DISPUTE THAT THE FINAL AGENCY ORDER BY THE
COMMISSION CAN BE REVIEWED BY A COURT. SO WE SUBMIT THAT
SACKETT IS ENTIRELY IN A POSIT.
AND IF I MAY MOVE ON, YOUR HONOR, TO THE EXCEPTION, THE
THREE FACTORS THAT YOUR HONOR DISCUSSED IN THE HILL DECISION.
THE COURT: YES. THANK YOU. AND I DO APPRECIATE YOUR
PATIENCE WITH MY QUESTIONS. IT'S VERY HELPFUL TO ME, SO THANK
YOU, BUT, YES, PLEASE MOVE ON.
MS. LIN: THANK YOU. NO PROBLEMS, YOUR HONOR. SO ON
THE FIRST FACTOR OF WHETHER THERE SHOULD BE AN EXEMPTION TO THE
STATUTORY REVIEW SCHEME IS THE MEANINGFUL JUDICIAL REVIEW
FACTOR. AND YOUR HONOR SAID IN HILL THAT PLAINTIFFS CHALLENGED
THE PROCEEDING -- PLAINTIFFS CHALLENGES ARE TO THE PROCEEDING
ITSELF AND -- THAT ARE NOT INESCAPABLY INTERTWINED WITH THE
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UNDERLYING MERITS OF THE SECURITIES VIOLATION.
WE SUBMIT THAT THE STANDARD ABOUT INESCAPABLY INTERTWINED
IS NOT THE STANDARD FOR DETERMINING WHETHER THERE'S MEANINGFUL
JUDICIAL REVIEW. WE SUBMIT THAT THE STANDARD SET FORTH BY THE
SUPREME COURT IN BOTH ELGIN AND THUNDER BASIN IS CLEAR. THERE'S
MEANINGFUL JUDICIAL REVIEW IF A FEDERAL COURT OF APPEALS WILL BE
ABLE TO ENTERTAIN THE CONSTITUTIONAL CLAIMS. AND THERE'S NO
DISPUTE HERE THAT THE ARTICLE TWO CLAIMS CAN BE ADDRESSED IN THE
COURT OF APPEALS ON DIRECT REVIEW OF THE COMMISSION'S ORDER.
I UNDERSTAND YOUR HONOR HAD RELIED ON DOE VS. F.A.A. AND
THE LAB M.D. CASES FOR THE PROPOSITION THAT THE STANDARD OF
INESCAPABLY INTERTWINED IS RELEVANT HERE. WE SUBMIT THAT IF YOU
LOOK AT THE LAB M.D. CASE, THERE WE HAD A FIRST AMENDMENT
RETALIATION CLAIM RELATING TO THE -- TO THE ADMINISTRATIVE
PROCEEDING. SO THE CLAIM THERE, WAS THAT THE PROCEEDING WOULD
NOT HAVE BEEN BROUGHT IN THE FIRST PLACE BUT FOR TO RETALIATE
THE FIRST AMENDMENT -- EXERCISE THE FIRST AMENDMENT RIGHTS BY
THE RESPONDENTS IN THAT CASE. IF YOU LOOK AT THAT, THAT KIND OF
CLAIM IS NO MORE INTERTWINED THAN WHAT WE HAVE HERE, WHICH IS
CHALLENGE TO THE AUTHORITY OF THE PRESIDING A.L.J. OVER THE
PROCEEDING. AND WE THINK THAT EVEN UNDER LAB M.D., THE ELEVENTH
CIRCUIT SAID, WELL, IF YOU LOOK AT DOE AND THUNDER BASIN, THEY
CONTROL. AND SO THE FIRST AMENDMENT CLAIM MUST BE DECIDED WITH
OTHER CLAIMS RAISED BY THE PLAINTIFF IN THAT CASE AT THE
CONCLUSION OF THAT ADMINISTRATIVE PROCESS, THEN REVIEWED IN THE
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COURT OF APPEALS. AND WE THINK LAB M.D. CANNOT BE DISTINGUISHED
BECAUSE IT TOO WAS NOT ABOUT THE UNDERLYING VIOLATIONS THAT THE
F.T.C. IN THAT CASE WAS TRYING TO BRING.
AND YOUR HONOR ALSO FOUND IN HILL THAT WAITING UNTIL THE
HARM PLAINTIFF ALLEGES CANNOT BE REMEDIED IS NOT MEANINGFUL.
AND BY THAT I UNDERSTOOD YOUR HONOR TO BE SAYING THAT, ONCE IT
HAD GONE THROUGH THE ADMINISTRATIVE PROCESS, THE
UNCONSTITUTIONAL PROCEEDING WILL HAVE ALREADY OCCURRED AND THAT
COULD NOT BE REMEDIED. AND WE SUBMIT THAT UNDER CLEAR SUPREME
COURT PRECEDENT WHERE THE INJURY INFLICTED ON THE PARTY SEEKING
REVIEW IS THE INJURY OF GOING THROUGH THE PROCESS ITSELF, THE
PARTY MUST WAIT UNTIL THE CONCLUSION OF THAT PROCEEDING. AND AS
JUDGE ABRAMS IN THE TILTON CASE FOUND, THIS POSTURE IS NOT
UNCOMMON IN OUR JUDICIAL SYSTEM, NOR IS IT UNCOMMON FOR THE
PLAINTIFFS HERE, BECAUSE UNDER YOUR -- UNDER YOUR HONOR'S
RATIONALE, ALL S.E.C. RESPONDENTS CAN MAKE THAT VERY CLAIM, AND
NO ONE WOULD HAVE TO GO THROUGH THE ADMINISTRATIVE PROCESS IF
THEY COME UP WITH A CONSTITUTIONAL CHALLENGE AND SAY, I DON'T
NEED TO GO THROUGH THIS PROCESS BECAUSE I WANT TO HAVE MY
CONSTITUTIONAL CLAIMS ADDRESSED.
THE COURT: BUT I THINK THIS CONSTITUTIONAL CLAIM IS
VERY DIFFERENT THAN THE MAJORITY OF CONSTITUTIONAL CLAIMS. AND
I WANTED YOU TO SPEAK WITH THAT A MINUTE. BECAUSE THIS ISN'T A
CONSTITUTIONAL CLAIM LIKE A DUE PROCESS CLAIM THAT IS WRAPPED UP
IN TERMS OF THE SPECIFIC FACTS OF WHAT'S GOING TO HAPPEN AT THE
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MS. LIN: AND THAT IS PRECISELY WHAT HAPPENED IN FREE
ENTERPRISE, BUT WHAT THE KEY DISTINCTION THERE, THOUGH, IS THAT
THEY DIDN'T HAVE JUDICIAL REVIEW. THEY HAD -- OR NOT IN A WAY
THAT IS MEANINGFUL TO THEM BECAUSE THEY HAVE TO -- WHAT THE
SUPREME COURT SAID, THAT THE FORUM, IF YOU WILL, THEY HAVE TO
TRY TO VIOLATE SOME KIND OF RANDOM RULE JUST TO GET JUDICIAL
REVIEW. AND THAT JUST CANNOT BE THE KIND OF MEANINGFUL REVIEW
THAT IS CONTEMPLATED UNDER THE SUPREME COURT'S STANDARD. SO WE
DON'T HAVE THAT SITUATION HERE. THE PLAINTIFFS HERE ARE NOT
PRESENTED WITH A CHOICE OF RISKING SEVERE PENALTIES IN ORDER TO
GET JUDICIAL REVIEW OR NO JUDICIAL REVIEW AT ALL. AND THAT'S A
FUNDAMENTAL DISTINCTION BETWEEN FREE ENTERPRISE AND HERE. SO WE
CAN SAFELY SAY THE PLAINTIFFS WILL HAVE REVIEW BECAUSE THEY'RE
ALREADY ON THEIR PATH. THEY'RE IN THE ADMINISTRATIVE
PROCEEDING. THEY CAN GET THAT CLAIM REVIEWED. AND SO WE THINK
THAT FREE ENTERPRISE IS -- ACTUALLY HIGHLIGHTS WHY PLAINTIFFS
HAVE MEANINGFUL JUDICIAL REVIEW HERE.
IF I CAN MOVE ON QUICKLY, YOUR HONOR, TO THE QUESTION ABOUT
WHETHER THE ARTICLE TWO CLAIMS ARE WHOLLY COLLATERAL TO THE
REVIEW SCHEME. YOUR HONOR SAID IN THE HILL CASE THAT PLAINTIFF
IS NOT CHALLENGING AN AGENCY ACTION, BUT IS CHALLENGING THE
AGENCY'S ABILITY TO MAKE A DECISION.
AND WE SUBMIT THAT THAT DISTINCTION IS NOT THE RELEVANT
DISTINCTION, BECAUSE PLAINTIFFS ARE ABLE TO, AGAIN, RAISE THEIR
ARTICLE TWO CLAIMS WITHIN THE ADMINISTRATIVE PROCESS. AND MAYBE
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THE BEST WAY TO LOOK AT THIS, IS THAT THE ARTICLE TWO CLAIMS IN
THIS CASE ARISE PRECISELY BECAUSE THERE'S AN ADMINISTRATIVE
PROCEEDING. THE CHALLENGES FLOW DIRECTLY FROM THE FACT THAT
THEY ARE THE SUBJECT OF THE PROCEEDING THAT THEY ARE TRYING TO
ENJOIN. AND SEEN IN THAT LIGHT, WE KNOW THAT THEY'RE
INTERTWINED. WE KNOW THAT THEY'RE NOT COLLATERAL BECAUSE
THEY'RE BOUND UP IN THIS ENTIRE ADMINISTRATIVE PROCESS.
SO, AGAIN, CITING THE EXAMPLE OF THE ELEVENTH CIRCUIT'S
DECISION IN LAB M.D., THERE, TOO, THE FIRST AMENDMENT
RETALIATION CLAIM ARISES BECAUSE OF THE ADMINISTRATIVE
PROCEEDING THAT WAS BROUGHT AGAINST RESPONDENT IN THAT CASE.
AND THE RETALIATION CLAIM HAD NOTHING TO DO WITH THE UNDERLYING
ENFORCEMENT ACTION, BUT IT ARISES OUT OF THAT BECAUSE THE
PLAINTIFF CLAIMED SO. AND SO WE HAVE THE SAME SITUATION HERE.
WE HAVE THE CLAIMS THAT ARE BOUND UP WITH THE ADMINISTRATIVE
PROCESS, THE CHALLENGE TO THE ADMINISTRATIVE PROCEEDING,
PRESIDING A.L.J.'S AUTHORITY.
SO THIS IS ALSO THE SCENARIO THAT IS SIMILAR TO, FOR
EXAMPLE, THE SECOND CIRCUIT'S DECISION IN ALTMAN VS. THE S.E.C.
WHERE THE PLAINTIFF THERE, TOO, WAS CHALLENGING THE
CONSTITUTIONAL AND STATUTORY AUTHORITY OF THE S.E.C., THE
COMMISSION, TO SANCTION HIM. AND THERE, TOO, THE -- IT'S BOUND
UP IN THE SANCTION PROCEEDING, AND THAT, TOO, WAS BARRED BY THE
STATUTORY REVIEW SCHEME. SO WE SUBMIT THE SAME THING SHOULD
APPLY HERE.
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SUPPORT FOR THAT PROPOSITION BECAUSE IT CAN BE ADDRESSED IN THAT
PROCESS.
THE COURT: OKAY.
MS. LIN: AND I'LL JUST SPEAK VERY BRIEFLY ABOUT THE
THIRD FACTOR, ABOUT WHETHER THESE KIND OF CLAIMS ARE WITHIN THE
AGENCY'S EXPERTISE. THEN YOUR HONOR SAID IN HILL THAT THE
ARTICLE TWO CLAIMS ARE NOT PART AND PARCEL OF AN ORDINARY
SECURITIES FRAUD CASE AND THERE IS NO EVIDENCE THAT THE
PLAINTIFF'S CONSTITUTIONAL CLAIMS ARE THE TYPE THAT THE S.E.C.
ROUTINELY CONSIDERS WHERE OTHER AGENCY'S EXPERTISE CAN BE
BROUGHT TO BEAR.
AND WE SUBMIT THAT THAT REASONING IS NOT SUPPORTED, AGAIN,
BY THE SUPREME COURT REASONING BECAUSE WHEN THE CONSTITUTIONAL
QUESTIONS ARE OF THE TYPE THAT CAN BE ADDRESSED BY THE
COMMISSION IS NOT RELEVANT BECAUSE BOTH ELGIN AND THUNDER BASIN
ESTABLISH THAT EVEN WHEN THE AGENCY CANNOT ADDRESS THE
CONSTITUTIONAL CLAIM, IT DOES NOT MEAN THAT THE CLAIMS ARE THEN
THEREFORE OUTSIDE THE STATUTORY SCHEME. SO THAT'S THE FIRST
PRINCIPLE THAT WOULD CONTROL HERE. AND IN ANY CASE THE
COMMISSION IN -- CURRENTLY IS CONSIDERING THESE VERY ARTICLE --
THESE VERY SAME ARTICLE TWO CHALLENGES THAT ARE BEING RAISED IN
THIS CASE, IS CONSIDERING THEM IN TIMBERVEST, AS WELL AS IN MANY
OTHER ADMINISTRATIVE PROCEEDINGS. SO THIS IS THE KIND OF THING
THAT THE COMMISSION IS ACTUALLY CONSIDERING. SO WHETHER THE
COMMISSION ROUTINELY CONSIDERS IT IS ALMOST NOT RELEVANT HERE
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SAME WAY. IT'S JUST THE THINGS I HAVE IN MY HEAD MIGHT BE A
LITTLE BIT DIFFERENT.
MR. WEISS: ABSOLUTELY, YOUR HONOR, AND GOOD MORNING.
I INTRODUCED MY CO-COUNSEL. I ALSO WANT TO INTRODUCE SITTING
BEHIND ME IS LARRY GRAY, AS WELL AS BOB HUBBARD, WHO ARE TWO OF
THE INDIVIDUAL PLAINTIFFS BOTH REPRESENTING GRAY FINANCIAL, AS
WELL AS THEMSELVES. AND THEY ARE ALSO RESPONDENTS IN THE
ADMINISTRATIVE PROCEEDING.
WE ARE HERE, YOUR HONOR, ASKING THAT THIS COURT ISSUE AN
INJUNCTION TO ENJOIN A PENDING S.E.C. ADMINISTRATIVE PROCEEDING
THAT IS IN VIOLATION OF ARTICLE TWO OF THE UNITED STATES
CONSTITUTION. YOUR HONOR IS, OF COURSE, INTIMATELY FAMILIAR
WITH HER ORDER IN HILL. WE HAVE NOT SEEN OR HEARD ANYTHING FROM
THE S.E.C. THAT WE HAVE NOT SEEN BEFORE IN THE MANY BRIEFS THAT
WERE FILED IN HILL AND ARGUMENTS THAT WERE RAISED HERE THERE.
IT'S ESSENTIALLY BEEN A REHASH OF ALL THAT.
THE OPINION IN HILL, AS YOU KNOW YOUR HONOR, IT'S A 45-PAGE
SOUNDLY WRITTEN DECISION WITH OVER, I THINK, CLOSE TO A HUNDRED
CITATIONS TO DIFFERENT CASES, STATUTES, RULES, REGULATIONS AND
WHATNOT. IT IS WELL-AUTHORITATIVE AND WELL-REASONED. AS IN
HILL, THE GRAY PLAINTIFFS ASKED AND I BELIEVE HAVE ESTABLISHED
ALL FOUR ELEMENTS FOR AN INJUNCTION TO BE ISSUED IN THIS CASE.
YOUR HONOR, A LITTLE BIT ABOUT THE ADMINISTRATIVE
PROCEEDING AND KIND OF HOW WE GOT THERE, AN INVESTIGATION BEGAN
INTO MY CLIENTS SEVERAL YEARS AGO THAT CULMINATED IN WHAT'S
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THROUGH WHICH THE COURT OF APPEALS IS GOING TO LOOK AT. THAT'S
THE LENS WITH WHICH THEY'RE GOING TO ANALYZE THE CASE.
THE COURT: BUT IF JUST ONE MORE THING HAD HAPPENED,
THERE WAS A MEMO THAT A COMMISSIONER SIGNED THAT SAID, I HEREBY
APPOINT THESE, THAT WOULD STILL BE THE CASE. SO, I MEAN, WELL,
LET'S SAY THAT THIS ADMINISTRATIVE LAW JUDGE WAS APPOINTED BY
THE COMMISSIONER. I MEAN, THEN IT WOULD BE GOING THROUGH -- YOU
KNOW, THE HILL CASE WOULDN'T HELP YOU. YOU'D STILL HAVE TO GO
THROUGH THE A.L.J. AND HAVE NO DISCOVERY, AND THEN GET TO THE
ELEVENTH CIRCUIT THAT WAY. SO I DON'T KNOW THAT THE FACT THAT
THE PROCEEDINGS ARE VERY DIFFERENT BELOW REALLY HELPS YOU,
BECAUSE THAT'S THE TACT THAT WOULD BE NORMALLY TAKEN?
MR. WEISS: YOUR HONOR, THAT'S A TOUGH QUESTION TO
ANSWER BECAUSE THE S.E.C. HAS ALREADY ADMITTED THAT A.L.J.
ELLIOTT WAS NOT PROPERLY APPOINTED. SO THAT FACT IS ALREADY IN
THE RECORD. AND WE SUBMITTED AN AFFIDAVIT TO THAT EFFECT, BOTH
MY AFFIDAVIT SUBMITTING THE AFFIDAVIT THAT WAS PRESENTED BY THE
S.E.C. IN THE TIMBERVEST CASE. SO THAT FACT HAS BEEN
ESTABLISHED. SO I DON'T KNOW THAT YOU --
THE COURT: I GUESS MY QUESTION IS A LITTLE DIFFERENT,
IS THAT THE JUDICIAL REVIEW THAT YOU GET GOING THIS PLACE AND
THE JUDICIAL REVIEW YOU GET IF YOU GO THROUGH THE A.L.J., IS,
YES, A FEDERAL DISTRICT COURT IS DIFFERENT THAN THE A.L.J., BUT
EVENTUALLY YOU GET TO THE ELEVENTH CIRCUIT GOING EITHER ROUTE.
NOW, I KNOW THAT THE A.L.J. IN THIS CASE WASN'T APPOINTED BY A
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COMMISSIONER, BUT LET'S SAY THAT THEY WERE. I MEAN, THE
PROBLEMS THAT YOU EXPLAINED ABOUT THERE NOT BEING DISCOVERY AND
ALL THAT, THAT WOULDN'T HELP YOU BECAUSE IT'S ALREADY KIND OF
CONSIDERED A WAY TO DO THINGS, IS TO GET TO THE ELEVENTH CIRCUIT
VIA THE A.L.J. SO WHY IS IT DIFFERENT IN TERMS OF MEANINGFUL
REVIEW THAT YOU HAVE TO GO THROUGH THE A.L.J. VERSUS THE
DISTRICT COURT WHEN YOU'RE GETTING TO THE SAME PLACE?
MR. WEISS: WELL, IF WE'RE ASSUMING THAT A.L.J.
ELLIOTT WAS PROPERLY APPOINTED, SO THAT KNOCKS THAT FACTOR OUT,
SO THE ONLY FACTOR REMAINING IS WHETHER OR NOT THEY WERE
INFERIOR OFFICERS, AND YOUR HONOR HAS PROPERLY HELD IN HILL --
THE COURT: I GUESS MY QUESTION IS A LITTLE DIFFERENT.
IT'S TALKING ABOUT THE MEANINGFUL REVIEW PIECE. SO IF WE'RE
LOOKING AT MEANINGFUL REVIEW, IN BOTH CASES YOU'RE GETTING TO
THE ELEVENTH CIRCUIT, YOU'RE JUST GOING THROUGH A DIFFERENT
PATH. SO THE ELEVENTH CIRCUIT IS GOING TO BE CALLED KIND OF ON
EITHER WAY TO BE MAKING THIS LEGAL DECISION. WHY IS IT NOT
MEANINGFUL TO HAVE TO GO TAKE A LITTLE BIT LONGER, BUT GET TO
THE ELEVENTH CIRCUIT STILL ON THIS SAME ISSUE?
MR. WEISS: I THINK I UNDERSTAND YOUR QUESTION, YOUR
HONOR. YOU END UP AT THE SAME PLACE, WHY IS IT DIFFERENT? AND
I THINK THE ANSWER IS THAT THE RECORD'S DIFFERENT. AND THE
AVENUES FOR REVERSAL WOULD BE DIFFERENT. SO BECAUSE YOU'VE GOT
THE -- AN ADMINISTRATIVE LAW JUDGE WHO MAKES -- I'LL GIVE YOU AN
EXAMPLE -- MAKES ALL CREDIBILITY DECISIONS. THE S.E.C. IS BOUND
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BY THOSE CREDIBILITY DECISIONS, AND THAT RECORD IS WHAT IT IS
THAT GOES UP, AS OPPOSED TO THE STANDARDS ARE DIFFERENT, AS
OPPOSED -- FROM THE TRIAL COURT. SO HOW A COURT OF APPEALS
VIEWS THE TRIAL COURT ON THE STANDARD REVIEW IS DIFFERENT FROM
HOW THE COURT OF APPEALS IS GOING TO VIEW THE S.E.C., AND, MORE
IMPORTANTLY, HOW THE S.E.C. IS GOING TO VIEW THE A.L.J. SO THE
RECORD IS DIFFERENT AS ARE THE STANDARDS OF REVIEW. SO I DON'T
THINK YOU END UP NECESSARILY -- YOU END UP IN THE SAME SPOT AS A
PRACTICAL MATTER BECAUSE YOU'RE BEFORE THE COURT OF APPEALS
PRESUMABLY, BUT I THINK HOW IT'S T'D UP AND THE TABLE THAT'S SET
BEFORE THE COURT OF APPEALS IS VASTLY DIFFERENT. BUT I DO WANT
TO CIRCLE BACK, THOUGH, BECAUSE THE -- YOU STILL DON'T HAVE
MEANINGFUL JUDICIAL REVIEW IF THE RELIEF THAT WE'RE SEEKING
CAN'T BE -- CAN'T BE ENTERTAINED BY THE COURT OF APPEALS. THE
COURT OF APPEALS CAN'T ISSUE AN INJUNCTION TO STOP SOMETHING
THAT'S ALREADY HAPPENED. A FEDERAL DISTRICT JUDGE CAN'T ISSUE
AN JUNCTION TO STOP SOMETHING THAT'S ALREADY HAPPENED, AND THE
S.E.C. CAN'T EITHER. SO, YOU KNOW, THIS COURT IS THE ONLY PLACE
THAT WE CAN GET THE RELIEF THAT WE'RE SEEKING. AND IT'S NOT
JUST ABOUT THE TIME AND EXPENSE, BUT ALSO, YOUR HONOR, AND I
THINK AS YOU CORRECTLY -- AS YOU CORRECTLY NOTED IN HILL, IT'S
ABOUT REQUIRING A PARTY TO GO THROUGH AN UNCONSTITUTIONAL
PROCEEDING. THAT IN AND OF ITSELF IS IRREPARABLE HARM. AND ALL
OF THAT KIND OF GOES, I THINK, TO THAT ELEMENT AS WELL OF AN
INJUNCTION.
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SO MOVING ON TO THE NEXT FACTOR IN THUNDER BASIN AND IN
FREE ENTERPRISE, AND THAT IS WHETHER OR NOT THE CLAIMS ARE
WHOLLY COLLATERAL TO THE SECURITIES LAWS. YOUR HONOR CORRECTLY
ANALYZED IT. IT'S THE SAME SORTS OF CLAIMS AS IN HILL. THE
NATURE OF THE CLAIMS THAT ARE BEFORE THE A.L.J. ARE FEDERAL
SECURITIES LAW RELATED, INVESTMENT ADVISOR ACT VIOLATIONS
ALLEGED, AND SECURITIES EXCHANGE ACT ALLEGED VIOLATION AS WELL.
WE'RE NOT CHALLENGING THE S.E.C. RULES. WE'RE NOT CHALLENGING
THE S.E.C.'S -- ANY OF THE AREAS THAT WOULD BE SUBJECT TO THE
EXPERTISE OF THOSE RULES. RATHER, WE ARE CHALLENGING THE
A.L.J.'S AND S.E.C.'S AUTHORITY TO MAKE THE DECISION LIKE FREE
ENTERPRISE WHERE THE OBJECTION WAS MADE TO THE BOARD'S
AUTHORITY. WE'RE NOT OBJECTING TO THE STANDARDS OF THOSE BOARDS
BY ANALOGY.
IN THE ELGIN CASE, AGAIN, A DISTINGUISHING FEATURE THERE IS
THAT THE PLAINTIFF EMPLOYEES WERE CHALLENGING THEIR TERMINATION.
THEY WERE -- THE NATURE OF THE CLAIMS WERE INTERTWINED WITH THE
SPECIFIC STATUTE AT ISSUE. SO IT WASN'T A COLLATERAL ATTACK.
WE, TODAY, ARE NOT MAKING AN AS-APPLIED ANALYSIS -- CHALLENGE,
YOUR HONOR. WE ARE MAKING ONE THAT'S FACIAL. AND ALTHOUGH THAT
FACTOR MAY NOT BE DETERMINATIVE UNDER THUNDER BASIN AND FREE
ENTERPRISE, IT IS A FACTOR THAT IS ILLUSTRATIVE OF THE
COLLATERAL ISSUE.
MOVING ON TO THE EXPERTISE QUESTION. AND, YOUR HONOR, I
THINK YOU HIT IT RIGHT ON THE HEAD. THE WORD IS EXPERTISE,
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CONSTITUTIONAL CLAIMS BEING BEYOND THE AGENCY'S EXPERTISE.
EXPERTISE IS AN EXPERT, SOMEONE WHO HAS SPECIAL TRAINING,
SPECIAL EDUCATION, SOMEONE WHO HAS A HEIGHTENED SPECIALIZED
INSIGHT INTO THE RESOLUTION OF THE ISSUE. AN S.E.C. A.L.J. DOES
NOT POSSESS THOSE CHARACTERISTICS AND NEITHER DOES THE S.E.C.
WITH RESPECT TO ARTICLE TWO CONSTITUTIONAL CHALLENGES. WE,
AGAIN, ARE NOT CHALLENGING THE RULES OR THE SECURITIES STATUTES
WHERE THE A.L.J. AND THE S.E.C. MAY HAVE EXPERTISE. INDEED, WE
ARE CHALLENGING THE CONSTITUTIONALITY. AND AS THE COURT SAID IN
THUNDER BASIN, ADJUDICATION OF CONSTITUTIONALITY IS
OF (VERBATIM) CONGRESSIONAL ENACTMENTS HAS GENERALLY BEEN
THOUGHT TO BE BEYOND THE JURISDICTION OF ADMINISTRATIVE
AGENCIES.
THE SUPREME COURT HAS RECOGNIZED IN THUNDER BASIN THAT THIS
IS NOT ONE OF THOSE AREAS OF EXPERTISE. NOW, YOUR HONOR ASKED
ABOUT THE TILTON CASE, AND I WILL TOUCH UPON THAT. CANDIDLY,
YOUR HONOR, THE TILTON CASE WAS WRONGLY DECIDED. AND THE REASON
WHY IT WAS WRONGLY DECIDED IS BECAUSE JUDGE ABRAMS DID NOT GO
THROUGH THE ANALYSIS THAT YOUR HONOR DID IN HILL. YOUR HONOR
STARTED WITH THE PRESUMPTION OF 1381, LOOKED AT JURISDICTION
BEING PRESUMED, AND THEN LOOKED AT THE VARIOUS FACTORS AS BEING
ILLUSTRATIVE AS TO WHETHER JURISDICTION WAS PROPER, WHICH OF
COURSE IT WAS. INSTEAD OF CONSIDERING THE PRESUMPTION AND THE
RELATIVE BURDENS, JUDGE ABRAMS WENT STRAIGHT TO THE FACTORS AND
HE APPLIED THUNDER BASIN AND IMPOSED THE BURDEN OF PROOF ON
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THOSE FACTORS ON THE PLAINTIFF. WHAT HE SAID WAS THAT THERE
WOULD BE ENOUGH IF THERE WAS A COURT OF APPEALS TO SATISFY A
MEANINGFUL REVIEW OF CONSTITUTIONAL CLAIMS, BUT HE NEVER
ADDRESSES THE FACT THAT THE COURT OF APPEALS CAN'T ISSUE AN
INJUNCTION. HE NEVER GOES THROUGH THE ANALYSIS STARTING WITH
THE PRESUMPTION. AS A RESULT, YOUR HONOR, THAT CASE IS NOT
CORRECTLY DECIDED BECAUSE HE DIDN'T GO THROUGH THE ANALYSIS THAT
YOUR HONOR DID IN HILL.
SO, YOUR HONOR, I THINK WE HAVE HIT UPON THE KEY FACTORS
ESTABLISHING JURISDICTION. THE PRESUMPTION EXISTS.
JURISDICTION IS PROPER UNDER 1381 -- 1331, AND THE THREE FACTORS
UNDER FREE ENTERPRISE AND THUNDER BASIN WORKING TOGETHER DON'T
IN ANY WAY SUGGEST THAT JURISDICTION WOULD BE IMPROPER. INDEED,
IT IS PROPER BEFORE YOUR HONOR.
NOW, NEXT I WANT TO TURN TO THE LIKELIHOOD OF SUCCESS, AND
SPECIFICALLY THE APPOINTMENT CLAUSE VIOLATION IN ARTICLE TWO.
AS INDICATED, YOUR HONOR, THE FACT THAT JUDGE ELLIOTT IS NOT
PROPERLY APPOINTED, THAT'S ALREADY IN THE RECORD. SECOND, WE
TURN TO THE INFERIOR OFFICER QUESTION BECAUSE THAT IS REALLY THE
ISSUE. AND YOUR HONOR IS CORRECT THAT FREYTAG IS THE CASE THAT
CONTROLS. IT'S THE UNITED STATES SUPREME COURT CASE. AND IT
LAYS OUT, I THINK, CORRECTLY FOR PURPOSES OF THIS COURT THE
OPERATIVE TEST FOR THE -- WHETHER OR NOT AN A.L.J. IS INFERIOR
OFFICER. THE QUESTION IS WHETHER OR NOT DOES -- WHETHER OR NOT
THE A.L.J. EXERCISES SIGNIFICANT AUTHORITY. DOES THE A.L.J.
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CONSTITUTION NECESSARILY IS PARAMOUNT, AND THAT IS GOING TO BE
CONTROLLING.
I'LL ADD, YOUR HONOR, THAT, ALTHOUGH WE RESPECT THE COURT'S
DECISION IN HILL IN RAISING QUESTIONS ABOUT THE LIKELIHOOD OF
SUCCESS ON OUR SEPARATION OF POWERS VIOLATION ARGUMENT, WE STILL
ARE -- WANT TO CONTINUE WITH THAT ARGUMENT, BUT I WOULD SAY
THIS, THAT WE WOULD LIKE TO BE ABLE TO TAKE DISCOVERY AND BE
ABLE TO ESTABLISH THAT AND PERHAPS PURSUE THAT ON A PRELIMINARY
INJUNCTION IN A LATER DATE. BUT THAT ARGUMENT, WE BELIEVE, IS
STILL VALID AND WE STILL BELIEVE THAT THERE ARE MORE THAN ONE
LAYER OF FOR-CAUSE REMOVAL, AND THERE IS AN UNCONSTITUTIONAL
MULTI-LAYER OF TENDED PROTECTIONS IN THIS CASE.
SO, YOUR HONOR, I BELIEVE THAT WE HAVE ESTABLISHED ALL FOUR
ELEMENTS OF AN INJUNCTION. THE COURT'S ORDER IN HILL IS
ABSOLUTELY DEAD ON POINT. IT IS THE SAME ANALYSIS, THE SAME
FACTS. THE ONLY FACT THAT'S DIFFERENT, I BELIEVE, IS THAT WE
FILED OUR INJUNCTION SLIGHTLY BEFORE HILL DID. HILL WAS COMING
UP ON AN ADMINISTRATIVE PROCEEDING WITHIN A COUPLE OF WEEKS.
OURS IS IN OCTOBER. BUT STILL, YOUR HONOR, THAT SHOULDN'T
MATTER BECAUSE THERE ARE A NUMBER OF THINGS THAT NEED TO BE DONE
IN THE ADMINISTRATIVE PROCEEDING, AND WE SHOULD NOT HAVE TO GO
THROUGH AN UNCONSTITUTIONAL ADMINISTRATIVE PROCEEDING AS THIS
COURT FOUND TO BE PERSUASIVE IN HILL. WITH THAT, YOUR HONOR, WE
REQUEST THAT OUR MOTION BE GRANTED. THANK YOU.
THE COURT: THANK YOU.
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UNITED STATES DISTRICT COURT OFFICIAL CERTIFIED TRANSCRIPT
C E R T I F I C A T E
UNITED STATES OF AMERICA
NORTHERN DISTRICT OF GEORGIA
I, MONTRELL VANN, RPR, RMR, CRR, OFFICIAL COURT REPORTER OF
THE UNITED STATES DISTRICT COURT, FOR THE NORTHERN DISTRICT OF
GEORGIA, ATLANTA, DO HEREBY CERTIFY THAT THE FOREGOING 88 PAGES
CONSTITUTE A TRUE TRANSCRIPT OF PROCEEDINGS HAD BEFORE THE SAID
COURT, HELD IN THE CITY OF ATLANTA, GEORGIA, IN THE MATTER
THEREIN STATED.
IN TESTIMONY WHEREOF, I HEREUNTO SET MY HAND ON THIS, THE
28TH DAY OF JULY 2015.
/S/ MONTRELL VANN MONTRELL VANN, RPR, RMR, CRR OFFICIAL COURT REPORTER UNITED STATES DISTRICT COURT
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GRAY FINANCIAL GROUP, INC., et al.,
: :
: Plaintiffs, :
: v. :
: CIVIL ACTION NO. 1:15-CV-0492-LMM
: SECURITIES AND EXCHANGE COMMISSION,
: :
: Defendant. :
ORDER
This case comes before the Court on Plaintiffs Gray Financial Group, Inc.
(“Gray Financial”), Laurence O. Gray, and Robert C. Hubbard, IV’s Motion for
Preliminary Injunction [41]. On June 3, 2015, Plaintiffs filed their Second
Amended Complaint, seeking to (1) declare the SEC’s appointment and removal
processes for its Administrative Law Judges (“ALJ”) unconstitutional, and (2)
enjoin Plaintiffs’ administrative proceeding. The Court heard oral argument on
July 13, 2015. After a review of the record and due consideration, Plaintiffs’
Motion [41] is GRANTED for the following reasons:
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I. Background1
Plaintiff Gray Financial is an investment advisory group which is registered
with the Securities and Exchange Commission (“SEC”), Georgia, and Michigan.
2d Am. Compl., Dkt. No. [28] ¶ 14. Gray Financial provides consulting services on
a non-discretionary basis to public and private pension plans, including: assisting
pension boards with preparation, monitoring, and annual review of investment
guidelines; conducting searches, due diligence, and presentations by investment
money managers; and monitoring investment performance and providing a
performance analysis. Id. ¶ 15. Plaintiff Lawrence O. Gray is the founder and
principal of Gray Financial, and Plaintiff Robert C. Hubbard is its Co-Chief
Executive Officer. Id. ¶¶ 11-12.
Relevant here, Gray Financial, as a part of its investment services, offered
Georgia pension plans an opportunity to invest in a “fund of funds alternative
investment,” known as Fund II. Id. ¶¶ 20-22. While Plaintiffs claim that there
have been no indication of client losses due to Fund II investments, the SEC
alerted Plaintiffs in August 2013 that it was investigating whether Plaintiffs’ Fund
II complied with the Georgia Public Retirement Systems Investment Authority
Law (“Georgia Pension Law”), O.C.G.A. § 47-20-87. Id. ¶ 23.
1 The following facts are drawn from the Second Amended Complaint unless otherwise indicated, and any fact finding is made solely for the purposes of this Motion.
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On May 21, 2015, the SEC served Plaintiffs with an Order Instituting
Cease-and-Desist Proceedings (“OIP”), which initiated the SEC’s administrative
enforcement action against Plaintiffs. Id. ¶ 29; OIP, Dkt. No. [41-3]. The SEC
alleges Plaintiffs have violated Sections 17(a), 17(a)(1), and 17(a)(3) of the
Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c)
thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisors
Act and Rule 206(4)-8(a)(1) and (2) thereunder by offering Fund II to Georgia
clients, as that fund allegedly did not comply with the Georgia Pension Law. OIP,
Dkt. No. [41-3] at 7.
A. SEC Administrative Process
The Exchange Act authorizes the SEC to initiate enforcement actions
against “any person” suspected of violating the Act and gives the SEC the sole
discretion to decide whether to bring an enforcement action in federal court or an
administrative proceeding. See 15 U.S.C. §§ 78u(d), 78u-1, 78u-2, 78u-3. The
Administrative Procedure Act (“APA”), 5 U.S.C. § 500, et seq., authorizes
executive agencies, such as the SEC, to conduct administrative proceedings
before an Administrative Law Judge (“ALJ”). SEC administrative proceedings
vary greatly from federal court actions.
The SEC’s Rules of Practice, 17 C.F.R. § 201.100, et seq., provide that the
SEC “shall” preside over all administrative proceedings whether by the
Commissioners handling the matter themselves or delegating the case to an ALJ;
there is no right to a jury trial. 17 C.F.R. § 201.110. When an ALJ is selected by the
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SEC to preside—as was done by the SEC in Plaintiffs’ case—the ALJ is selected by
the Chief Administrative Law Judge. Id. The ALJ then presides over the matter
(including the evidentiary hearing) and issues the initial decision. 17 C.F.R. §
201.360(a)(1). However, the SEC may on its own motion or at the request of a
party order interlocutory review of any matter during the ALJ proceeding;
“[p]etitions by parties for interlocutory review are disfavored,” though. 17 C.F.R.
§ 201.400(a).
The initial decision can be appealed by either the respondent or the SEC’s
Division of Enforcement, 17 C.F.R. § 201.410, or the SEC can review the matter
“on its own initiative.” 17 C.F.R. § 201.411(c). A decision is not final until the SEC
issues it. If there is no appeal and the SEC elects not to review an initial order, the
ALJ’s decision is “deemed the action of the Commission,” 15 U.S.C. § 78d-1(c),
and the SEC issues an order making the ALJ’s initial order final. 17 C.F.R. §
201.360(d)(2).
If the SEC grants review of the ALJ’s initial decision, its review is
essentially de novo and it can permit the submission of additional evidence. 17
C.F.R. §§ 201.411(a), 201.452. However, the SEC will accept the ALJ’s “credibility
finding, absent overwhelming evidence to the contrary.” In re Clawson, Exchange
Act Release No. 48143, 2003 WL 21539920, at *2 (July 9, 2003); In re Pelosi,
Securities Act Release No. 3805, 2014 WL 1247415, at *2 (Mar. 27, 2014) (“The
Commission gives considerable weight to the credibility determination of a law
judge since it is based on hearing the witnesses' testimony and observing their
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demeanor. Such determinations can be overcome only where the record contains
substantial evidence for doing so.”) (footnote and internal quotation marks
omitted).
If a majority of the participating Commissioners do not agree regarding the
outcome, the ALJ’s initial decision “shall be of no effect, and an order will be
issued in accordance with this result.” 17 C.F.R. § 201.411(f). Otherwise, the SEC
will issue a final order at the conclusion of its review.
If respondents such as Plaintiffs lose with the SEC, they may petition for
review of the SEC’s order in the federal court of appeals (either their home circuit
or the D.C. Circuit). 15 U.S.C. §§ 78y(a)(1), 80a-42(a), 80b-13(a). Once the record
is filed, the court of appeals then retains “exclusive” jurisdiction “to affirm or
modify and enforce or to set aside the order in whole or in part.” 15 U.S.C. §
78y(a)(3). The SEC’s findings of facts are “conclusive” “if supported by
substantial evidence.” 15 U.S.C. § 78y(a)(4). The court of appeals may also order
additional evidence to be taken before the SEC and remand the action for the SEC
to conduct an additional hearing with the new evidence. 15 U.S.C. § 78y(a)(5).
The SEC then files its new findings of facts based on the additional evidence with
the court of appeals which will be taken as conclusive if supported by substantial
evidence. Id.
B. SEC ALJs
SEC ALJs, including ALJ Elliot who presides over Plaintiffs’ case, are “not
hired through a process involving the approval of the individual members of the
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Commission.” SEC Aff., Dkt. No. [35-1] ¶ 4; see also 5 C.F.R. § 930.204 (“An
agency may appoint an individual to an administrative law judge position only
with prior approval of OPM, except when it makes its selection from the list of
eligibles provided by OPM. An administrative law judge receives a career
appointment and is exempt from the probationary period requirements under
part 315 of this chapter.”). An ALJ’s salary is set by statute. 5 U.S.C. § 5372.
Congress has authorized the SEC to delegate its functions to an ALJ. 15
U.S.C. §§ 78d-1(a), 80b-12. Pursuant to that authority, the SEC has promulgated
regulations, which set out its ALJ’s powers. 17 C.F.R. § 200.14 makes ALJs
responsible for the “fair and orderly conduct of [administrative] proceedings” and
gives them the authority to: “(1) Administer oaths and affirmations; (2) Issue
subpoenas; (3) Rule on offers of proof; (4) Examine witnesses; (5) Regulate the
course of a hearing; (6) Hold pre-hearing conferences; (7) Rule upon motions;
and (8) Unless waived by the parties, prepare an initial decision containing the
conclusions as to the factual and legal issues presented, and issue an appropriate
order.” 17 C.F.R. § 200.14(a);2 see also 17 C.F.R. § 200.30–9 (authorizing ALJs to
make initial decisions).
2 The SEC Rules of Practice provide a similar list of powers for “hearing officers,” or ALJs. 17 C.F.R. § 201.101(a)(5) (“(5) Hearing officer means an administrative law judge, a panel of Commissioners constituting less than a quorum of the Commission, an individual Commissioner, or any other person duly authorized to preside at a hearing”). 17 C.F.R. § 201.111 provides,
The hearing officer shall have the authority to do all things necessary and appropriate to discharge his or her duties. No provision of these
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Rules of Practice shall be construed to limit the powers of the hearing officer provided by the Administrative Procedure Act, 5 U.S.C. 556, 557. The powers of the hearing officer include, but are not limited to, the following: (a) Administering oaths and affirmations; (b) Issuing subpoenas authorized by law and revoking, quashing, or modifying any such subpoena; (c) Receiving relevant evidence and ruling upon the admission of evidence and offers of proof; (d) Regulating the course of a proceeding and the conduct of the parties and their counsel; (e) Holding prehearing and other conferences as set forth in § 201.221 and requiring the attendance at any such conference of at least one representative of each party who has authority to negotiate concerning the resolution of issues in controversy; (f) Recusing himself or herself upon motion made by a party or upon his or her own motion; (g) Ordering, in his or her discretion, in a proceeding involving more than one respondent, that the interested division indicate, on the record, at least one day prior to the presentation of any evidence, each respondent against whom that evidence will be offered; (h) Subject to any limitations set forth elsewhere in these Rules of Practice, considering and ruling upon all procedural and other motions, including a motion to correct a manifest error of fact in the initial decision. A motion to correct is properly filed under this Rule only if the basis for the motion is a patent misstatement of fact in the initial decision. Any motion to correct must be filed within ten days of the initial decision. A brief in opposition may be filed within five days of a motion to correct. The hearing officer shall have 20 days from the date of filing of any brief in opposition filed to rule on a motion to correct; (i) Preparing an initial decision as provided in § 201.360;
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The SEC’s website also describes SEC ALJs in the following manner:
Administrative Law Judges are independent judicial officers who in most cases conduct hearings and rule on allegations of securities law violations initiated by the Commission's Division of Enforcement. They conduct public hearings at locations throughout the United States in a manner similar to non-jury trials in the federal district courts. Among other actions, they issue subpoenas, conduct prehearing conferences, issue defaults, and rule on motions and the admissibility of evidence. At the conclusion of the public hearing, the parties submit proposed findings of fact and conclusions of law. The Administrative Law Judge prepares an Initial Decision that includes factual findings, legal conclusions, and, where appropriate, orders relief.
. . . An Administrative Law Judge may order sanctions that include suspending or revoking the registrations of registered securities, as well as the registrations of brokers, dealers, investment companies, investment advisers, municipal securities dealers, municipal advisors, transfer agents, and nationally recognized statistical rating organizations. In addition, Commission Administrative Law Judges can order disgorgement of ill-gotten gains, civil penalties, censures, and cease-and-desist orders against these entities, as well as individuals, and can suspend or bar persons from association with these entities or from participating in an offering of a penny stock.
SEC Office of Administrative Law Judges, http://www.sec.gov/alj (last visited
August 3, 2015).
(j) Upon notice to all parties, reopening any hearing prior to the filing of an initial decision therein, or, if no initial decision is to be filed, prior to the time fixed for the filing of final briefs with the Commission; and (k) Informing the parties as to the availability of one or more alternative means of dispute resolution, and encouraging the use of such methods.
17 C.F.R. § 201.111.
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C. Plaintiffs’ Administrative Proceeding
As stated supra, the SEC filed an OIP against Plaintiffs on May 21, 2015. On
June 19, 2015, Plaintiffs filed an unopposed motion to stay the administrative
proceeding before the ALJ until this Court could decide this preliminary
injunction motion. Despite the stay request being filed as an unopposed motion,
the ALJ denied that request on June 22, 2015. Dkt. No. [45-1] at 2 (“I will abide
by an injunction if it is issued; however, as of now I have been instructed to
resolve this proceeding within 300 days of service of the OIP.”). Plaintiffs’
administrative evidentiary hearing is scheduled for October 26, 2015, before the
ALJ.
On June 15, 2015, Plaintiffs filed the instant motion, asking this Court to
(1) declare the SEC’s appointment and removal processes for its Administrative
Law Judges (“ALJ”) unconstitutional, and (2) enjoin Plaintiffs’ administrative
proceeding. The Court heard oral argument on July 13, 2015. The SEC opposes
Plaintiffs’ Motion, arguing that (1) this Court does not have subject matter
jurisdiction, and (2) even if it does, Plaintiffs have failed to meet their burden
under the preliminary injunction standard.
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II. Discussion3
A. Subject Matter Jurisdiction
The SEC first contends that this Court does not have subject matter
jurisdiction because the administrative proceeding, with its eventual review from
a court of appeals, has exclusive jurisdiction over Plaintiffs’ constitutional claims.
In other words, the SEC contends that its election to pursue claims against
Plaintiffs in an administrative proceeding, “channels claims like Plaintiffs’
through the SEC administrative process and then directly to an appropriate court
of appeals whose jurisdiction is ‘exclusive.’” Def. Br., Dkt. No. [48] at 18; see 15
U.S.C. §§ 80a-42(a), 80b-13(a); supra at 3-5 (explaining the administrative
review procedure). The SEC thus argues that §§ 80a-42 and 80b-13 are now
Plaintiffs’ exclusive judicial review channels, and this Court cannot consider
Plaintiffs’ constitutional claims; judicial review can only come from the courts of
appeal following the administrative proceeding and the SEC’s issuance of a final
order in Plaintiffs’ case.
The SEC’s position is in tension with 28 U.S.C. § 1331, which provides that
federal district courts “have original jurisdiction of all civil actions arising under
3 On June 8, 2015, this Court issued a preliminary injunction in Hill v. SEC, No. 1:15-cv-1801-LMM, finding that (1) subject matter jurisdiction existed to address claims such as the Plaintiffs’ here, and (2) the Hill plaintiff had demonstrated a likelihood of success on the merits that the SEC’s ALJ appointment process violated the Appointments Clause. Much of the SEC’s briefing, therefore, deals with the Court’s prior holding in Hill. Accordingly, while many of the arguments in this case are unchanged from Hill, the Court will occasionally address the SEC’s position in Hill to give context for the SEC’s arguments and the Court’s holding in this case.
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the Constitution, laws, or treaties of the United States,” and 28 U.S.C. § 2201,
which authorizes declaratory judgments. “[I]t is established practice for [the
Supreme] Court to sustain the jurisdiction of federal courts to issue injunctions to
protect rights safeguarded by the Constitution.” Bell v. Hood, 327 U.S. 678, 684
(1946); Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 491
n.2 (2010). And “injunctive relief has long been recognized as the proper means
for preventing entities from acting unconstitutionally.” Corr. Servs. Corp. v.
Malesko, 534 U.S. 61, 74 (2001); see also 5 U.S.C. § 702 (stating that under the
Administrative Procedure Act, any “person suffering legal wrong because of
agency action, or adversely affected or aggrieved by agency action within the
meaning of a relevant statute, is entitled to judicial review thereof” and may seek
injunctive relief).
To restrict the district court’s statutory grant of jurisdiction under § 1331,
there must be Congressional intent to do so. The Supreme Court has held that,
“[p]rovisions for agency review do not restrict judicial review unless the ‘statutory
scheme’ displays a ‘fairly discernible’ intent to limit jurisdiction, and the claims at
issue ‘are of the type Congress intended to be reviewed within th[e] statutory
structure.’” Free Enterprise, 561 U.S. at 489 (quoting Thunder Basin Coal Co. v.
Reich, 510 U.S. 200, 207, 212, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994)).
The SEC contends that despite statutory language providing that these
types of enforcement actions could be heard in either the district court or
administrative proceedings, once the SEC selected the administrative forum,
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Plaintiffs were bound by that decision and §§ 80a-42 and 80b-13 became the
exclusive judicial review provisions. The SEC argues that Congress declared its
intent for the administrative proceeding to be the exclusive forum for judicial
review for these cases by allowing the SEC to make the administrative proceeding
its forum choice. See Def. Br., Dkt. No. [48] at 19-21 (citing Thunder Basin, 510
U.S. at 207-16).
The Court finds, however, that Congress’s purposeful language allowing
both district court and administrative proceedings shows a different intent.
Instead, the clear language of the statute provides a choice of forum, and there is
no language indicating that the administrative proceeding was to be an exclusive
forum. There can be no “fairly discernible” Congressional intent to limit
jurisdiction away from district courts when the text of the statute provides the
district court as a viable forum. In fact, the SEC admitted at the hearing that
under the statutory scheme, it could choose to bring both an administrative
proceeding and a district court action at the same time against the same person
involving the same case. The SEC then argued that Congress intended to give the
SEC the right to split the proceedings into two different forums but did not
intend to give Plaintiffs that same right. The clear language of the statute does
not support that interpretation.
The SEC cannot manufacture Congressional intent by making the forum
choice for Congress; Congress must express its own intent within the language of
the statute. Similarly, in Free Enterprise, the Supreme Court held that the text of
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§ 78y—a substantively identical provision, in relevant part, to the ones at issue
here—“does not expressly limit the jurisdiction that other statutes confer on
district courts. See, e.g., 28 U.S.C. §§ 1331, 2201. Nor does it do so implicitly.” 561
U.S. at 489.
Here, the Court finds that because Congress created a statutory scheme
which expressly included the district court as a permissible forum for the SEC’s
claims, Congress did not intend to limit § 1331 and prevent Plaintiffs from raising
their collateral constitutional claims in the district court. Congress could not have
intended the statutory review process to be exclusive because it expressly
provided for district courts to adjudicate not only constitutional issues but
Exchange Act violations, at the SEC’s option. See Elgin v. Dep't of Treasury, __
U.S. __, 132 S. Ct. 2126, 2133 (2012) (“To determine whether it is ‘fairly
discernible’ that Congress precluded district court jurisdiction over petitioners'
claims, we examine the [the Exchange Act]'s text, structure, and purpose.”).
The Court also does not find that Thunder Basin prevents this finding. The
SEC claims that the SEC’s judicial review process is “virtually identical” to the
Mine Act’s, and thus this Court should find—as the Supreme Court did in
Thunder Basin—that the SEC’s judicial review scheme is “exclusive.” Def. Br.,
Dkt. No. [48] at 19. Pretermitting the fact that the Mine Act did not create the
forum selection provision which the SEC enjoys here, Thunder Basin was a
challenge to the agency’s interpretation of a statute it was charged with enforcing,
as opposed to here, where Plaintiffs are challenging the validity of the
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administrative process itself. The nature of the claims at issue in Thunder Basin
determined that the constitutional claims were required to go through that review
scheme.4 Because a materially different challenge exists in the instant case, the
Court therefore does not find the SEC’s administrative proceeding is exclusive
pursuant to Thunder Basin.
But even if Congress’s intent cannot be gleaned from Congress’s purposeful
choice to include the district court as a viable forum, the Court still finds that
jurisdiction would be proper as Congress’s intent can be presumed based on the
standard articulated in Thunder Basin, Free Enterprise, and Elgin. A court may
“presume that Congress does not intend to limit jurisdiction” if (1) “a finding of
preclusion could foreclose all meaningful judicial review”; (2) “if the suit is wholly
collateral to a statute's review provisions”; and if (3) “the claims are outside the
agency's expertise.” Free Enterprise, 561 U.S. at 489 (quoting Thunder Basin, 510
U.S. at 212-213) (internal quotations omitted). A discussion of these factors
follows.
1. Barring Plaintiffs’ Claims Would Prevent Meaningful Judicial Review.
The SEC first argues that because Plaintiffs have a certain path to judicial
review through a court of appeals, Plaintiffs cannot demonstrate they lack
4 Notably, since Thunder Basin, other courts have held that the Mine Act does not preclude all constitutional claims from district court jurisdiction. See Elk Run Coal Co. v. U.S. Dep't of Labor, 804 F. Supp. 2d 8, 19 (D.D.C. 2011) (finding that the Mine Act did not preclude “broad constitutional challenges” from district court jurisdiction, and stating that Thunder Basin supported such a finding).
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meaningful judicial review. Def. Br., Dkt. No. [48] at 21-24. But the Court finds
that requiring Plaintiffs to pursue their constitutional claims following the SEC’s
administrative process “could foreclose all meaningful judicial review” of their
constitutional claims. Free Enterprise, 561 U.S. at 489 (emphasis added) (quoting
Thunder Basin, 510 U.S. at 212-213); see Duka, 2015 WL 1943245, at *5.
Plaintiffs’ claims go to the constitutionality of Congress’s entire statutory
scheme, and Plaintiffs specifically seek an order enjoining the SEC from pursuing
them in its “unconstitutional” tribunals. If Plaintiffs are required to raise their
constitutional law claims following the administrative proceeding, they will be
forced to endure what they contend is an unconstitutional process. Plaintiffs
could raise their constitutional arguments only after going through the process
they contend is unconstitutional—and thus being inflicted with the ultimate harm
Plaintiffs allege (that is, being forced to litigate in an unconstitutional forum). By
that time, Plaintiffs’ claims would be moot and their remedies foreclosed because
the courts of appeals cannot enjoin a proceeding which has already occurred.
The SEC argues that “[a]lthough Plaintiffs may be frustrated that they
cannot challenge the constitutionality of the administrative proceeding prior to
enduring those very proceedings, this posture is not uncommon in our judicial
system, nor a burden peculiar to this case.” Def. Br., Dkt. No. [48] at 23 (quoting
Tilton v. SEC, 15-cv-2472 (S.D.N.Y. June 30, 2015)) (alterations omitted). The
question, then, is what does “meaningful judicial review” mean if, as the SEC
contends, all that is needed is a route to eventual judicial review of some type? At
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the hearing, the SEC stated that “meaningful judicial review” for purposes of Free
Enterprise means that the “court is competent to address the constitutional
claims at a later time.” But the Court finds that the SEC’s definition provides no
meaning to the term “meaningful”; under the SEC’s version of the term, all that
is needed is judicial review, not judicial review which would provide a litigant any
meaningful relief. Because the courts of appeals cannot enjoin an
unconstitutional administrative proceeding which has already occurred, those
claims would be moot and the meaningful review Thunder Basin contemplates
would be missing.
The Court also finds that Eleventh Circuit precedent supports a finding
that this delayed judicial review is not meaningful. In Doe v. F.A.A., 432 F.3d
1259 (11th Cir. 2005), thirteen aircraft mechanics sued the FAA, seeking a
preliminary injunction “instructing the FAA how to proceed in its process of
reexamination.” 432 F.3d at 1260. An investigation revealed that the school
where plaintiffs received their airmen certificates had fraudulently examined and
certified some mechanics who were unqualified to hold the certification. Id.
Because the FAA was unable to determine which certifications were fraudulent,
the FAA wrote all relevant mechanics requiring them to recertify. Id. “The parties
agree[d] that the FAA ha[d] the power to reexamine airmen and to suspend and
revoke their certificates.” Id. at 1262. But the plaintiffs sought and received an
injunction on the basis that their due process rights would be violated by the FAA
pursuing its administrative procedure.
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The Eleventh Circuit reversed, finding that the Court did not have subject
matter jurisdiction. The Court held that the mechanics’ constitutional arguments
were “inescapably intertwined” with the merits of an FAA order. Id. at 1263 (“The
mechanics' constitutional claims (that the FAA has infringed upon their due
process rights by failing to observe statutory and administrative processes)
necessarily require a review of the procedures and actions taken by the FAA with
regard to the mechanics' certificates. Therefore, the constitutional claims fall
within the ambit of the administrative scheme, and the district court is without
subject-matter jurisdiction.”); see also Green v. Brantley, 981 F.2d 514, 521 (11th
Cir. 1993) (holding that the Circuit lacked subject matter jurisdiction because
“the merits of [plaintiff’s] claims are inescapably intertwined with a review of the
procedures and merits surrounding the FAA's order.”). The Eleventh Circuit
therefore held that “delayed judicial review (that is, review by a federal court of
appeals after determination by the administrative commission rather than initial
review by a federal district court)” was still meaningful in those circumstances.
Doe, 432 F.3d at 1263.
The Court finds that Doe is distinguishable. The plaintiffs in Doe conceded
the FAA had the authority to initiate administrative proceedings, but claimed that
because the FAA had not yet initiated administrative proceedings against them,
they were not required to go through the administrative process. Id. at 1262. The
FAA did not have a forum selection decision, and the plaintiff conceded the FAA’s
ability to pursue reexamination. The Eleventh Circuit found that Plaintiffs’ due
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process challenges were “inescapably intertwined” with the merits of the FAA’s
actions.
Here, Plaintiffs’ claims rise or fall regardless of what has occurred or will
occur in the SEC administrative proceeding; Plaintiffs do not challenge the SEC’s
conduct in that proceeding or the allegations against them—they challenge the
proceeding itself. See Free Enterprise, 561 U.S. at 490 (“But petitioners object to
the Board’s existence, not to any of its auditing standards.”); Touche Ross & Co.
v. SEC, 609 F.2d 570, 577 (2d Cir. 1979) (“While the Commission's administrative
proceeding is not ‘plainly beyond its jurisdiction,’ nevertheless to require
appellants to exhaust their administrative remedies would be to require them to
submit to the very procedures which they are attacking.”).
Plaintiffs’ claims here are not “inescapably intertwined” with the merits of
the SEC’s securities claims against them. Therefore, while the delayed judicial
review in Doe was acceptable because the constitutional claims depended on how
long the FAA took to complete an admittedly constitutional process, delayed
judicial review here will cause an allegedly unconstitutional process to occur.
At the hearing, the SEC argued that the Court applied the wrong standard
in Hill when it looked to whether plaintiff’s claims were “inescapably
intertwined” with the underlying merits when deciding whether delayed judicial
review was meaningful. However, the SEC ignores that the Eleventh Circuit
frequently looks to whether the claims are “inextricably intertwined” in
evaluating whether delayed judicial review is appropriate and did so as recently
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as this year. LabMD, Inc. v. F.T.C., 776 F.3d 1275, 1280 (11th Cir. 2015)5 (“We
have consistently looked to how ‘inescapably intertwined’ the constitutional
claims are to the agency proceeding, reasoning that the harder it is to distinguish
5 At the hearing, the SEC argued that LabMD supports its argument that a structural challenge to a statute is not treated differently than a claim, such as due process, which is based on what has occurred in the administrative proceeding itself—all should go through the administrative procedure and await eventual judicial review in the courts of appeal. This Court does not read LabMD to support that position. In LabMD, the Eleventh Circuit held that because plaintiff’s claims “that the FTC’s actions were ultra vires and unconstitutional [] are intertwined with its APA claim for relief,” those claims “may only be heard at the end of the administrative proceeding.” 776 F.3d at 1277. The Eleventh Circuit went on to hold that even assuming the plaintiff’s First Amendment retaliation claim was “less intertwined” with his additional claims (because the retaliatory conduct was allegedly complete at the time the complaint was filed), the Eleventh Circuit would still require the retaliation claim to be heard at the end of the administrative proceeding. Id. at 1280. The Eleventh Circuit noted that its prior precedent did not suggest that First Amendment retaliation claims were treated differently than other constitutional claims, thus it would send all of plaintiff’s constitutional claims through the administrative proceeding since they were intertwined. Id. This finding concerns whether First Amendment retaliation claims are unique, not whether the Eleventh Circuit has abandoned its prior opinions that the district court should assess the interrelatedness of the claims. If that were not the case, the majority of LabMD’s holding—which looked to determine whether the plaintiff’s claims were interrelated with the administrative proceeding—would have been irrelevant. Notably, the Eleventh Circuit’s holding was specifically grounded on the fact the claims were intertwined, and the Eleventh Circuit only found the retaliation claim was “less intertwined” not that it was not intertwined at all. Id. at 1277. It is also worth noting that the First Amendment retaliation claim was not a structural challenge to the administrative proceeding—it was grounded in whether the FTC filed its administrative proceeding in response to plaintiff publishing a book which allegedly exposed FTC corruption. Id. at 1280. Therefore, the retaliation claim related to the FTC’s decision to bring an administrative proceeding not that the administrative proceeding itself would be invalid because of some structural defect in that process.
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them, the less prudent it is to interfere in an ongoing agency process.”) (citing
Doe, 432 F.3d at 1263; Green, 981 F.2d at 521). It was also the SEC in Hill who
argued that this line of Eleventh Circuit cases controls this issue. See Hill v. SEC,
No. 1:15-cv-1801-LMM, Dkt. No. [12] at 21. Because this Court is bound by the
Eleventh Circuit, it will apply the Eleventh Circuit’s reasoning in assessing this
question.
Waiting until the harm which Plaintiffs allege cannot be remedied is not
meaningful judicial review.6 See LabMD, Inc. v. F.T.C., 776 F.3d 1275, 1280 (11th
6 Many of the cases the SEC cites from other districts on this issue can be distinguished from the facts here. Chau, Jarkesy v. S.E.C., 48 F. Supp. 3d 32 (D.D.C. 2014), and Altman v. U.S. S.E.C., 768 F. Supp. 2d 554 (S.D.N.Y. 2011), all addressed substantive challenges to the merits of the administrative proceedings. See Chau, 2014 WL 6984236 (challenging the SEC’s conduct within the administrative proceeding, such as failing to postpone a hearing following a document dump); Jarkesy, 48 F. Supp. 3d at 32 (claiming that he could not obtain a fair hearing before the SEC because the SEC’s settlements with two others stated that the plaintiff was liable for securities fraud); Altman, 768 F. Supp. 2d at 561 (involving a challenge to the SEC’s own rules and stating that this was not a case where the plaintiff disputed the SEC had the expertise to hear challenges to its own rules and noted that the plaintiff did not challenge the “existence” of the proceeding but rather the “extent of the SEC’s ability to sanction attorneys under the SEC’s own rules”). The Court also notes that Chau’s reasoning supports this Court’s ruling. Specifically, The Chau court stated,
There is an important distinction between a claim that an administrative scheme is unconstitutional in all instances—a facial challenge—and a claim that it violates a particular Plaintiffs’ rights in light of the facts of a specific case—an as-applied challenge. As between the two, courts are more likely to sustain pre-enforcement jurisdiction over “broad facial and systematic challenges,” such as the claim at issue in Free Enterprise Fund. This tendency is not a hard-and-fast rule, as “the distinction between facial and as-applied
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Cir. 2015) (“We have consistently looked to how ‘inescapably intertwined’ the
constitutional claims are to the agency proceeding, reasoning that the harder it is
to distinguish them, the less prudent it is to interfere in an ongoing agency
process.”) (citing Doe, 432 F.3d at 1263; Green, 981 F.2d at 521). Therefore, the
Court finds that the administrative procedure does not provide meaningful
judicial review under these circumstances.
2. Plaintiffs’ Claims Are Wholly Collateral to the SEC Proceeding.
The SEC argues that Plaintiffs’ claims are not wholly collateral to the
administrative proceeding because “it is an effort to short-circuit the appeals
process.” Def. Br., Dkt. No. [48] at 24. Specifically, the SEC claims that the Court
erred in characterizing the Hill plaintiff’s claims as “facial” as “the Supreme Court
has explicitly rejected the argument that ‘facial constitutional challenges’ should
be ‘carved out for district court adjudication’ when Congress has created an
exclusive review scheme.” Id. (alteration omitted) (quoting Elgin, 132 S. Ct. at
challenges is not so well defined that it has some automatic effect or that it must always control the pleadings and disposition in every case involving a constitutional challenge.” Rather, it is a recognition that the Thunder Basin and Free Enterprise factors militate against jurisdiction when a pre-enforcement constitutional claim relates to factual issues that are the subject of a pending administrative adjudication.
Chau v. U.S. S.E.C., No. 14-CV-1903 LAK, 2014 WL 6984236, at *6 (S.D.N.Y. Dec. 11, 2014) (footnotes omitted) (quoting Elk Run Coal Co. v. Dep’t of Labor, 804 F. Supp. 2d 8, 21 (D.D.C. 2011) (describing Free Enterprise as a “broad facial and systemic challenge”); Elgin, 132 S. Ct. at 2135 (explaining that the as-applied vs. facial distinction is not talismanic)).
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2135) (citing Hill Order, No. 1:15-cv-1801-LMM, Dkt. No. [28] at 18 n.5). Because
the SEC argues there is no distinction between facial and as applied challenges
for the purpose of assessing whether claims are wholly collateral, the SEC claims
that Plaintiffs’ facial challenges here should not support jurisdiction.
First, the Court did not find that the Hill plaintiff’s claims were per se
wholly collateral because they were facial. The footnote which the SEC cites was
in the “meaningful judicial review” section of the Court’s Order, and the
footnote’s purpose was to point out that a case which the SEC cited—Chau—
generally supported the Court’s reasoning, not that the Court was adopting a per
se facial challenge rule. In fact, as a part of that footnote, the Court cited Elgin for
the proposition that the as applied/facial distinction is not talismanic. Hill Order,
No. 1:15-cv-1801-LMM, Dkt. No. [28] at 18 n.5 (“Elgin, 132 S. Ct. at 2135
(explaining that the as-applied vs. facial distinction is not talismanic)”).
Second, the Court disagrees with the SEC’s reading of Elgin. The Elgin
Court only stated that the as applied/facial distinction is not a per se rule, not
that facial challenges could never be “wholly collateral” under the Elgin/Free
Enterprise factors. Elgin, 132 S. Ct. at 2135-36 (“the distinction between facial
and as-applied challenges is not so well defined that it has some automatic effect
or that it must always control the pleadings and disposition in every case
involving a constitutional challenge.”) (emphasis added).
Third, the SEC’s argument here misunderstands the Hill holding regarding
whether the claims are wholly collateral. In Hill, the SEC argued that plaintiff’s
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claims were not wholly collateral to the SEC proceeding because it is possible that
plaintiff might not be found liable in the administrative proceeding or he might
eventually obtain relief on appeal. The SEC cited Elgin and argued that
“Plaintiff’s claims are not collateral to the statutory provisions governing review
of SEC administrative proceedings because they are the means by which Plaintiff
seeks to halt his SEC proceeding.” Hill Def. Br., No. 1:15-cv-1801-LMM, Dkt. No.
[12] at 22 (citing Elgin, 132 S. Ct. at 2139). But the Court in Hill found Elgin
distinguishable.
In Elgin, the plaintiffs had been terminated from their civil service jobs for
failing to register for the selective service. Rather than appealing their
terminations to the Merit Systems Protective Board or the Court of Appeals for
the Federal Circuit, as required by the Civil Service Reform Act, plaintiffs filed an
action in federal district court, claiming that their termination was
unconstitutional. The Supreme Court ruled that the plaintiffs’ claim was not
“wholly collateral to the CSRA scheme,” but was “a challenge to CSRA-covered
employment action brought by CSRA-covered employees requesting relief that
the CSRA routinely affords,”—i.e., reversal of employment decisions,
reinstatement, and awarding back pay. Elgin, 132 S. Ct. at 2140 (internal
quotation marks omitted).
The Court in Hill found that the plaintiff was not challenging an agency
decision; the plaintiff was challenging whether the SEC’s ability to conduct an
administrative proceeding before its ALJs was constitutional. The Court went on
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to find that what occurred at the administrative proceeding and the SEC’s
conduct there was irrelevant to this proceeding. See Free Enterprise, 561 U.S. at
490 (“But petitioners object to the Board’s existence, not to any of its auditing
standards.”); Duka, 2015 WL 1943245, at *6; Gupta, 796 F. at 513 (noting the
plaintiff would state a constitutional claim “even if [plaintiff] were entirely guilty
of the charges made against him in the OIP”). The same reasoning applies here.
Accordingly, Plaintiffs’ constitutional claims are wholly collateral to the
administrative proceeding.
3. Plaintiffs’ Constitutional Claims Are Outside the Agency’s Expertise.
The SEC claims that the SEC “can bring its expertise to bear on Plaintiffs’
claims,” and the SEC is considering similar constitutional claims in another
proceeding. Def. Br., Dkt. No. [48] at 25. Despite the SEC’s argument, the Court
finds that Plaintiffs’ Article II claims are outside the agency’s expertise.
Plaintiffs’ constitutional claims are governed by Supreme Court
jurisprudence, and “the statutory questions involved do not require technical
considerations of agency policy.” Free Enterprise, 561 U.S. at 491 (alteration and
internal quotations omitted) (quoting Johnson v. Robison, 415 U.S. 361, 373
(1974)); see also Thunder Basin, 510 U.S. at 215 (“[A]djudication of the
constitutionality of congressional enactments has generally been thought beyond
the jurisdiction of administrative agencies.”) (quoting Johnson, 415 U.S. at 368).
These claims are not part and parcel of an ordinary securities fraud case, and
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there is no evidence that (1) Plaintiffs’ constitutional claims are the type the SEC
“routinely considers,” or (2) the agency’s expertise can be “brought to bear” on
Plaintiffs’ claims as they were in Elgin. Elgin, 132 S. Ct. at 2140. Determining
whether SEC ALJs are inferior officers turns more on whether the ALJ’s powers
and duties fit within the Supreme Court’s prior jurisprudential standards for
inferior officers and less on regulatory interpretation. See Duka, 2015 WL
1943245, at *7.
The Court finds that as to this factor, Plaintiffs’ constitutional claims are
outside the SEC’s expertise, and that this Court has subject matter jurisdiction.
Therefore the Court will now determine whether Plaintiffs are entitled to a
preliminary injunction on their Article II claims.
B. Preliminary Injunction
To obtain a preliminary injunction, the moving party must demonstrate:
(1) a substantial likelihood of success on the merits; (2) a substantial threat of
irreparable injury if the injunction is not granted; (3) the threatened injury to the
movant outweighs the damage to the opposing party; and (4) granting the
injunction would not be adverse to the public interest. Four Seasons Hotels &
Resorts, B.V. v. Consorcio Barr, S.A., 320 F.3d 1205, 1210 (11th Cir. 2003). "The
preliminary injunction is an extraordinary and drastic remedy not to be granted
unless the movant ‘clearly carries the burden of persuasion’ as to the four
prerequisites." United States v. Jefferson Cnty., 720 F.2d 1511, 1519 (11th Cir.
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1983) (quoting Canal Auth. v. Callaway, 489 F.2d 567, 573 (5th Cir. 1974)). The
same factors apply to a temporary restraining order. Ingram v. Ault, 50 F.3d 898,
900 (11th Cir. 1995). The Court will consider each factor in turn.
1. Likelihood of Success on the Merits
Plaintiffs bring two claims under Article II of the Constitution: (1) that the
ALJ’s appointment violates the Appointments Clause of Article II because he was
not appointed by the President, a court of law, or a department head, and (2) the
ALJ’s two-layer tenure protection violates the Constitution’s separation of
powers, specifically the President’s ability to exercise Executive power over his
inferior officers. Both of Plaintiffs’ arguments depend on this Court finding that
the ALJ is an inferior officer who would trigger these constitutional protections.
See U.S. Const. art. II § 2, cl. 2; Freytag v. Comm’r of Internal Revenue, 501 U.S.
868, 880 (1991); Free Enterprise, 561 U.S. at 484, 506. Therefore, the Court will
consider this threshold issue first.
a. Inferior Officer
The issue of whether the SEC ALJ is an inferior officer or employee for
purposes of the Appointments Clause depends on the authority he has in
conducting administrative proceedings. The Appointments Clause of Article II of
the Constitution provides:
[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but
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the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
U.S. Const. art. II, § 2, cl. 2. The Appointments Clause thus creates two classes of
officers: principal officers, who are selected by the President with the advice and
consent of the Senate, and inferior officers, whom “Congress may allow to be
appointed by the President alone, by the heads of departments, or by the
Judiciary.” Buckley v. Valeo, 424 U.S. 1, 132 (1976). The Appointments Clause
applies to all agency officers including those whose functions are “predominately
quasijudicial and quasilegislative” and regardless of whether the agency officers
are “independent of the Executive in their day-to-day operations.” Id. at 133
(quoting Humphrey’s Executor v. United States, 295 U.S. 602, 625-26 (1935)).
“[A]ny appointee exercising significant authority pursuant to the laws of
the United States is an ‘Officer of the United States,’ and must, therefore, be
appointed in the manner prescribed by § 2, cl. 2, of [Article II].” Freytag, 501 U.S.
at 881 (quoting Buckley, 424 U.S. at 126) (alteration in the original). By way of
example, the Supreme “Court has held that district-court clerks, thousands of
clerks within the Treasury and Interior Departments, an assistant surgeon, a
cadet-engineer, election monitors, federal marshals, military judges, Article I
[Tax Court special trial] judges, and the general counsel for the Transportation
Department are inferior officers.” Kent Barnett, Resolving the ALJ Quandary, 66
Vand. L. Rev. 797, 812 (2013) (citing Free Enterprise, 561 U.S. at 540 (Breyer, J.,
dissenting) (citing cases)).
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Plaintiffs claim that SEC ALJs are inferior officers because they exercise
“significant authority pursuant to the laws of the Unites States” while the SEC
contends ALJs are “mere employees” based upon Congress’s treatment of them
and the fact that they cannot issue final orders, cannot grant “certain injunctive
relief,” and do not have contempt power,7 inter alia. The Court finds that based
upon the Supreme Court’s holding in Freytag, SEC ALJs are inferior officers. See
also Duka, 2015 WL 1943245, at *8 (“The Supreme Court's decision in Freytag v.
Commissioner, 501 U.S. 868 (1991), which held that a Special Trial Judge of the
Tax Court was an ‘inferior officer’ under Article II, would appear to support the
conclusion that SEC ALJs are also inferior officers.”).
In Freytag, the Supreme Court was asked to decide whether special trial
judges (“STJ”) in the Tax Court were inferior officers under Article II. 501 U.S. at
880. The Government argued, much as the SEC does here, that STJs do “no more
than assist the Tax Court judge in taking the evidence and preparing the
proposed findings and opinion,” id., and they “lack authority to enter a final
decision.” Id. at 881; see also Def. Br., Dkt. No. [48] at 27-32 (arguing that SEC
ALJs are not inferior officers because they cannot enter final orders and are
7 ALJs can find individuals in contempt, but cannot order fines or imprisonment as a possible sanction. See 17 C.F.R. § 201.180 (noting an ALJ can punish “[c]ontemptuous conduct” by excluding someone from a hearing or preventing them from representing another during the proceeding); Def. Br., Dkt. No. [48] at 33 (stating “SEC ALJs’ power to punish contemptuous conduct is limited and does not include any ability to impose fines or imprisonment.”).
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subject to the SEC’s “plenary authority”). The Supreme Court rejected that
argument, stating that the Government’s argument
ignores the significance of the duties and discretion that special trial judges possess. The office of special trial judge is “established by Law,” Art. II, § 2, cl. 2, and the duties, salary, and means of appointment for that office are specified by statute. See Burnap v. United States, 252 U.S. 512, 516–517 (1920); United States v. Germaine, 99 U.S. 508, 511–512 (1879). These characteristics distinguish special trial judges from special masters, who are hired by Article III courts on a temporary, episodic basis, whose positions are not established by law, and whose duties and functions are not delineated in a statute. Furthermore, special trial judges perform more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the special trial judges exercise significant discretion.
Freytag, 501 U.S. at 881-82.
The Court finds that like the STJs in Freytag, SEC ALJs exercise
“significant authority.” The office of an SEC ALJ is established by law, and the
“duties, salary, and means of appointment for that office are specified by statute.”
Id.; see supra (setting out the ALJ system, to include the establishment of ALJs
and their duties, salary, and means of appointment). ALJs are permanent
employees—unlike special masters—and they take testimony, conduct trial, rule
on the admissibility of evidence, and can issue sanctions, up to and including
excluding people (including attorneys) from hearings and entering default. 17
C.F.R. §§ 200.14 (powers); 201.180 (sanctions).
Relying on Landry v. Federal Deposit Insurance Corp., 204 F.3d 1125 (D.C.
Cir. 2000), the SEC argues that unlike the STJs who were inferior officers in
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Freytag, SEC ALJs do not have contempt power and cannot issue final orders,8 as
the STJs could in limited circumstances. In Landry, the D.C. Circuit considered
whether FDIC ALJs were inferior officers. The D.C. Circuit found FDIC ALJs, like
the STJs, were established by law; their duties, salary, and means of appointment
were specified by statute; and they conduct trials, take testimony, rule on
evidence admissibility, and enforce discovery compliance. 204 F.3d at 1133-34.
And it recognized that Freytag found that those powers constituted the exercise
of “significant discretion . . . a magic phrase under the Buckley test.” Id. at 1134
(internal citation omitted).
Despite the similarities of the STJs and the FDIC ALJs, the Landry court
applied Freytag to hold that whether the entity had the authority to render a final
decision was a dispositive factor. According to the D.C. Circuit, Freytag “noted
that [(1)] STJs have the authority to render the final decision of the Tax Court in
declaratory judgment proceedings and in certain small-amount tax cases,” and
(2) the “Tax Court was required to defer to the STJ's factual and credibility
findings unless they were clearly erroneous.” Landry, 204 F.3d at 1133 (emphasis
8 Plaintiffs argue that SEC ALJ’s can issue final orders because if the respondent does not petition the SEC to review the ALJ’s initial order and the SEC does not decide to review the matter on its own, the action of the ALJ will be “deemed the action of the Commission.” 15 U.S.C. § 78d-1(c); see Pls. Rep., Dkt. No. [49] at 7-8. The SEC argues that the SEC retains plenary authority over ALJs and the regulations make clear that only when the SEC itself issues an order does the decision become final. Def. Br., Dkt. No. [48] at 15 (citing 17 C.F.R. § 201.360(d)(2)). This Court agrees with the SEC. Because the regulations specify that the SEC itself must issue the final order essentially “confirming” the initial order, the Court finds that SEC ALJs do not have final order authority.
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in original). While recognizing that the Freytag court “introduced mention of the
STJ’s power to render final decisions with something of a shrug,” Landry held
that FDIC ALJ’s were not inferior officers because did not have the “power of
final decision in certain classes of cases.” Id. at 1134.
The concurrence rejected the majority’s reasoning, finding that Freytag
“cannot be distinguished” because “[t]here are no relevant differences between
the ALJ in this case and the [STJ] in Freytag.” Id. at 1140, 1141. After first
explaining that the Supreme Court actually found the Tax Court’s deference to
the STJ’s credibility findings was irrelevant to its analysis,9 the concurrence
stated that the majority’s “first distinction of Freytag is thus no distinction at all.”
Id. at 1142. The concurrence also noted that the majority’s holding in Landry
(which ultimately relied on the FDIC ALJ’s lack of final order authority) was
based on an alternative holding from Freytag as the Supreme Court had already
determined the STJs were inferior officers before it analyzed the final order
authority issue. Landry, 204 F.3d at 1142.
The Landry decision is also not persuasive as FDIC ALJs differ from SEC
ALJs in that their decisions are purely recommendary under the APA. The APA
requires agencies to decide whether their ALJs will issue “initial decisions” or
“recommendary decisions.” Initial decisions may become final “without further
9 The Supreme Court stated that Tax Court Rule 183, which established the deferential standard, was “not relevant to [its] grant of certiorari,” and noted that it would say no more about the rule than to say that the STJ did not have final authority to decide Petitioner’s case. Freytag, 501 U.S. at 874 n.3; see also Landry, 204 F.3d at 1142 (Randolph, J., concurring).
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proceedings unless there is an appeal to, or review on motion of, the agency
within time provided by rule,” while recommendary decisions always require
further agency action. 5 U.S.C. § 557(b). FDIC ALJs issue recommendary
decisions, whereas SEC ALJs issue initial decisions. On this ground alone, FDIC
ALJs are different from SEC ALJs.
The Court concludes that the Supreme Court in Freytag found that the
STJs powers—which are nearly identical to the SEC ALJs here—were
independently sufficient to find that STJs were inferior officers. See also Butz v.
Economou, 438 U.S. 478, 513 (1978) (“There can be little doubt that the role of
the . . . administrative law judge . . . is ‘ functionally comparable’ to that of a
judge. His powers are often, if not generally, comparable to those of a trial judge:
He may issue subpoenas, rule on proffers of evidence, regulate the course of the
hearing, and make or recommend decisions.”); see also Freytag, 501 U.S. at 910
(Scalia, J., concurring in part and concurring in judgment, joined by O’Connor,
Kennedy, & Souter, JJ.) (finding that all ALJs are “executive officers”); Edmond
v. United States, 520 U.S. 651, 663 (1997) (“[W]e think it evident that ‘inferior
officers' are officers whose work is directed and supervised at some level by
others who were appointed by Presidential nomination with the advice and
consent of the Senate.”). Only after it concluded STJs were inferior officers did
Freytag address the STJ’s ability to issue a final order; the STJ’s limited authority
to issue final orders was only an additional reason, not the reason. Therefore, the
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Court finds that Freytag mandates a finding that the SEC ALJs exercise
“significant authority” and are thus inferior officers.
At the hearing, the SEC argued Freytag’s finding that STJ’s limited final
order authority supported their inferior officer status was not an alternative
holding but a “complimentary” one. The SEC also stated the Supreme Court’s
finding that the STJs had final order authority was the “most critical part” of the
Freytag decision. The Court finds that understanding is based on a misreading of
Freytag. First, the Supreme Court explicitly rejected the Government’s argument
in Freytag that “special trial judges may be deemed employees in subsection
(b)(4) cases because they lack authority to enter a final decision.” Freytag, 501
U.S. at 881. Second, the Supreme Court only discussed the STJs limited final
order authority as being an additional reason for their inferior officer status. Id.
at 882 (“Even if the duties of special trial judges under subsection (b)(4) were not
as significant as we and the two courts have found them to be, our conclusion
would be unchanged.”) (emphasis added). It was only after the Supreme Court
found STJs were inferior officers that it discussed their limited final order
authority as being another ground for inferior officer status.
The Court also does not find persuasive the SEC’s argument that SEC ALJs
are not inferior officers because they cannot issue “certain injunctive relief” as
could the Special Trial Judges in Freytag. Def. Br., Dkt. No. [48] at 33. It is
undisputed that the SEC Commissioners themselves—who are indisputably
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officers of the United States—cannot issue injunctive relief without going to the
district court. Thus, the Court finds this a distinction without consequence.
The SEC also argues that this Court should defer to Congress’s apparent
determination that ALJs are inferior officers. In the SEC’s view, Congress is
presumed to know about the Appointments Clause, and it decided to have ALJs
appointed through OPM and subject to the civil service system; thus, Congress
intended for ALJs to be employees according to the SEC. See Def. Br. [48] at 34-
38. But “[t]he Appointments Clause prevents Congress from dispensing power
too freely; it limits the universe of eligible recipients of the power to appoint.”
Freytag, 501 U.S. at 880. Even if the SEC is correct that Congress determined that
ALJs are inferior officers, Congress may not “decide” an ALJ is an employee, but
then give him the powers of an inferior officer; that would defeat the separation-
of-powers protections the Clause was enacted to protect.
In response to the SEC’s argument that classifying ALJs as civil servants
informs their constitutional status, the Court notes that competitive civil service
by its terms also includes officers within its auspices. “Competitive [civil] service”
includes with limited exceptions “all civil service positions in the executive
branch,” 5 U.S.C. § 2102, and “officers” are specifically included within
competitive service. 5 U.S.C. § 2104. Thus, under the SEC’s reasoning, all officers
are now mere employees by virtue of Congress’s placement of them in civil
service. Such an argument cannot be accepted.
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As well, the SEC argues that “Congress envisioned that an ALJ’s ‘initial
decision’ would be ‘advisory in nature’ and would merely ‘sharpen[] . . . the issues
for subsequent proceedings.” Def. Br., Dkt. No. [48] at 29 (citing Attorney
General’s Manual on the Administrative Procedure Act (“Manual”),
http://archive.law.fsu.edu/library/admin/1947vii.html, at 83-84 (1947)). But in
reading the Manual, the Court finds the SEC has taken the Attorney General’s
statement out of context. With regard to ALJs “sharpening” “the issues for
subsequent proceedings,” the Attorney General was discussing cases in which the
credibility of witnesses was not material or where the ALJ who drafted the
opinion was not the hearing officer. Manual, at 83-84 (“However, in cases where
the credibility of witnesses is not a material factor, or cases where the
recommended or initial decision is made by an officer other than the one who
heard the evidence, the function of such decision will be, rather, the
sharpening of the issues for subsequent proceedings.”) (emphasis
added). The Manual also refers to ALJs as “subordinate officers” consistent with
their status as inferior officers. Id. The Court finds the SEC’s arguments
unavailing; the SEC ALJs are inferior officers.
b. Appointments Clause Violation
Because SEC ALJs are inferior officers, the Court finds Plaintiffs have
established a likelihood of success on the merits of their Appointments Clause
claim. Inferior officers must be appointed by the President, department heads, or
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courts of law. U.S. Const. art. II § 2, cl. 2. Otherwise, their appointment violates
the Appointments Clause.
The SEC concedes that Plaintiffs’ ALJ, ALJ Elliot, was not appointed by an
SEC Commissioner. SEC Aff., Dkt. No. [35-1] ¶ 4; see also Free Enterprise, 561
U.S. at 511-512 (finding that the SEC Commissioners jointly constitute the “head”
of the SEC for appointment purposes). The SEC ALJ was not appointed by the
President, a department head, or the Judiciary. Because he was not appropriately
appointed pursuant to Article II, his appointment is likely unconstitutional in
violation of the Appointments Clause.10
4. Remaining Preliminary Injunction Factors
The Court finds that Plaintiffs have also satisfied the remaining
preliminary injunction factors. First, Plaintiffs will be irreparably harmed if this
injunction does not issue because if the SEC is not enjoined, Plaintiffs will be
subject to an unconstitutional administrative proceeding, and they would not be
able to recover monetary damages for this harm because the SEC has sovereign
immunity. See Odebrecht Const., Inc. v. Sec'y, Fla. Dep't of Transp., 715 F.3d
1268, 1289 (11th Cir. 2013) (“In the context of preliminary injunctions, numerous
10 Because the Court finds Plaintiffs can establish a likelihood of success on his Appointments Clause claim, the Court declines to decide at this time whether the ALJ’s two-layer tenure protections also violate Article II’s removal protections. However, the Court has serious doubts that it does, as ALJs likely occupy “quasi-judicial” or “adjudicatory” positions, and thus these two-layer protections likely do not interfere with the President’s ability to perform his duties. See Duka, 2015 WL 1943245, at *8-10; see also Humphrey’s Executor, 295 U.S. at 628-29, 631-32.
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courts have held that the inability to recover monetary damages because of
sovereign immunity renders the harm suffered irreparable.”) (collecting cases);
see also Cunningham v. Adams, 808 F.2d 815, 821 (11th Cir. 1987) (“An injury is
‘irreparable’ only if it cannot be undone through monetary remedies.”). If the
administrative proceeding is not enjoined, Plaintiffs’ requested relief here would
also become moot as the Court of Appeals would not be able to enjoin a
proceeding which has already occurred. See supra at 15, 18-20 (explaining
Plaintiffs’ harm).
Second, the Court finds that the public interest and the balance of equities
are in Plaintiffs’ favor. The 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 Plaintiffs’ claims. The SEC claims that the public interest weighs in its
favor because the SEC “would be impeded in considering appropriate remedial
action for any securities law violations that it finds in the proceeding, including
potential limitations on future advisory work by Plaintiffs.” Def. Br., Dkt. No.
[48] at 46. But the Court does not find that it is ever in the public interest for the
Constitution to be violated. The Supreme Court has held that the Appointments
Clause “not only guards against [separation-of-powers] encroachment but also
preserves another aspect of the Constitution’s structural integrity by preventing
the diffusion of the appointment power.” Freytag, 501 U.S. at 878. Both are
important to the public interest. The Court further notes that the SEC is not
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foreclosed from pursuing Plaintiff in federal court or in an administrative
proceeding before an SEC Commissioner, and thus any small harm which it
might face could be easily cured by the SEC itself.
III. Conclusion
Because the Court finds Plaintiffs have proved a substantial likelihood of
success on the merits of their claim that the SEC has violated the Appointments
Clause as well as the other factors necessary for the grant of a preliminary
injunction, the Court finds a preliminary injunction is appropriate to enjoin the
SEC administrative proceeding and to allow the Court sufficient time to consider
this matter on the merits.
The Court notes that this conclusion may seem unduly technical, as the
ALJ’s appointment could easily be cured by having the SEC Commissioners issue
an appointment or preside over the matter themselves. However, the Supreme
Court has stressed that the Appointments Clause guards Congressional
encroachment on the Executive and “preserves . . . the Constitution’s structural
integrity by preventing the diffusion of appointment power.” Freytag, 501 U.S. at
878. This issue is “neither frivolous nor disingenuous.” Id. at 879. The Article II
Appointments Clause is contained in the text of the Constitution and is an
important part of the Constitution’s separation of powers framework.
In addition, the Appointments Clause may not be waived, not even by the
Executive. Id. at 880 (“Neither Congress nor the Executive can agree to waive this
structural protection.”). As this likely Appointment Clause violation “goes to the
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validity of the [administrative] proceeding that is the basis for this litigation,” id.
at 879, it is hereby ORDERED that Defendant, the Securities and Exchange
Commission, is preliminarily enjoined from conducting the administrative
proceeding brought against Plaintiffs, captioned In the Matter of Gray Financial
Group, Inc. Laurence O. Gray, and Robert C. Hubbard, IV, Administrative
Proceeding File No. 3-16554 (May 21, 2015), including the hearing scheduled for
October 26, 2015, before an Administrative Law Judge who has not been
appointed by the head of the Department. This order shall remain in effect until it
is further modified by this Court or until resolution of Plaintiffs’ claim for
permanent injunctive relief, whichever comes first.
The parties are DIRECTED to confer on a timetable for conducting
discovery and briefing the remaining issues. The parties are then DIRECTED to
submit by August 18, 2015, a consent scheduling order to the Court for
consideration and a motion to stay this proceeding pending appeal, if applicable.
If the parties are unable to agree to the terms of a scheduling order, the parties
can submit their alternative submissions.
IT IS SO ORDERED this 4th day of August, 2015.
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
CHARLES L. HILL, JR., : :
: Plaintiff, :
: v. :
: CIVIL ACTION NO. 1:15-CV-1801-LMM
: SECURITIES AND EXCHANGE COMMISSION,
: :
: Defendant. :
ORDER
This case comes before the Court on Plaintiff Charles L. Hill, Jr.’s Motion
for a Temporary Restraining Order, or in the Alternative, a Preliminary
Injunction [2]. On May 19, 2015, Plaintiff filed this action in federal court,
seeking to (1) declare an SEC administrative proceeding unconstitutional, and (2)
enjoin the administrative proceeding from occurring until the Court issues its
ruling. Plaintiff seeks a stay of the administrative proceeding prior to its June 15,
2015, scheduled evidentiary hearing to allow the parties to conduct limited
discovery and brief the declaratory judgment claims. The Court heard oral
argument on May 27, 2015. After a review of the record and due consideration,
Plaintiff’s Motion [2] is GRANTED, in part and DENIED, in part for the
following reasons:
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I. Background1
Plaintiff Charles L. Hill, Jr. is unregistered with the Securities and
Exchange Commission (“SEC”). Am. Compl., Dkt. No. [17] ¶ 1. Plaintiff is a self-
employed real estate developer. Id. ¶ 14. In June and July 2011, Plaintiff
purchased and then sold a large quantity of Radiant Systems, Inc. (“Radiant”)
stock, making a profit of approximately $744,000. Id. ¶¶ 23-26. The SEC alleges
that Plaintiff made these transactions because he received inside information
about a future merger between Radiant and NCR Corporation. Id. ¶ 33.
Plaintiff contends he never received inside information and bought and
sold stock based upon (1) his personal knowledge of and experience with
Radiant’s product and management, and (2) his stock broker’s suggestion to sell.
See id. ¶¶ 2, 14-28. Plaintiff argues that the SEC (1) does not have any direct
evidence of insider trading, and (2) relies on a “speculative theory that Mr. Hill
must have had access to inside information on Radiant merely on the timing and
concentration of his purchases.” Id. ¶¶ 29, 31.
The SEC conducted a “nearly two-year investigation” between March 2013
and February 2015. Id. ¶¶ 27, 30, 39. It took “12 examinations, issued at least 13
subpoenas for documents[,] and received tens of thousands of documents. . . .”
Id. ¶ 30. On February 17, 2015, the SEC served Plaintiff with an Order Instituting
Cease-And-Desist Proceedings (“OIP”) under Section 21C of the Securities
1 The following facts are drawn from the Amended Complaint unless otherwise indicated, and any fact finding is made solely for the purposes of this Motion.
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Exchange Act of 1934 (“Exchange Act”), alleging he is liable for insider trading in
violation of Section 14(e) of the Exchange Act and Rule 14e-3. Ex. 4, Dkt. No. [2-
6]. The SEC seeks a cease-and-desist order, a civil penalty, and disgorgement. Id.
A. The Exchange Act
In 1990, through the Securities Enforcement Remedies and Penny Stock
Reform Act, Pub. L. No. 101-429, 104 Stat. 931, 939 (1990), Congress first
authorized the SEC to pursue “any person” for Exchange Act violations through
an administrative cease-and-desist proceeding. See 15 U.S.C. § 78u-3. This
proceeding allows the SEC to obtain an order enjoining violations of the
Exchange Act. Id. In 2010, Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act (“Dodd-Frank”), Pub. L. No. 111-203, 124 Stat. 1376
(2010), which authorized the SEC to seek civil monetary penalties from “any
person”—both those registered and unregistered with the SEC—in an
administrative hearing. See 15 U.S.C. § 78u-2.
Prior to the passage of Dodd-Frank in 2010, the SEC could not seek civil
penalties from an unregistered individual like Plaintiff in an administrative
proceeding; it could only have brought an administrative proceeding against
“regulated person[s]” or companies. See Duka v. S.E.C., __ F. Supp. 3d __, No.
15 Civ. 357 (RMB) (SN), 2015 WL 1943245, at *2 (S.D.N.Y. Apr. 15, 2015) (citing
Gupta v. S.E.C., 796 F. Supp. 2d 503, 507 (S.D.N.Y. 2011)). The earlier version of
the statute allowed the SEC to pursue unregistered individuals like Plaintiff for
civil penalties only in federal court where these individuals could invoke their
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Seventh Amendment right to jury trial. In sum, the Exchange Act currently
authorizes the SEC to initiate enforcement actions against “any person”
suspected of violating the Act and gives the SEC the sole discretion to decide
whether to bring an enforcement action in federal court or an administrative
proceeding. See 15 U.S.C. §§ 78u(d), 78u-1, 78u-2, 78u-3.
B. SEC Administrative Process
The Administrative Procedure Act (“APA”), 5 U.S.C. § 500, et seq.,
authorizes executive agencies, such as the SEC, to conduct administrative
proceedings before an Administrative Law Judge (“ALJ”). SEC administrative
proceedings vary greatly from federal court actions.
The Federal Rules of Civil Procedure and Evidence do not apply in SEC
administrative proceedings. Instead, the SEC uses its own Rules of Practice. 17
C.F.R. § 201.100(a).2 “[A]ny evidence ‘that can conceivably throw any light upon
the controversy, including hearsay, normally will be admitted in an
administrative proceeding.’” Am. Compl., Dkt. No. [17] ¶ 53 (quoting In re
Ochanpaugh, Exchange Act Release No. 54363, 2006 WL 2482466, at *6 n.29
(Aug. 25, 2006)) (internal quotations omitted). And respondents such as Plaintiff
“are generally barred from taking depositions under Rules of Practice 233 and
234,” and can “obtain documents only through the issuance of a Subpoena under
2 However, the SEC could order an “alternative procedure” or refuse to enforce a rule if it determined “that to do so would serve the interests of justice and not result in prejudice to the parties to the proceeding.” 17 C.F.R. § 201.100(c).
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Rule of Practice 232.” Am. Compl., Dkt. No. [17] ¶ 54; see also 17 C.F.R. §§
201.232-234.
SEC administrative proceedings also occur much more quickly than federal
court actions. Following an OIP’s issuance, an evidentiary hearing must occur
within four months. 17 C.F.R. § 201.360(a)(2).3 The SEC also has discretion to
hold the evidentiary hearing as soon as one month following the OIP. See id.
Counterclaims are not permissible in administrative proceedings. Am. Compl.
Dkt. No. [1] ¶ 56. And the Rules of Practice do not allow for the equivalent of
12(b) motions in federal court which test the allegations’ sufficiency. Id. ¶ 57.
The SEC’s Rules of Practice, 17 C.F.R. § 201.100, et seq., provide that the
SEC “shall” preside over all administrative proceedings whether by the
Commissioners handling the matter themselves or delegating the case to an ALJ;
there is no right to a jury trial. 17 C.F.R. § 201.110. When an ALJ is selected by the
SEC to preside—as was done by the SEC in Plaintiff’s case—the ALJ is selected by
the Chief Administrative Law Judge. Id. The ALJ then presides over the matter
(including the evidentiary hearing) and issues the initial decision. 17 C.F.R. §
201.360(a)(1). However, the SEC may on its own motion or at the request of a
party order interlocutory review of any matter during the ALJ proceeding;
3 The SEC or ALJ can enlarge any time limit for “good cause shown,” but the SEC and ALJ are cautioned to “adhere to a policy of strongly disfavoring such requests, except in circumstances where the requesting party makes a strong showing that the denial of the request of motion would substantially prejudice their case.” 17 C.F.R. § 201.161(a)-(b).
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“[p]etitions by parties for interlocutory review are disfavored,” though. 17 C.F.R.
§ 201.400(a).
The initial decision can be appealed by either the respondent or the SEC’s
Division of Enforcement, 17 C.F.R. § 201.410, or the SEC can review the matter
“on its own initiative.” 17 C.F.R. § 201.411(c). A decision is not final until the SEC
issues it. If there is no appeal and the SEC elects not to review an initial order, the
ALJ’s decision is “deemed the action of the Commission,” 15 U.S.C. § 78d-1(c),
and the SEC issues an order making the ALJ’s initial order final. 17 C.F.R. §
201.360(d)(2).
If the SEC grants review of the ALJ’s initial decision, its review is
essentially de novo and it can permit the submission of additional evidence. 17
C.F.R. §§ 201.411(a), 201.452. However, the SEC will accept the ALJ’s “credibility
finding, absent overwhelming evidence to the contrary.” In re Clawson, Exchange
Act Release No. 48143, 2003 WL 21539920, at *2 (July 9, 2003); In re Pelosi,
Securities Act Release No. 3805, 2014 WL 1247415, at *2 (Mar. 27, 2014) (“The
Commission gives considerable weight to the credibility determination of a law
judge since it is based on hearing the witnesses' testimony and observing their
demeanor. Such determinations can be overcome only where the record contains
substantial evidence for doing so.”) (footnote and internal quotation marks
omitted).
If a majority of the participating Commissioners do not agree regarding the
outcome, the ALJ’s initial decision “shall be of no effect, and an order will be
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issued in accordance with this result.” 17 C.F.R. § 201.411(f). Otherwise, the SEC
will issue a final order at the conclusion of its review.
If a respondent such as Plaintiff loses with the SEC, he may petition for
review of the SEC’s order in the federal court of appeals (either his home circuit
or the D.C. Circuit). 15 U.S.C. § 78y(a)(1). Once the record is filed, the court of
appeals then retains “exclusive” jurisdiction to “to affirm or modify and enforce
or to set aside the order in whole or in part.” 15 U.S.C. § 78y(a)(3). The SEC’s
findings of facts are “conclusive” “if supported by substantial evidence.” 15 U.S.C.
§ 78y(a)(4). The court of appeals may also order additional evidence to be taken
before the SEC and remand the action for the SEC to conduct an additional
hearing with the new evidence. 15 U.S.C. § 78y(a)(5). The SEC then files its new
findings of facts based on the additional evidence with the court of appeals which
will be taken as conclusive if supported by substantial evidence. Id.
C. SEC ALJs
SEC ALJs are “not appointed by the President, the Courts, or the [SEC]
Commissioners. Instead, they are hired by the SEC’s Office of Administrative
Law Judges, with input from the Chief Administrative Law Judge, human
resource functions, and the Office of Personnel Management” (“OPM”). Am.
Compl., Dkt. No. [17] ¶ 80; see also 5 C.F.R. § 930.204 (“An agency may appoint
an individual to an administrative law judge position only with prior approval of
OPM, except when it makes its selection from the list of eligibles provided by
OPM. An administrative law judge receives a career appointment and is exempt
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from the probationary period requirements under part 315 of this chapter.”). An
ALJ’s salary is set by statute. 5 U.S.C. § 5372.
Congress has authorized the SEC to delegate any of its functions to an ALJ.
15 U.S.C. § 78d-1(a). Pursuant to that authority, the SEC has promulgated
regulations, which set out its ALJ’s powers. 17 C.F.R. § 200.14 makes ALJs
responsible for the “fair and orderly conduct of [administrative] proceedings” and
gives them the authority to: “(1) Administer oaths and affirmations; (2) Issue
subpoenas; (3) Rule on offers of proof; (4) Examine witnesses; (5) Regulate the
course of a hearing; (6) Hold pre-hearing conferences; (7) Rule upon motions;
and (8) Unless waived by the parties, prepare an initial decision containing the
conclusions as to the factual and legal issues presented, and issue an appropriate
order.” 17 C.F.R. § 200.14(a);4 see also 17 C.F.R. § 200.30–9 (authorizing ALJs to
make initial decisions).
4 The SEC Rules of Practice provide a similar list of powers for “hearing officers,” or ALJs. 17 C.F.R. § 201.101(a)(5) (“(5) Hearing officer means an administrative law judge, a panel of Commissioners constituting less than a quorum of the Commission, an individual Commissioner, or any other person duly authorized to preside at a hearing”). 17 C.F.R. § 201.111 provides,
The hearing officer shall have the authority to do all things necessary and appropriate to discharge his or her duties. No provision of these Rules of Practice shall be construed to limit the powers of the hearing officer provided by the Administrative Procedure Act, 5 U.S.C. 556, 557. The powers of the hearing officer include, but are not limited to, the following: (a) Administering oaths and affirmations;
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(b) Issuing subpoenas authorized by law and revoking, quashing, or modifying any such subpoena; (c) Receiving relevant evidence and ruling upon the admission of evidence and offers of proof; (d) Regulating the course of a proceeding and the conduct of the parties and their counsel; (e) Holding prehearing and other conferences as set forth in § 201.221 and requiring the attendance at any such conference of at least one representative of each party who has authority to negotiate concerning the resolution of issues in controversy; (f) Recusing himself or herself upon motion made by a party or upon his or her own motion; (g) Ordering, in his or her discretion, in a proceeding involving more than one respondent, that the interested division indicate, on the record, at least one day prior to the presentation of any evidence, each respondent against whom that evidence will be offered; (h) Subject to any limitations set forth elsewhere in these Rules of Practice, considering and ruling upon all procedural and other motions, including a motion to correct a manifest error of fact in the initial decision. A motion to correct is properly filed under this Rule only if the basis for the motion is a patent misstatement of fact in the initial decision. Any motion to correct must be filed within ten days of the initial decision. A brief in opposition may be filed within five days of a motion to correct. The hearing officer shall have 20 days from the date of filing of any brief in opposition filed to rule on a motion to correct; (i) Preparing an initial decision as provided in § 201.360; (j) Upon notice to all parties, reopening any hearing prior to the filing of an initial decision therein, or, if no initial decision is to be filed, prior to the time fixed for the filing of final briefs with the Commission; and
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D. Plaintiff’s Administrative Proceeding
As stated supra, the SEC filed an OIP against Plaintiff on February 17,
2015. In the administrative proceeding, Plaintiff moved for summary disposition,
asserting three constitutional arguments before the ALJ: (1) that the proceeding
violates Article II of the Constitution because ALJs are protected by two layers of
tenure protection; (2) that Congress’s delegation of authority to the SEC to
pursue cases before ALJs violates the delegation doctrine in Article I of the
Constitution; and (3) that Congress violated his Seventh Amendment right to jury
trial by allowing the SEC to pursue charges in an administrative proceeding. ALJ
decision, Dkt. No. [2-4] at 2. ALJ James E. Grimes found on May 14, 2015, that
he did not have the authority to address issues (2) and (3) and “doubt[ed] that
[he had] the authority to address [] issue” (1). Id. at 7, 10-11. However, he did
deny Plaintiff’s Article II removal claim on the merits. Id.
Plaintiff’s administrative evidentiary hearing is scheduled for June 15,
2015, before the ALJ. On May 19, 2015, Plaintiff filed his Complaint, asking this
Court to (1) declare the administrative proceeding unconstitutional for the same
reasons asserted in the administrative proceeding, and (2) enjoin the
administrative proceeding from occurring until the Court can issue its ruling. The
(k) Informing the parties as to the availability of one or more alternative means of dispute resolution, and encouraging the use of such methods.
17 C.F.R. § 201.111.
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Court heard oral argument on May 27, 2015. On May 29, 2015, Plaintiff amended
his Complaint, adding a claim that the SEC ALJ’s appointment violated the
Appointments Clause of Article II as the ALJ is allegedly an inferior officer and he
was not appointed by the President, the courts of law, or a department head. See
U.S. Const. art. II, § 2, cl. 2. The Court allowed Plaintiff and the SEC to file
supplemental briefs on this issue following the hearing. Dkt. No. [18].
The SEC opposes Plaintiff’s Motion, arguing that (1) this Court does not
have subject matter jurisdiction, and (2) even if it does, Plaintiff has failed to
meet his burden under the preliminary injunction standard.
II. Discussion
A. Subject Matter Jurisdiction
The SEC first contends that this Court does not have subject matter
jurisdiction because the administrative proceeding, with its eventual review from
a court of appeals, has exclusive jurisdiction over Plaintiff’s constitutional claims.
In other words, the SEC contends that its election to pursue claims against
Plaintiff in an administrative proceeding, “channels review of Plaintiff’s claims
through the Commission’s administrative process, with review in the courts of
appeals.” Def. Br., Dkt. No. [12] at 18; see 15 U.S.C. § 78y; supra at ___
(explaining the administrative review procedure). The SEC thus argues that § 78y
is now Plaintiff’s exclusive judicial review channel, and this Court cannot
consider Plaintiff’s constitutional claims; judicial review can only come from the
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courts of appeal following the administrative proceeding and the SEC’s issuance
of a final order in Plaintiff’s case.
The SEC’s position is in tension with 28 U.S.C. § 1331, which provides that
federal district courts “have original jurisdiction of all civil actions arising under
the Constitution, laws, or treaties of the United States,” and 28 U.S.C. § 2201,
which authorizes declaratory judgments. “[I]t is established practice for [the
Supreme] Court to sustain the jurisdiction of federal courts to issue injunctions to
protect rights safeguarded by the Constitution.” Bell v. Hood, 327 U.S. 678, 684
(1946); Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 491
n.2 (2010). And “injunctive relief has long been recognized as the proper means
for preventing entities from acting unconstitutionally.” Corr. Servs. Corp. v.
Malesko, 534 U.S. 61, 74 (2001); see also 5 U.S.C. § 702 (stating that under the
Administrative Procedure Act, any “person suffering legal wrong because of
agency action, or adversely affected or aggrieved by agency action within the
meaning of a relevant statute, is entitled to judicial review thereof” and may seek
injunctive relief).
To restrict the district court’s statutory grant of jurisdiction under § 1331,
there must be Congressional intent to do so. The Supreme Court has held that,
“[p]rovisions for agency review do not restrict judicial review unless the ‘statutory
scheme’ displays a ‘fairly discernible’ intent to limit jurisdiction, and the claims at
issue ‘are of the type Congress intended to be reviewed within th[e] statutory
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structure.’” Free Enterprise, 561 U.S. at 489 (quoting Thunder Basin Coal Co. v.
Reich, 510 U.S. 200, 207, 212, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994)).
At the hearing, the SEC argued that despite statutory language providing
that these types of enforcement actions could be heard in either the district court
or administrative proceedings, once the SEC selected the administrative forum,
Plaintiff was bound by that decision and § 78y became the exclusive judicial
review provision. The SEC contends that Congress declared its intent for the
administrative proceeding to be the exclusive forum for judicial review for these
cases by allowing the SEC to make the administrative proceeding its forum
choice.
The Court finds, however, that Congress’s purposeful language allowing
both district court and administrative proceedings shows a different intent.
Instead, the clear language of the statute provides a choice of forum, and there is
no language indicating that the administrative proceeding was to be an exclusive
forum. There can be no “fairly discernible” Congressional intent to limit
jurisdiction away from district courts when the text of the statute provides the
district court as a viable forum. The SEC cannot manufacture Congressional
intent by making that choice for Congress; Congress must express its own intent
within the language of the statute. Similarly, in Free Enterprise, the Supreme
Court held that the text of § 78y—the provision at issue here—“does not expressly
limit the jurisdiction that other statutes confer on district courts. See, e.g., 28
U.S.C. §§ 1331, 2201. Nor does it do so implicitly.” 561 U.S. at 489.
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Here, the Court finds that because Congress created a statutory scheme
which expressly included the district court as a permissible forum for the SEC’s
claims, Congress did not intend to limit § 1331 and prevent Plaintiff from raising
his collateral constitutional claims in the district court. Congress could not have
intended the statutory review process to be exclusive because it expressly
provided for district courts to adjudicate not only constitutional issues but
Exchange Act violations, at the SEC’s option. See Elgin v. Dep't of Treasury, __
U.S. __, 132 S. Ct. 2126, 2133 (2012) (“To determine whether it is ‘fairly
discernible’ that Congress precluded district court jurisdiction over petitioners'
claims, we examine the [the Exchange Act]'s text, structure, and purpose.”).
But even if Congress’s intent cannot be gleaned from Congress’s purposeful
choice to include the district court as a viable forum, the Court still finds that
jurisdiction would be proper as Congress’s intent can be presumed based on the
standard articulated in Thunder Basin, Free Enterprise, and Elgin. A court may
“presume that Congress does not intend to limit jurisdiction” if (1) “a finding of
preclusion could foreclose all meaningful judicial review”; (2) “if the suit is wholly
collateral to a statute's review provisions”; and if (3) “the claims are outside the
agency's expertise.” Free Enterprise, 561 U.S. at 489 (quoting Thunder Basin, 510
U.S. at 212-213) (internal quotations omitted). A discussion of these factors
follows.
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1. Barring Plaintiff’s Claims Would Prevent Meaningful Judicial Review.
The SEC first argues that because Plaintiff has a “certain path” to judicial
review through a court of appeals, Plaintiff cannot demonstrate he lacks
meaningful judicial review. Def. Br., Dkt. No. [12] at 20. But the Court finds that
requiring Plaintiff to pursue his constitutional claims following the SEC’s
administrative process “could foreclose all meaningful judicial review” of his
constitutional claims. Free Enterprise, 561 U.S. at 489 (emphasis added) (quoting
Thunder Basin, 510 U.S. at 212-213); see Duka, 2015 WL 1943245, at *5.
Plaintiff’s claims go to the constitutionality of Congress’s entire statutory
scheme, and Plaintiff specifically seeks an order enjoining the SEC from pursuing
him in its “unconstitutional” tribunals. If Plaintiff is required to raise his
constitutional law claims following the administrative proceeding, he will be
forced to endure what he contends is an unconstitutional process. Plaintiff could
raise his constitutional arguments only after going through the process he
contends is unconstitutional—and thus being inflicted with the ultimate harm
Plaintiff alleges (that is, being forced to litigate in an unconstitutional forum). By
that time, Plaintiff’s claims would be moot and his remedies foreclosed because
the Court of Appeals cannot enjoin a proceeding which has already occurred.
The SEC argues that Plaintiff’s argument “boils down to the assertion that
administrative respondents need not wait for actual adjudication of their cases in
order to challenge their legality,” and the Eleventh Circuit has “rejected precisely
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this argument.” See Def. Br., Dkt. No. [12] at 21 (quoting Chau v. U.S. S.E.C., __
F. Supp. 3d __, No. 14-CV-1903 LAK, 2014 WL 6984236, at *12 (S.D.N.Y. Dec.
11, 2014) (internal quotation marks omitted)); see also Def. Br., Dkt. No. [12] at
21 (citing Doe v. F.A.A., 432 F.3d 1259, 1263 (11th Cir. 2005)). However, this
Court does not read those Eleventh Circuit decisions so broadly.
In Doe, thirteen aircraft mechanics sued the FAA, seeking a preliminary
injunction “instructing the FAA how to proceed in its process of reexamination.”
432 F.3d at 1260. An investigation revealed that the school where plaintiffs
received their airmen certificates had fraudulently examined and certified some
mechanics who were unqualified to hold the certification. Id. Because the FAA
was unable to determine which certifications were fraudulent, the FAA wrote all
relevant mechanics requiring them to recertify. Id. “The parties agreed that the
FAA ha[d] the power to reexamine airmen and to suspend and revoke their
certificates.” Id. at 1262. But the plaintiffs sought and received an injunction on
the basis that their due process rights would be violated by the FAA pursuing its
administrative procedure.
The Eleventh Circuit reversed, finding that the Court did not have subject
matter jurisdiction. The Court held that the mechanics’ constitutional arguments
were “inescapably intertwined” with the merits of an FAA order. Id. at 1263 (“The
mechanics' constitutional claims (that the FAA has infringed upon their due
process rights by failing to observe statutory and administrative processes)
necessarily require a review of the procedures and actions taken by the FAA with
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regard to the mechanics' certificates. Therefore, the constitutional claims fall
within the ambit of the administrative scheme, and the district court is without
subject-matter jurisdiction.”); see also Green v. Brantley, 981 F.2d 514, 521 (11th
Cir. 1993) (holding that the Circuit lacked subject matter jurisdiction because
“the merits of [plaintiff’s] claims are inescapably intertwined with a review of the
procedures and merits surrounding the FAA's order.”). The Court therefore held
that “delayed judicial review (that is, review by a federal court of appeals after
determination by the administrative commission rather than initial review by a
federal district court)” was still meaningful in those circumstances. Doe, 432 F.3d
at 1263.
The Court finds that Doe is distinguishable. The plaintiffs in Doe conceded
the FAA had the authority to initiate administrative proceedings, but claimed that
because the FAA had not yet initiated administrative proceedings against them,
they were not required to go through the administrative process. Id. at 1262. The
FAA did not have a forum selection decision, and the plaintiff conceded the FAA’s
ability to pursue reexamination. The Eleventh Circuit found that plaintiff’s due
process challenges were “inescapably intertwined” with the merits of the FAA’s
actions.
Here, Plaintiff’s claims rise or fall regardless of what has occurred or will
occur in the SEC administrative proceeding; Plaintiff does not challenge the
SEC’s conduct in that proceeding or the allegations against him—he challenges
the proceeding itself. See Free Enterprise, 561 U.S. at 490 (“But petitioners object
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to the Board’s existence, not to any of its auditing standards.”); Touche Ross &
Co. v. SEC, 609 F.2d 570, 577 (2d Cir. 1979) (“While the Commission's
administrative proceeding is not ‘plainly beyond its jurisdiction,’ nevertheless to
require appellants to exhaust their administrative remedies would be to require
them to submit to the very procedures which they are attacking.”).
Plaintiff’s claims here are not “inescapably intertwined” with the merits of
the SEC’s insider trading claims against him. Therefore, while the delayed
judicial review in Doe was acceptable because the constitutional claims depended
on how long the FAA took to complete an admittedly constitutional process,
delayed judicial review here will cause an allegedly unconstitutional process to
occur.
Waiting until the harm Plaintiff alleges cannot be remedied is not
meaningful judicial review.5 See LabMD, Inc. v. F.T.C., 776 F.3d 1275, 1280 (11th
5 The cases the SEC cites from other districts on this issue can be distinguished from the facts here. Chau, Jarkesy v. S.E.C., 48 F. Supp. 3d 32 (D.D.C. 2014), and Altman v. U.S. S.E.C., 768 F. Supp. 2d 554 (S.D.N.Y. 2011), all addressed substantive challenges to the merits of the administrative proceedings. See Chau, 2014 WL 6984236 (challenging the SEC’s conduct within the administrative proceeding, such as failing to postpone a hearing following a document dump); Jarkesy, 48 F. Supp. 3d at 32 (claiming that he could not obtain a fair hearing before the SEC because the SEC’s settlements with two others stated that the plaintiff was liable for securities fraud); Altman, 768 F. Supp. 2d at 561 (involving a challenge to the SEC’s own rules and stating that this was not a case where the plaintiff disputed the SEC had the expertise to hear challenges to its own rules and noted that the plaintiff did not challenge the “existence” of the proceeding but rather the “extent of the SEC’s ability to sanction attorneys under the SEC’s own rules”).
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Cir. 2015) (“We have consistently looked to how ‘inescapably intertwined’ the
constitutional claims are to the agency proceeding, reasoning that the harder it is
to distinguish them, the less prudent it is to interfere in an ongoing agency
process.”) (citing Doe, 432 F.3d at 1263; Green, 981 F.2d at 521). Therefore, the
Court finds that § 78y does not provide meaningful judicial review under these
circumstances.
2. Plaintiff’s Claims Are Wholly Collateral to the SEC Proceeding.
The Court also notes that Chau’s reasoning supports this Court’s ruling. Specifically, The Chau court stated,
There is an important distinction between a claim that an administrative scheme is unconstitutional in all instances—a facial challenge—and a claim that it violates a particular plaintiff's rights in light of the facts of a specific case—an as-applied challenge. As between the two, courts are more likely to sustain pre-enforcement jurisdiction over “broad facial and systematic challenges,” such as the claim at issue in Free Enterprise Fund. This tendency is not a hard-and-fast rule, as “the distinction between facial and as-applied challenges is not so well defined that it has some automatic effect or that it must always control the pleadings and disposition in every case involving a constitutional challenge.” Rather, it is a recognition that the Thunder Basin and Free Enterprise factors militate against jurisdiction when a pre-enforcement constitutional claim relates to factual issues that are the subject of a pending administrative adjudication.
Chau v. U.S. S.E.C., No. 14-CV-1903 LAK, 2014 WL 6984236, at *6 (S.D.N.Y. Dec. 11, 2014) (footnotes omitted) (quoting Elk Run Coal Co. v. Dep’t of Labor, 804 F. Supp. 2d 8, 21 (D.D.C. 2011) (describing Free Enterprise as a “broad facial and systemic challenge”); Elgin, 132 S. Ct. at 2135 (explaining that the as-applied vs. facial distinction is not talismanic)).
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The SEC also argues that Plaintiff’s claims are not wholly collateral to the
SEC proceeding because it is possible that Plaintiff may not be found liable in the
administrative proceeding or he may eventually obtain relief on appeal. The SEC
cites Elgin and argues that “Plaintiff’s claims are not collateral to the statutory
provisions governing review of SEC administrative proceedings because they are
the means by which Plaintiff seeks to halt his SEC proceeding.” Def. Br., Dkt. No.
[12] at 22 (citing Elgin, 132 S. Ct. at 2139). But Elgin is distinguishable.
In Elgin, the plaintiffs had been terminated from their civil service jobs for
failing to register for the selective service. Rather than appealing their
terminations to the Merit Systems Protective Board or the Court of Appeals for
the Federal Circuit, as required by the Civil Service Reform Act, plaintiffs filed an
action in federal district court, claiming that their termination was
unconstitutional. The Supreme Court ruled that the plaintiffs’ claim was not
“wholly collateral to the CSRA scheme,” but was “a challenge to CSRA-covered
employment action brought by CSRA-covered employees requesting relief that
the CSRA routinely affords,”—i.e., reversal of employment decisions,
reinstatement, and awarding back pay. Elgin, 132 S. Ct. at 2139-40 (internal
quotation marks omitted).
Plaintiff is not challenging an agency decision; Plaintiff is challenging
whether the SEC’s ability to make that decision was constitutional. What occurs
at the administrative proceeding and the SEC’s conduct there is irrelevant to this
proceeding which seeks to invalidate the entire statutory scheme. See Free
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Enterprise, 561 U.S. at 490 (“But petitioners object to the Board’s existence, not
to any of its auditing standards.”); Duka, 2015 WL 1943245, at *6; Gupta, 796 F.
at 513 (noting the plaintiff would state a constitutional claim “even if [plaintiff]
were entirely guilty of the charges made against him in the OIP”). Accordingly,
Plaintiff’s constitutional claims are wholly collateral to the administrative
proceeding.
3. Plaintiff’s Constitutional Claims Are Outside the Agency’s Expertise.
The SEC claims that Plaintiff’s challenges “fall within the Commission’s
expertise,” and the “SEC is in the best position to interpret its own policies and
regulations in the first instance.” Dkt. No. [12] at 13. The Court finds that
Plaintiff’s Article I, Seventh Amendment, and Article II claims are outside the
agency’s expertise.6
Plaintiff’s constitutional claims are governed by Supreme Court
jurisprudence, and “the statutory questions involved do not require technical
considerations of agency policy.” Free Enterprise, 561 U.S. at 491 (alteration and
internal quotations omitted) (quoting Johnson v. Robison, 415 U.S. 361, 373
(1974)); see also Thunder Basin, 510 U.S. at 215 (“[A]djudication of the
constitutionality of congressional enactments has generally been thought beyond
the jurisdiction of administrative agencies.”) (quoting Johnson, 415 U.S. at 368).
These claims are not part and parcel of an ordinary securities fraud case, and
6 The SEC ALJ agrees with this conclusion. See ALJ decision, Ex. 2, Dkt. No. [2-4].
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there is no evidence that (1) Plaintiff’s constitutional claims are the type the SEC
“routinely considers,” or (2) the agency’s expertise can be “brought to bear” on
Plaintiff’s claims as they were in Elgin. Elgin, 132 S. Ct. at 2140.
The Court finds that as to this factor, Plaintiff’s constitutional claims are
outside the SEC’s expertise, and that this Court has subject matter jurisdiction.
B. Preliminary Injunction
To obtain a preliminary injunction, the moving party must demonstrate:
(1) a substantial likelihood of success on the merits; (2) a substantial threat of
irreparable injury if the injunction is not granted; (3) the threatened injury to the
movant outweighs the damage to the opposing party; and (4) granting the
injunction would not be adverse to the public interest. Four Seasons Hotels &
Resorts, B.V. v. Consorcio Barr, S.A., 320 F.3d 1205, 1210 (11th Cir. 2003). "The
preliminary injunction is an extraordinary and drastic remedy not to be granted
unless the movant ‘clearly carries the burden of persuasion’ as to the four
prerequisites." United States v. Jefferson Cnty., 720 F.2d 1511, 1519 (11th Cir.
1983) (quoting Canal Auth. v. Callaway, 489 F.2d 567, 573 (5th Cir. 1974)). The
same factors apply to a temporary restraining order. Ingram v. Ault, 50 F.3d 898,
900 (11th Cir. 1995). The Court first analyzes whether Plaintiff has met his
burden to demonstrate a substantial likelihood to succeed on the merits of each
of his constitutional arguments.
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1. Non-Delegation Doctrine
Plaintiff first argues that the Dodd-Frank Act violates Article I of the
Constitution because it gives the SEC unfettered discretion to select its forum. As
stated supra, prior to the Dodd-Frank Act, the SEC could not have brought an
administrative proceeding seeking civil penalties against unregistered individuals
such as Plaintiff. Now, the SEC may choose between two forums for violations:
federal district court or an SEC administrative proceeding. 7 Plaintiff argues that
the Dodd-Frank Act violates Article I of the Constitution because it “delegates
decisionmaking authority to the Commission to bring an administrative
proceeding for civil penalties against unregulated individuals . . . without any
intelligible principle as to when the Commission is to bring an enforcement
action against an unregulated individual in an administrative forum.” Pl. Br., Dkt.
No. [2-1] at 9.
Article I, § 1 of the U.S. Constitution vests, “[a]ll legislative Powers herein
granted . . . in a Congress of the United States.” Pursuant to the delegation
doctrine, Congress may delegate this legislative decisionmaking power to
agencies, but only if it “lay[s] down by legislative act an intelligible principle to
which the person or body authorized to [act] is directed to conform.” Whitman v.
Am. Trucking Assocs., 531 U.S. 457, 472 (2001) (quoting J.W. Hampton Jr., & Co.
v. United States, 276 U.S. 394, 409 (1928)). “Whether the statute delegates
7 At the hearing, the SEC noted that available penalties vary slightly based on choice of forum. Hr’g Tr., Dkt. No. [19] at 99:4-7 (noting that treble damages are only available in federal court and not in an administrative proceeding).
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legislative power is a question for the courts, and an agency’s voluntary self-
denial has no bearing upon the answer.” Whitman, 531 U.S. at 473. Exercise of
legislative power depends not on form but upon “whether [the actions] contain
matter which is properly to be regarded as legislative in its character and effect.”
I.N.S. v. Chadha, 462 U.S. 919, 952 (1983) (quoting S. Rep. No. 1335, 54th Cong.,
2d Sess., 8 (1897)).
The SEC contends that the non-delegation doctrine is inapplicable because
the “Executive [Branch] does not act in a legislative capacity by selecting the
forum in which to enforce a law; that authority is a part of the Executive power
itself.” Def. Br., Dkt. No. [12] at 24; see also U.S. Const. art. II, § 3 (stating the
Executive “shall take Care that the Laws be faithfully executed”). The SEC argues
that its forum selection decision is no different from any other decision made by
prosecutors, and courts consistently reject non-delegation challenges to
prosecutorial-discretion-related decisions. See United States v. Batchelder, 442
U.S. 114, 126 (1979) (rejecting a non-delegation challenge where “the power that
Congress has delegated to those officials is no broader than the authority they
routinely exercise in enforcing the criminal laws.”); United States v. I.D.P., 102
F.3d 507, 511 (11th Cir. 1996) (noting that the Government’s “authority to decide
whether to prosecute a case in a federal forum [is the] type of decision [that] falls
squarely within the parameters of prosecutorial discretion . . . .”). This Court
agrees.
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In Batchelder, the Supreme Court was asked to resolve whether the
Government’s “unfettered” prosecutorial discretion to decide between two
identical statutes except for their penalty provisions was constitutional, when one
statute had a much higher sentencing range. 442 U.S. at 116-17, 125. The
defendant had been convicted under the statute with the higher penalty, and the
defendant challenged Congress’s delegation of authority to prosecutors to (1)
decide between the statutes, and (2) thus choose a higher sentencing range for
identical conduct. The court of appeals had remanded the case to the district
court for resentencing, finding that the defendant could only be subject to the
maximum sentence under the statute with the lower penalty. The court of appeals
found that the “prosecutor’s power to select one of two statutes that are identical
except for their penalty provisions implicated important constitutional
protections.” 442 U.S. at 117 (internal quotations omitted).
The Supreme Court reversed, finding that there is a “settled rule” in
prosecutorial choice, 442 U.S. at 124, and “[m]ore importantly, there is no
appreciable difference between the discretion a prosecutor exercises when
deciding whether to charge under one of two statutes with different elements and
the discretion he exercises when choosing one of two statutes with identical
elements.” 442 U.S. at 125. “Just as a defendant has no constitutional right to
elect which of two applicable federal statutes shall be the basis of his indictment
and prosecution neither is he entitled to choose the penalty scheme under which
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he will be sentenced.” Id. The Court specifically rejected defendant’s delegation
argument, finding that:
[t]he provisions at issue plainly demarcate the range of penalties that prosecutors and judges may seek to impose. In light of that specificity, the power that Congress has delegated to those officials is no broader than the authority they routinely exercise in enforcing the criminal laws. Having informed the courts, prosecutors, and defendants of the permissible punishment alternatives available under each Title, Congress has fulfilled its duty.
442 U.S. at 126.
The Court finds that this case is similar to Batchelder. Just as the Supreme
Court held that the defendant in Batchelder could not choose the statute of his
indictment, Plaintiff here may not choose his forum when Congress has dedicated
that decision to the Executive. See United States v. Allen, 160 F.3d 1096, 1108
(6th Cir. 1998) (rejecting defendant’s “attempt to end-run the doctrine of
prosecutorial discretion” by arguing the prosecutor’s charging decision violated
the non-delegation doctrine); see also Whitman, 531 U.S. at 474-475 (“In short,
we have almost never felt qualified to second-guess Congress regarding the
permissible degree of policy judgment that can be left to those executing or
applying the law.”) (internal quotations omitted). When the SEC makes its forum
selection decision, it is acting under executive authority and exercising
prosecutorial discretion. See Chadha, 462 U.S. at 951 (“When the Executive acts,
it presumptively acts in an executive or administrative capacity as defined in Art.
II.”).
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Plaintiff argues that unlike Batchelder, where the Supreme Court found
that Congress set out clear parameters as to the possible punishments, Dodd-
Frank does not provide the SEC any criteria to make its forum selection decision.
Pl. Reply, Dkt. No. [13] at 12-13. However, just as the prosecutor was allowed to
select between two statutes which prevented identical conduct but provided
different possible penalties in Batchelder, the Court finds that the SEC may select
between two statutes which allow for different forum choices. The statutes in
Batchelder did not tell the prosecutor what factors to consider in making his
decision between the statutes, and the effect of the prosecutor’s decision in
Batchelder was equally paramount to Plaintiff’s claims here—the defendant there
would spend more time incarcerated if the prosecutor selected the higher penalty
statute.
Congress has advised the SEC through the enactment of specific statutes as
to what conduct may be pursued in each forum. It is for the enforcement agency
to decide where to bring that claim under its exercise of executive power. Because
the SEC has been made aware of the permissible forums available under each
statute, “Congress has fulfilled its duty.” Batchelder, 442 U.S. at 126.
Plaintiff also argues that the SEC’s forum decision is an improper exercise
of legislative power. Specifically, the SEC contends that “by virtue of the Act, the
SEC received additional power from Congress to alter the rights, duties, and legal
relations of individuals,” and that under Chadha, this action constituted
legislative action not executive action. Pl. Reply, Dkt. No. [13] at 10-11.
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In Chadha, the Supreme Court found that the one-House veto provision
was unconstitutional, but it did so without using the non-delegation doctrine.
462 U.S. at 959. In invalidating the statute, the Supreme Court first noted the
presumption that “[w]hen any Branch acts, it is presumptively exercising the
power the Constitution has delegated to it.” Id. at 951. Beginning with that
presumption, the Court held that the one-House veto was legislative in effect
because “[i]n purporting to exercise power defined in Art. I, § 8, cl. 4 to ‘establish
an uniform Rule of Naturalization,’ the House took action that had the purpose
and effect of altering the legal rights, duties, and relations of persons,
including the Attorney General, Executive Branch officials and Chadha, all
outside the legislative branch.” Id. at 952 (emphasis added). Plaintiff seizes on
the bolded language above to claim that because the SEC’s forum selection
decision affects him—specifically, his ability to assert his 7th Amendment rights—
the SEC has been delegated legislative authority.
The Court does not agree with Plaintiff’s reading of Chadha. Instead,
Chadha stands for the basic proposition that when Congress acts pursuant to its
Article I powers, the action is legislative. If Plaintiff’s broad reading were true as
to actions of the executive branch, that would mean any SEC decision which
affected a person’s “legal rights, duties, and relations of persons”—to include
charging decisions which the Supreme Court has held involve prosecutorial
discretion, see Batchelder, 442 U.S. at 124 —would be legislative actions. See
Chadha, 462 U.S. at 953 n.16 (noting that when the head of an executive agency
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performs his duties pursuant to statute, “he does not exercise ‘legislative’
power.”) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213-214 (1976)).
Plaintiff’s reading does not comport with the Executive’s constitutional role
in faithfully executing the laws. Because Congress has properly delegated power
to the executive branch to make the forum choice for the underlying SEC
enforcement action, the Court finds that the Plaintiff cannot prove a substantial
likelihood of success on the merits on his non-delegation claim.
2. Seventh Amendment
Plaintiff next argues that the SEC’s decision to prosecute the claims against
him in the administrative proceeding rather than the district court violates his
Seventh Amendment right to a jury trial. Pl. Br., Dkt. No. [2-1] at 15. The Seventh
Amendment provides, “[i]n Suits at common law, where the value in controversy
shall exceed twenty dollars, the right of trial by jury shall be preserved . . . .” “The
phrase ‘Suits at common law’ has been construed to refer to cases tried prior to
the adoption of the Seventh Amendment in courts of law in which jury trial was
customary as distinguished from courts of equity or admiralty in which jury trial
was not.” Atlas Roofing Co. v. Occupational Safety & Health Review Comm'n, 430
U.S. 442, 449 (1977) (citing Parsons v. Bedford, 3 Pet. 433, 7 L.Ed. 732 (1830)).
“[T]he Seventh Amendment also applies to actions brought to enforce statutory
rights that are analogous to common-law causes of action ordinarily decided in
English law courts in the late 18th century, as opposed to those customarily heard
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by courts of equity or admiralty.” Granfinanciera, S.A. v. Nordberg, 492 U.S. 33,
42 (1989) (citing Curtis v. Loether, 415 U.S. 189, 193 (1974)).
The form of [the Court’s] analysis is familiar. “First, we compare the statutory action to 18th-century actions brought in the courts of England prior to the merger of the courts of law and equity. Second, we examine the remedy sought and determine whether it is legal or equitable in nature.” Tull v. United States, 481 U.S. 412, 417–418 (1987) (citations omitted). The second stage of this analysis is more important than the first. Id., at 421. If, on balance, these two factors indicate that a party is entitled to a jury trial under the Seventh Amendment, we must decide whether Congress may assign and has assigned resolution of the relevant claim to a non-Article III adjudicative body that does not use a jury as factfinder.
Granfinanciera, 492 U.S. at 42.
The SEC does not dispute Plaintiff’s argument that an enforcement action
for civil penalties is “clearly analogous to the 18th-century action in debt,” Tull,
481 U.S. at 420, and this remedy is legal in nature. See Tull, 481 U.S. at 422 (“A
civil penalty was a type of remedy at common law that could only be enforced in
courts of law. Remedies intended to punish culpable individuals, as opposed to
those intended simply to extract compensation or restore the status quo, were
issued by courts of law, not courts of equity.”).
Rather, the SEC contends that “Plaintiff’s claim fails because it is firmly
established that Congress ‘may assign th[e] adjudication’ of cases involving so-
called ‘public rights’ to ‘an administrative agency with which a jury trial would be
incompatible[] without violating the Seventh Amendment[] . . . even if the
Seventh Amendment would have required a jury where the adjudication of those
rights is assigned instead to a federal court of law.’” Def. Br., Dkt. No. [12] at 26
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(alteration in the original) (quoting Atlas Roofing, 430 U.S. at 455). This Court
agrees.
“Public rights” cases are those which “arise between the Government and
persons subject to its authority ‘in connection with the performance of the
constitutional functions of the executive or legislative departments.’” Atlas
Roofing, 430 U.S. at 457 (internal quotation omitted) (quoting Crowell v. Benson,
285 U.S. 22, 31 (1932)). Plaintiff does not dispute that this SEC enforcement
action involves a public right. See Pl. Reply, Dkt. No. [13] at 19-20. Because the
SEC is acting as a sovereign in the performance of its executive duties when it
pursues an enforcement action, the Court also agrees that this is a public rights
case.
Despite this being a public rights case, Plaintiff argues that Congress must
make the decision as to whether or not a new cause of action will contain a right
to a jury trial when Congress originally creates the cause of action. That is,
Plaintiff contends that the Seventh Amendment right can only be taken away at
the time Congress is creating the “new public right.” Id. at 17-21 (emphasis
added). Plaintiff seizes on language from Atlas Roofing and Granfinanciera that
the public right must be “new” or “novel,” to be excluded from the Seventh
Amendment’s protections. See Atlas Roofing, 430 U.S. at 455 (“[W]hen Congress
creates new statutory ‘public rights,’ it may assign their adjudication to an
administrative agency with which a jury trial would be incompatible, without
violating the Seventh Amendment's injunction that jury trial is to be ‘preserved’
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in ‘suits at common law.’”) (emphasis added); Granfinanciera, 492 U.S. at 51
(“Congress may devise novel causes of action involving public rights free from the
strictures of the Seventh Amendment if it assigns their adjudication to tribunals
without statutory authority to employ juries as factfinders.”) (emphasis added).
This Court disagrees.
Plaintiff’s argument puts form over substance and defines “new” in a way
that the Supreme Court did not intend. See Tull, 481 U.S. at 418 n.4 (“[T]he
Seventh Amendment is not applicable to administrative proceedings.”).
Plaintiff’s position is that Congress could have sent all enforcement actions for
unregistered persons to an administrative proceeding at the time the original
statute was drafted—because at that time, the public right was “new.” But once it
decided unregistered persons such as Plaintiff would get a jury trial, as it initially
did in the Exchange Act, Plaintiff became “vested” with a Seventh Amendment
right that Congress is now powerless to remove.
The Court does not find Plaintiff’s argument persuasive. In Atlas Roofing,
the Supreme Court stated, the “Government could commit the enforcement of
statutes and the imposition and collection of fines to the judiciary, in which event
jury trial would be required . . . , but [] the United States could also validly opt for
administrative enforcement, without judicial trials.” 430 U.S. at 460 (internal
citation omitted). For cases involving public rights, Congress has the choice as to
whether or not a jury trial will be required. Congress does not tie its hands when
it initially creates a cause of action. Plaintiff cites no authority which specifically
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holds that Congress may not change its mind and reassign public rights to
administrative proceedings.8
As the Supreme Court has stated,
The point is that the Seventh Amendment was never intended to establish the jury as the exclusive mechanism for factfinding in civil cases. It took the existing legal order as it found it, and there is little or no basis for concluding that the Amendment should now be interpreted to provide an impenetrable barrier to administrative factfinding under otherwise valid federal regulatory statutes. We cannot conclude that the Amendment rendered Congress powerless when it concluded that remedies available in courts of law were inadequate to cope with a problem within Congress' power to regulate to create new public rights and remedies by statute and commit their enforcement, if it chose, to a tribunal other than a court of law such as an administrative agency in which facts are not found by juries.
Atlas Roofing, 430 U.S. at 460.
In enacting Dodd-Frank, Congress specifically noted that it was doing so in
response to the financial crisis. Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat.
1376 (2010) (stating the statute was enacted “[t]o promote the financial stability
of the United States by improving accountability and transparency in the
financial system, to end ‘too big to fail’, to protect the American taxpayer by
ending bailouts, to protect consumers from abusive financial services practices . .
. .”). Congress thus decided that to carry out its mission to “clean up” the financial
8 Plaintiff argues under Granfinanciera that Congress may not reclassify or relabel a cause of action to avoid the Seventh Amendment. See Pl. Reply, Dkt. No. [13] at 18. However, Granfinanciera involved Congress relabeling a private right—to which the Seventh Amendment always attaches, see Atlas Roofing, 430 U.S. at 458—to create a supposed public right. See Granfinanciera, 492 U.S. at 60-61. It is undisputed that even the pre-Dodd-Frank claim involved a public right.
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system, it would allow the SEC to bring actions in administrative proceedings “to
administrative agencies with special competence in the relevant field.” Atlas
Roofing, 430 U.S. at 455. Congress found that the prior scheme was not working,
and it redrafted the legislation. Because the legislation related to public rights,
the Seventh Amendment does not prevent Congress from doing so. See Atlas
Roofing, 430 U.S. at 460; id. at 461 (“Congress found the common-law and other
existing remedies for work injuries resulting from unsafe working conditions to
be inadequate to protect the Nation's working men and women. It created a new
cause of action, and remedies therefor, unknown to the common law, and placed
their enforcement in a tribunal supplying speedy and expert resolutions of the
issues involved. The Seventh Amendment is no bar to the creation of new rights
or to their enforcement outside the regular courts of law.”). The Court finds that
Plaintiff cannot prove a substantial likelihood of success on the merits on his
Seventh Amendment claim as this claim involves a public right, and Congress has
the right to send public rights cases to administrative proceedings.
3. Article II
Plaintiff next brings two claims under Article II of the Constitution: (1) that
the ALJ’s appointment violates the Appointments Clause of Article II because he
was not appointed by the President, a court of law, or a department head, and (2)
the ALJ’s two-layer tenure protection violates the Constitution’s separation of
powers, specifically the President’s ability to exercise Executive power over his
inferior officers. Both of Plaintiff’s arguments depend on this Court finding that
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the ALJ is an inferior officer who would trigger these constitutional protections.
See U.S. Const. art. II § 2, cl. 2; Freytag v. Comm’r of Internal Revenue, 501 U.S.
868, 880 (1991); Free Enterprise, 561 U.S. at 484, 506. Therefore, the Court will
consider this threshold issue first.
a. Inferior Officer
The issue of whether the SEC ALJ is an inferior officer or employee for
purposes of the Appointments Clause depends on the authority he has in
conducting administrative proceedings. The Appointments Clause of Article II of
the Constitution provides:
[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.
U.S. Const. art. II, § 2, cl. 2. The Appointments Clause thus creates two classes of
officers: principal officers, who are selected by the President with the advice and
consent of the Senate, and inferior officers, whom “Congress may allow to be
appointed by the President alone, by the heads of departments, or by the
Judiciary.” Buckley v. Valeo, 424 U.S. 1, 132 (1976). The Appointments Clause
applies to all agency officers including those whose functions are “predominately
quasi judicial and quasi legislative” and regardless of whether the agency officers
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are “independent of the Executive in their day-to-day operations.” Id. at 133
(quoting Humphrey’s Executor v. United States, 295 U.S. 602, 625-26 (1935)).
“[A]ny appointee exercising significant authority pursuant to the laws of
the United States is an ‘Officer of the United States,’ and must, therefore, be
appointed in the manner prescribed by § 2, cl. 2, of [Article II].” Freytag, 501 U.S.
at 881 (quoting Buckley, 424 U.S. at 126) (alteration in the original). By way of
example, the Supreme “Court has held that district-court clerks, thousands of
clerks within the Treasury and Interior Departments, an assistant surgeon, a
cadet-engineer, election monitors, federal marshals, military judges, Article I
[Tax Court special trial] judges, and the general counsel for the Transportation
Department are inferior officers.” Kent Barnett, Resolving the ALJ Quandary, 66
Vand. L. Rev. 797, 812 (2013) (citing Free Enterprise, 561 U.S. at 540 (Breyer, J.,
dissenting) (citing cases)).
Plaintiff claims that SEC ALJs are inferior officers because they exercise
“significant authority pursuant to the laws of the Unites States” while the SEC
contends ALJs are “mere employees” based upon Congress’s treatment of them
and the fact that they cannot issue final orders and do not have contempt power,9
inter alia. The Court finds that based upon the Supreme Court’s holding in
Freytag, SEC ALJs are inferior officers. See also Duka, 2015 WL 1943245, at *8
9 ALJs can find people in contempt, but cannot compel compliance with their order. See 17 C.F.R. § 201.180 (noting an ALJ can punish “[c]ontemptuous conduct”); Def. Br., Dkt. No. [12] at 24 (stating ALJs lack “contempt power” and stating an ALJ cannot compel compliance with any subpoenas he issues).
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(“The Supreme Court's decision in Freytag v. Commissioner, 501 U.S. 868, 111
(1991), which held that a Special Trial Judge of the Tax Court was an ‘inferior
officer’ under Article II, would appear to support the conclusion that SEC ALJs
are also inferior officers.”).
In Freytag, the Supreme Court was asked to decide whether special trial
judges (“STJ”) in the Tax Court were inferior officers under Article II. 501 U.S. at
880. The Government argued, much as the SEC does here, that STJs do “no more
than assist the Tax Court judge in taking the evidence and preparing the
proposed findings and opinion,” id., and they “lack authority to enter a final
decision.” Id. at 881; see also Def. Br., Dkt. No. [12] at 30-33 (arguing that SEC
ALJs are not inferior officers because they cannot enter final orders and are
subject to the SEC’s “plenary authority”). The Supreme Court rejected that
argument, stating that the Government’s argument
ignores the significance of the duties and discretion that special trial judges possess. The office of special trial judge is “established by Law,” Art. II, § 2, cl. 2, and the duties, salary, and means of appointment for that office are specified by statute. See Burnap v. United States, 252 U.S. 512, 516–517 (1920); United States v. Germaine, 99 U.S. 508, 511–512 (1879). These characteristics distinguish special trial judges from special masters, who are hired by Article III courts on a temporary, episodic basis, whose positions are not established by law, and whose duties and functions are not delineated in a statute. Furthermore, special trial judges perform more than ministerial tasks. They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the special trial judges exercise significant discretion.
Freytag, 501 U.S. at 881-82.
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The Court finds that like the STJs in Freytag, SEC ALJs exercise
“significant authority.” The office of an SEC ALJ is established by law, and the
“duties, salary, and means of appointment for that office are specified by statute.”
Id.; see supra (setting out the ALJ system, to include the establishment of ALJs
and their duties, salary, and means of appointment). ALJs are permanent
employees—unlike special masters—and they take testimony, conduct trial, rule
on the admissibility of evidence, and can issue sanctions, up to and including
excluding people (including attorneys) from hearings and entering default. 17
C.F.R. §§ 200.14 (powers); 201.180 (sanctions).
Relying on Landry v. Federal Deposit Insurance Corp., 204 F.3d 1125 (D.C.
Cir. 2000), the SEC argues that unlike the STJs who were inferior officers in
Freytag, the SEC ALJs do not have contempt power and cannot issue final
orders,10 as the STJs could in limited circumstances. In Landry, the D.C. Circuit
considered whether FDIC ALJs were inferior officers. The D.C. Circuit found
FDIC ALJs, like the STJs, were established by law; their duties, salary, and means
of appointment were specified by statute; and they conduct trials, take testimony,
10 Plaintiff argues that SEC ALJ’s can issue final orders because if the respondent does not petition the SEC to review the ALJ’s initial order and the SEC does not decide to review the matter on its own, the action of the ALJ will be “deemed the action of the Commission.” 15 U.S.C. § 78d-1(c). The SEC argues that the SEC retains plenary authority over ALJs and the regulations make clear that only when the SEC itself issues an order does the decision become final. Def. Br., Dkt. No. [24] at 2-3 (citing 17 C.F.R. § 201.360(d)(2)). This Court agrees with the SEC. Because the regulations specify that the SEC itself must issue the final order essentially “confirming” the initial order, the Court finds that SEC ALJs do not have final order authority.
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rule on evidence admissibility, and enforce discovery compliance. 204 F.3d at
1133-34. And it recognized that Freytag found that those powers constituted the
exercise of “significant discretion . . . a magic phrase under the Buckley test.” Id.
at 1134 (internal citation omitted).
Despite the similarities of the STJs and the FDIC ALJs, the Landry court
applied Freytag as holding that whether the entity had the authority to render a
final decision was a dispositive factor. According to the D.C. Circuit, Freytag
“noted that [(1)] STJs have the authority to render the final decision of the Tax
Court in declaratory judgment proceedings and in certain small-amount tax
cases,” and (2) the “Tax Court was required to defer to the STJ's factual and
credibility findings unless they were clearly erroneous.” Landry, 204 F.3d at 1133
(emphasis in original). While recognizing that the Freytag court “introduced
mention of the STJ’s power to render final decisions with something of a shrug,”
Landry held that FDIC ALJ’s were not inferior officers because did not have the
“power of final decision in certain classes of cases.” Id. at 1134.
The concurrence rejected the majority’s reasoning, finding that Freytag
“cannot be distinguished” because “[t]here are no relevant differences between
the ALJ in this case and the [STJ] in Freytag.” Id. at 1140, 1141. After first
explaining that the Supreme Court actually found the Tax Court’s deference to
the STJ’s credibility findings was irrelevant to its analysis,11 the concurrence
11 The Supreme Court stated that Tax Court Rule 183, which established the deferential standard, was “not relevant to [its] grant of certiorari,” and noted that
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stated that the majority’s “first distinction of Freytag is thus no distinction at all.”
Id. at 1142. The concurrence also noted that the majority’s holding in Landry
(which ultimately relied on the FDIC ALJ’s lack of final order authority) was
based on an alternative holding from Freytag as the Supreme Court had already
determined the STJs were inferior officers before it analyzed the final order
authority issue. Landry, 204 F.3d at 1142.
Similarly, this Court concludes that the Supreme Court in Freytag found
that the STJs powers—which are nearly identical to the SEC ALJs here—were
independently sufficient to find that STJs were inferior officers. See also Butz v.
Economou, 438 U.S. 478, 513 (1978) (“There can be little doubt that the role of
the . . . administrative law judge . . . is ‘ functionally comparable’ to that of a
judge. His powers are often, if not generally, comparable to those of a trial judge:
He may issue subpoenas, rule on proffers of evidence, regulate the course of the
hearing, and make or recommend decisions.”); see also Edmond v. United States,
520 U.S. 651, 663 (1997) (“[W]e think it evident that ‘inferior officers' are officers
whose work is directed and supervised at some level by others who were
appointed by Presidential nomination with the advice and consent of the
Senate.”). Only after it concluded STJs were inferior officers did Freytag address
the STJ’s ability to issue a final order; the STJ’s limited authority to issue final
orders was only an additional reason, not the reason. Therefore, the Court finds
it would say no more about the rule than to say that the STJ did not have final authority to decide Petitioner’s case. Freytag, 501 U.S. at 874 n.3; see also Landry, 204 F.3d at 1142 (Randolph, J., concurring).
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that Freytag mandates a finding that the SEC ALJs exercise “significant
authority” and are thus inferior officers.
The SEC also argues that this Court should defer to Congress’s apparent
determination that ALJs are inferior officers. In the SEC’s view, Congress is
presumed to know about the Appointments Clause, and it decided to have ALJs
appointed through OPM and subject to the civil service system; thus, Congress
intended for ALJs to be employees according to the SEC. See Def. Br. [12] at 33-
37. But “[t]he Appointments Clause prevents Congress from dispensing power
too freely; it limits the universe of eligible recipients of the power to appoint.”
Freytag, 501 U.S. at 880. Congress may not “decide” an ALJ is an employee, but
then give him the powers of an inferior officer; that would defeat the separation-
of-powers protections the Clause was enacted to protect. The Court finds that
SEC ALJs are inferior officers.
b. Appointments Clause Violation
Because SEC ALJs are inferior officers, the Court finds Plaintiff has
established a likelihood of success on the merits on his Appointments Clause
claim. Inferior officers must be appointed by the President, department heads, or
courts of law. U.S. Const. art. II § 2, cl. 2. Otherwise, their appointment violates
the Appointments Clause.
The SEC concedes that Plaintiff’s ALJ, James E. Grimes, was not appointed
by an SEC Commissioner. See Def. Br., Dkt. No. [15] at 2; see also Free
Enterprise, 561 U.S. at 511-512 (finding that the SEC Commissioners jointly
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constitute the “head” of the SEC for appointment purposes). The SEC ALJ was
not appointed by the President, a department head, or the Judiciary. Because he
was not appropriately appointed pursuant to Article II, his appointment is likely
unconstitutional in violation of the Appointments Clause.12
4. Remaining Preliminary Injunction Factors
The Court finds that Plaintiff has also satisfied the remaining preliminary
injunction factors. First, Plaintiff will be irreparably harmed if this injunction
does not issue because if the SEC is not enjoined, Plaintiff 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. See
Odebrecht Const., Inc. v. Sec'y, Fla. Dep't of Transp., 715 F.3d 1268, 1289 (11th
Cir. 2013) (“In the context of preliminary injunctions, numerous courts have held
that the inability to recover monetary damages because of sovereign immunity
renders the harm suffered irreparable.”) (collecting cases); see also Cunningham
v. Adams, 808 F.2d 815, 821 (11th Cir. 1987) (“An injury is ‘irreparable’ only if it
cannot be undone through monetary remedies.”). If the administrative
proceeding is not enjoined, Plaintiff’s requested relief here would also become
12 Because the Court finds Plaintiff can establish a likelihood of success on his Appointments Clause claim, the Court declines to decide at this time whether the ALJ’s two-layer tenure protections also violate Article II’s removal protections. However, the Court has serious doubts that it does, as ALJs likely occupy “quasi-judicial” or “adjudicatory” positions, and thus these two-layer protections likely do not interfere with the President’s ability to perform his duties. See Duka, 2015 WL 1943245, at *8-10; see also Humphrey’s Executor, 295 U.S. at 628-29, 631-32.
Case 1:15-cv-01801-LMM Document 28 Filed 06/08/15 Page 42 of 45
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43
moot as the Court of Appeals would not be able to enjoin a proceeding which has
already occurred. See supra at 15, 18-19 (explaining Plaintiff’s harm).
Second, the Court finds that the public interest and the balance of equities
are in Plaintiff’s favor. The 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. The SEC claims that the public interest weighs in its
favor because the SEC is charged with “protect[ing] investors and maintain[ing]
the integrity of the securities markets.” Def. Br., Dkt. No. [12] at 44 (citing Duka,
2015 WL 1943245, at *7 n.13). But the Court does not find that it is ever in the
public interest for the Constitution to be violated. The Supreme Court has held
that the Appointments Clause “not only guards against [separation-of-powers]
encroachment but also preserves another aspect of the Constitution’s structural
integrity by preventing the diffusion of the appointment power.” Freytag, 501
U.S. at 878. Both are important to the public interest. The Court further notes
that the SEC is not foreclosed from pursing Plaintiff in federal court or in an
administrative proceeding before an SEC Commissioner, and thus any small
harm which it might face could be easily cured by the SEC itself.
III. Conclusion
Because the Court finds Plaintiff has proved a substantial likelihood of
success on the merits of his claim that the SEC has violated the Appointments
Clause as well as the other factors necessary for the grant of a preliminary
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44
injunction, the Court finds a preliminary injunction is appropriate to enjoin the
SEC administrative proceeding and to allow the Court sufficient time to consider
this matter on the merits.
The Court notes that this conclusion may seem unduly technical, as the
ALJ’s appointment could easily be cured by having the SEC Commissioners issue
an appointment or preside over the matter themselves. However, the Supreme
Court has stressed that the Appointments Clause guards Congressional
encroachment on the Executive and “preserves the Constitution’s structural
integrity by preventing the diffusion of appointment power.” Freytag, 501 U.S. at
878. This issue is “neither frivolous or disingenuous.” Id. at 879. The Article II
Appointments Clause is contained in the text of the Constitution and is an
important part of the Constitution’s separation of powers framework.
In addition, the Appointments Clause may not be waived, not even by the
Executive. Id. at 880 (“Neither Congress nor the Executive can agree to waive this
structural protection.”). As this likely Appointment Clause violation “goes to the
validity of the [administrative] proceeding that is the basis for this litigation,” id.
at 879, it is hereby ORDERED that Defendant, the Securities and Exchange
Commission, is preliminarily enjoined from conducting the administrative
proceeding brought against Plaintiff, captioned In the Matter of Charles L. Hill,
Jr., Administrative Proceeding File No. 3-16383 (Feb. 11, 2015), including the
hearing scheduled for June 15, 2015, before an Administrative Law Judge who
has not been appointed by the head of the Department. This order shall remain in
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45
effect until it is further modified by this Court or until resolution of Plaintiff’s
claim for permanent injunctive relief, whichever comes first.
The parties are DIRECTED to confer on a timetable for conducting
discovery and briefing the remaining issues. The parties are then DIRECTED to
submit by June 15, 2015, a consent scheduling order to the Court for
consideration. If the parties are unable to agree to the terms of a scheduling
order, the parties can submit their alternative submissions.
IT IS SO ORDERED this 8th day of June, 2015.
Case 1:15-cv-01801-LMM Document 28 Filed 06/08/15 Page 45 of 45
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General DocketUnited States Court of Appeals for the Eleventh Circuit
Court of Appeals Docket #: 15-12831 Docketed: 06/25/2015Nature of Suit: 2850 Securities, Commodities, ExchangeCharles Hill, Jr. v. Securities and Exchange CommisAppeal From: Northern District of Georgia Case Handler: Caruso, Joe, CC
(404) 335-6177Fee Status: Fee Not Required
Case Type Information: 1) U.S. Civil 2) U.S. Defendant - Non PLRA 3) -
Originating Court Information:District: 113E-1 : 1:15-cv-01801-LMMCivil Proceeding: Leigh Martin May, U.S. District Judge
Date Filed: 05/19/2015 Date NOA Filed: 06/24/2015
Prior Cases: None
Current Cases: None
CHARLES L. HILL, JR. Plaintiff - Appellee
Stephen E. HudsonDirect: 404-815-6356[COR LD NTC Retained]Kilpatrick Townsend & Stockton, LLPFirm: 404-815-65001100 PEACHTREE ST STE 2800ATLANTA, GA 30309
Akash DesaiDirect: 404-815-6500[COR NTC Retained]Kilpatrick Townsend & Stockton, LLPFirm: 404-815-65001100 PEACHTREE ST STE 2800ATLANTA, GA 30309
Joshua Cole HessDirect: 404-815-6604[COR NTC Retained]Kilpatrick Townsend & Stockton, LLPFirm: 404-815-65001100 PEACHTREE ST STE 2800ATLANTA, GA 30309
Hillary Dawn RightlerDirect: 404-815-6584[COR NTC Retained]Kilpatrick Townsend & Stockton, LLPFirm: 404-815-65001100 PEACHTREE ST STE 2800ATLANTA, GA 30309
versus
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SECURITIES AND EXCHANGE COMMISSION Defendant - Appellant
Mark B. SternDirect: 202-514-5089[COR LD NTC U.S. Government]U.S. Department of JusticeRM 7531Firm: 202-514-2001950 PENNSYLVANIA AVE NWWASHINGTON, DC 20530
Megan BarberoDirect: 202-532-4631[COR NTC U.S. Government]U.S. Department of JusticeCivil Division, Appellate StaffRM 7226Firm: 202-514-3511950 PENNSYLVANIA AVE NWWASHINGTON, DC 20530-0001
Matthew J. Berns[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Mark R. FreemanDirect: 202-514-5714[COR NTC US Attorney]U.S. Department of JusticeRM 7228Firm: 202-514-2001950 PENNSYLVANIA AVE NWWASHINGTON, DC 20530
Adam Grogg[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
John Andrew HornDirect: 404-581-6118[NTC US Attorney]U.S. Attorney's OfficeFirm: 404-581-600075 TED TURNER DR SW STE 600ATLANTA, GA 30303
Jean LinDirect: 202-514-3716[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-4805
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20 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Steven A. Myers[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Jennifer Ricketts[NTC U.S. Government]U.S. Department of Justice - Civil DivisionFederal Programs BranchFirm: 202-514-3374PO BOX 883WASHINGTON, DC 20044-0883
Susan K. Rudy[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Justin M. Sandberg[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Lawrence R. Sommerfeld[NTC US Attorney]U.S. Attorney's OfficeFirm: 404-581-600075 TED TURNER DR SW STE 600ATLANTA, GA 30303
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CHARLES L. HILL, JR.,
Plaintiff - Appellee,
versus
SECURITIES AND EXCHANGE COMMISSION,
Defendant - Appellant.
06/25/201551 pg, 2.63 MB
CIVIL APPEAL DOCKETED. Notice of appeal filed by Appellant Securities and Exchange Commission on 06/24/2015. Fee Status: Fee Not Required. No hearingsto be transcribed. The appellants brief is due on or before 08/04/2015. The appendix is due no later than 7 days from the filing of the appellant's brief
07/01/20151 pg, 63.75 KB
APPEARANCE of Counsel Form filed by Megan Barbero for the Securities and Exchange Commission (ECF: Megan Barbero)
07/01/2015 Added Attorney Megan Barbero for Appellant Securities and Exchange Commission, in case 15-12831.
07/01/2015 E-filed Appearance of Counsel processed for Attorney Megan Barbero for AppellantSecurities and Exchange Commission in 15-12831.
07/02/201578 pg, 499.17 KB
MOTION for stay of injunction filed by Securities and Exchange Commission. Opposition to Motion is Unknown. [7511639-1]-[Edited 08/10/2015 by JC] (ECF: Megan Barbero)
07/02/20151 pg, 26.59 KB
APPEARANCE of Counsel Form filed by Mark B. Stern for Securities and Exchange Commission (ECF: Megan Barbero)
07/02/2015 Added Attorney Mark B. Stern for Appellant Securities and Exchange Commission, in case 15-12831.
07/02/2015 E-filed Appearance of Counsel processed for Attorney Mark B. Stern for AppellantSecurities and Exchange Commission in 15-12831.
07/02/20151 pg, 26.57 KB
APPEARANCE of Counsel Form filed by Mark R. Freeman for the Securities and Exchange Commission (ECF: Megan Barbero)
07/02/2015 Added Attorney(s) Mark R. Freeman for party(s) Appellant Securities and ExchangeCommission, in case 15-12831.
07/02/2015 E-filed Appearance of Counsel processed for Attorney Mark R. Freeman for Appellant Securities and Exchange Commission in 15-12831.
07/06/20151 pg, 26.38 KB
APPEARANCE of Counsel Form filed by Stephen E. Hudson for Charles L. Hill, Jr.. (ECF: Stephen Hudson)
07/06/201512 pg, 107.91 KB
MOTION Motion to Strike Appellant's Motion filed by Charles L. Hill, Jr.. Motion is Opposed. [7513073-1] (ECF: Stephen Hudson)
07/06/2015 E-filed Appearance of Counsel processed for Attorney Stephen E. Hudson for Appellee Charles L. Hill Jr. in 15-12831.
07/07/20156 pg, 96.18 KB
Reply to response filed by Appellant Securities and Exchange Commission. (ECF: Mark Stern)
07/07/20155 pg, 13.51 KB
Reply to response filed by Appellee Charles L. Hill, Jr.. (ECF: Stephen Hudson)
07/14/2015 Attorney Megan Barbero for Appellant Securities and Exchange Commission has
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1 pg, 14.76 KB been notified that upon expiration of fourteen (14) days from this date, this appealwill be dismissed by the clerk without further notice unless the required Civil Appeal Statement has been received. A motion to file the Civil Appeal Statement out of time should also be filed at this time.
07/15/201554 pg, 412.4 KB
MOTION for leave to file a Civil Appeal Statement out of time filed by Securities andExchange Commission. Motion is Opposed. [7522877-1]--[Edited 07/15/2015 by JC] (ECF: Megan Barbero)
07/16/201530 pg, 82.21 KB
RESPONSE to Motion for stay of injunction filed by Appellant Securities and Exchange Commission in 15-12831 [7511639-2] filed by Attorney Stephen E. Hudson for Appellee Charles L. Hill, Jr.. (ECF: Stephen Hudson)
07/16/20153 pg, 10.18 KB
AMENDED Certificate of Interested Persons and Corporate Disclosure Statement filed by Attorney Stephen E. Hudson for Appellee Charles L. Hill, Jr.. On the same day the CIP is served, the party filing it must also complete the court's web-based stock ticker symbol certificate at the link here http://www.ca11.uscourts.gov/web-based-cip or on the court's website. See 11th Cir. R. 26.1-2(b). (ECF: Stephen Hudson)
07/17/20152 pg, 29.39 KB
ORDER: The appellant's motion for leave to file the civil appeal statement out of time is GRANTED. [7522877-2] (FMH)
07/17/201548 pg, 339.43 KB
Civil Appeal Statement filed by Attorney Megan Barbero for Appellant Securities andExchange Commission.
07/23/201519 pg, 142.62 KB
Reply to response filed by Appellant Securities and Exchange Commission. (ECF: Megan Barbero)
07/24/20154 pg, 92 KB
Response to Civil Appeal Statement form filed by Attorney Stephen E. Hudson for Appellee Charles L. Hill, Jr.. (ECF: Stephen Hudson)
07/31/20151 pg, 26.47 KB
APPEARANCE of Counsel Form filed by Akash Desai for Charles L. Hill, Jr.. (ECF: Akash Desai)
07/31/20151 pg, 26.4 KB
APPEARANCE of Counsel Form filed by Hess, Joshua C. - Appellee (ECF: JoshuaHess)
07/31/2015 E-filed Appearance of Counsel processed for Attorney Akash Desai for Appellee Charles L. Hill Jr. in 15-12831.
07/31/2015 Added Attorney Joshua Cole Hess for Appellee Charles L. Hill Jr., in case 15-12831.
07/31/2015 E-filed Appearance of Counsel processed for Attorney Joshua Cole Hess for Appellee Charles L. Hill Jr. in 15-12831.
07/31/20151 pg, 26.41 KB
APPEARANCE of Counsel Form filed by Hillary Dawn Rightler for Charles L. Hill, Jr.. (ECF: Hillary Rightler)
07/31/2015 E-filed Appearance of Counsel processed for Attorney Hillary Dawn Rightler for Appellee Charles L. Hill Jr. in 15-12831.
08/03/201510 pg, 220.2 KB
Notice of Filing Supplemental Authority filed by Attorney Stephen E. Hudson forAppellee Charles L. Hill, Jr.. (ECF: Stephen Hudson)
08/04/201558 pg, 306.71 KB
Appellant's brief filed by Securities and Exchange Commission. (ECF: Megan Barbero)
08/05/2015 Received paper copies of EBrief filed by Appellant Securities and Exchange Commission.
08/07/20155 pg, 80.47 KB
Notice of District Court Denial of Motion for a Stay Pending Appeal filed by Attorney Megan Barbero for Appellant Securities and Exchange Commission. (ECF: Megan
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Barbero)
08/10/20152 pg, 34.46 KB
ORDER: Appellee's "Motion to Strike" is DENIED. Appellant's "Motion to StayPreliminary Injunction Pending Appeal" is DENIED. Appellant's request to expedite this appeal is GRANTED IN PART to the extent that this appeal shall be expedited for merits disposition purposes upon the conclusion of briefing. [7513073-2] [7511639-2] [7511639-3] (FMH, CRW and AJ)--[Edited 08/13/2015 by JC]
08/11/2015126 pg, 1.29 MB
Appendix filed [1 VOLUMES] by Appellant Securities and Exchange Commission. (ECF: Megan Barbero)
08/12/2015 Received paper copies of EAppendix filed by Appellant Securities and Exchange Commission. 1 VOLUME - 2 SETS
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General DocketUnited States Court of Appeals for the Eleventh Circuit
Court of Appeals Docket #: 15-13738 Docketed: 08/20/2015Nature of Suit: 2899 Adminstrative Review ActGray Financial Group, Inc., et al v. U.S. Securities and ExchangeAppeal From: Northern District of Georgia Case Handler: Frost, Gerald B., F
(404) 335-6182Fee Status: Fee Not Required
Case Type Information: 1) U.S. Civil 2) U.S. Defendant - Non PLRA 3) -
Originating Court Information:District: 113E-1 : 1:15-cv-00492-LMMCivil Proceeding: Leigh Martin May, U.S. District Judge
Date Filed: 02/19/2015 Date NOA Filed: 08/19/2015
Prior Cases: None
Current Cases: None
GRAY FINANCIAL GROUP, INC. Plaintiff - Appellee
Kathryn S. GostingerDirect: 678-553-2201[NTC Retained]Greenberg Traurig, LLC3333 PIEDMONT RD NE STE 2500ATLANTA, GA 30305
Ernest L. GreerDirect: 678-553-2420[NTC Retained]Greenberg Traurig, LLC3333 PIEDMONT RD NE STE 2500ATLANTA, GA 30305
Michael James KingDirect: 678-553-2100[NTC Retained]Greenberg Traurig, LLC3333 PIEDMONT RD NE STE 2500ATLANTA, GA 30305
Terry R. WeissDirect: 678-553-2603[NTC Retained]Greenberg Traurig, LLC3333 PIEDMONT RD NE STE 2500ATLANTA, GA 30305
LAURENCE O. GRAY Plaintiff - Appellee
Kathryn S. GostingerDirect: 678-553-2201[NTC Retained](see above)
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Ernest L. GreerDirect: 678-553-2420[NTC Retained](see above)
Michael James KingDirect: 678-553-2100[NTC Retained](see above)
Terry R. WeissDirect: 678-553-2603[NTC Retained](see above)
ROBERT C. HUBBARD, IV Plaintiff - Appellee
Kathryn S. GostingerDirect: 678-553-2201[NTC Retained](see above)
Ernest L. GreerDirect: 678-553-2420[NTC Retained](see above)
Michael James KingDirect: 678-553-2100[NTC Retained](see above)
Terry R. WeissDirect: 678-553-2603[NTC Retained](see above)
versus
U.S. SECURITIES AND EXCHANGE COMMISSION Defendant - Appellant
Matthew J. Berns[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Adam Grogg[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
John Andrew HornDirect: 404-581-6118[NTC US Attorney]U.S. Attorney's OfficeFirm: 404-581-600075 TED TURNER DR SW STE 600ATLANTA, GA 30303
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Jean LinDirect: 202-514-3716[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Steven A. Myers[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Justin M. Sandberg[NTC U.S. Government]U.S. Department of JusticeCivil DivisionFirm: 202-514-480520 MASSACHUSETTS AVE NWWASHINGTON, DC 20530
Lawrence R. Sommerfeld[NTC US Attorney]U.S. Attorney's OfficeFirm: 404-581-600075 TED TURNER DR SW STE 600ATLANTA, GA 30303
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GRAY FINANCIAL GROUP, INC., LAURENCE O. GRAY,ROBERT C. HUBBARD, IV,
Plaintiffs - Appellees,
versus
U.S. SECURITIES AND EXCHANGE COMMISSION,
Defendant - Appellant.
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08/20/201545 pg, 254.98 KB
CIVIL APPEAL DOCKETED. Notice of appeal filed by Appellant U.S. Securities and Exchange Commission on 08/20/2015. Fee Status: Fee Not Required. Awaiting Appellant's CIP Due on 09/14/2015 as to Appellant U.S. Securities and Exchange Commission
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APPEARANCE of Counsel Form filed by Megan Barbero for the Securities and Exchange Commission (ECF: Megan Barbero)
08/27/20151 pg, 26.71 KB
APPEARANCE of Counsel Form filed by Melissa N. Patterson, representing the Appellant (ECF: Melissa Patterson)
08/27/20151 pg, 26.66 KB
APPEARANCE of Counsel Form filed by Mark B. Stern, representing the Appellant (ECF: Melissa Patterson)
08/27/20151 pg, 26.73 KB
APPEARANCE of Counsel Form filed by Mark R Freeman for Securities and Exchange Commission (ECF: Mark Freeman)
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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA
GRAY FINANCIAL GROUP, INC., et al., Plaintiff, v.
U.S. SECURITIES AND EXCHANGE COMMISSION, Defendant.
No. 15-cv-492-LMM
DEFENDANT’S CONSENT MOTION TO
STAY PROCEEDINGS PENDING APPEAL
Defendant, the Securities and Exchange Commission (the “SEC” or
“Commission”), respectfully requests that, with the exception of Defendant’s
pending Motion to Stay Preliminary Injunction Pending Appeal, ECF No. 61,
filed simultaneously with this motion, this Court stay all proceedings in this case
pending the Eleventh Circuit’s resolution of Defendant’s appeal of the
preliminary injunction issued by this Court on August 4, 2015, enjoining the
SEC’s administrative proceeding against Plaintiffs. See Order, ECF No. 56. The
undersigned has conferred with counsel for Plaintiffs who indicates that
Plaintiffs consent to this motion. In support of this motion, Defendant states as
follows:
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2
1. “[T]he Court has discretion to stay the proceedings during the
pendency of an appeal, as a proper exercise of control over its docket.” Outside
the Box Innovations, LLC v. Travel Caddy, Inc., No. 05-cv-2482, 2007 WL 7753799, at
*4 (N.D. Ga. Aug. 7, 2007) (citing Clinton v. Jones, 520 U.S. 681, 706 (1997)). As the
Supreme Court has said, “the power to stay proceedings is incidental to the
power inherent in every court to control the disposition of the causes of its
docket with economy of time and effort for itself, for counsel, and for litigants.”
Landis v. N. Am. Co., 299 U.S. 248, 254-55 (1936). “A variety of circumstances may
justify a district court stay,” and “[a] stay sometimes is authorized simply as a
means of controlling the district court’s docket and of managing cases before the
district court.” Ortega Trujillo v. Conover & Co. Commc’ns, Inc., 221 F.3d 1262, 1264
(11th Cir. 2000); see also, e.g., Alps South, LLC v. Ohio Willow Wood Co., No. 8:09-cv-
386, 2014 WL 4211308, at *1 (M.D. Fla. Aug. 26, 2014) (“The power of a federal
trial court to stay its proceedings is well recognized.”).
2. In considering Defendant’s appeal of this Court’s issuance of a
preliminary injunction, the Eleventh Circuit will address whether this Court had
jurisdiction in the first instance. “Judicial economy would certainly be served by
having the [Eleventh] Circuit address this issue of jurisdiction in the early stages
of litigation, rather than after a full disposition on the merits.” Kemp v. CTL
Distrib., No. 09-cv-1109, 2010 WL 3891101, at *1 (M.D. La. Sept. 30, 2010). If the
Eleventh Circuit finds that this Court has jurisdiction, then it will also address
this Court’s finding that Plaintiff is likely to succeed on his Appointments Clause
challenge. Specifically, the Eleventh Circuit will likely determine whether the
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3
SEC administrative law judge (“ALJ”) presiding over the initial stages of
Plaintiff’s administrative proceeding is an “inferior Officer[]” of the United
States. U.S. Const., Art. II, § 2, cl. 2. The Eleventh Circuit’s holding on that issue
will bear significantly on this Court’s consideration of the merits of Plaintiff’s
Article II claims.
3. Because the outcome of the proceedings in the Eleventh Circuit is
likely to have a significant if not dispositive impact on this case, any briefing of
dispositive motion(s) prior to the Eleventh Circuit’s ruling would be largely
superfluous, and thus a waste of the parties’ and the Court’s time. A stay, on the
other hand, would conserve the resources of both the parties and the Court until
it is clear which issues, if any, will need to be resolved by this Court. See Jack
Faucett Assocs., Inc. v. AT&T, No. 81-cv-1804, 1983 WL 1908 (D.D.C. Nov. 17,
1983). As a matter of judicial economy and common sense, it is far more
reasonable for the Court and the parties to await the Eleventh Circuit’s ruling
before proceeding in this case.
4. Moreover, this is not a case where the stay would be “unreasonably
long,” Landis, 299 U.S. at 258, or “immoderate,” Ortega Trujillo, 221 F.3d at 1264;
see also Dunn v. Air Line Pilots Ass’n, 836 F. Supp. 1574, 1584 (S.D. Fla. 1993) (“A
stay of proceedings is generally in the court’s discretion. It is based on a
balancing test in which the movant bears the burden of showing either ‘a clear
case of hardship or inequity’ if the case proceeds, or little possibility the stay will
harm others.” (quoting Landis, 299 U.S. at 254-55) (emphasis added)). Defendant
intends to request that the Eleventh Circuit expedite its appeal and expects that
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4
the appeal can proceed quickly. Indeed, the Eleventh Circuit has granted
expedition in the government’s appeal of the injunction issued in Hill v. SEC, No.
15-cv-1801-LMM (N.D. Ga.), which raises Article II claims identical to those at
issue in this case.
For these reasons, Defendant respectfully requests this Court to stay all
proceedings in this case (with the exception of Defendant’s pending motion to
stay the preliminary injunction) pending resolution of Defendant’s appeal of this
Court’s order granting Plaintiff’s motion for a preliminary injunction. In the
alternative, should this Court deny Defendant’s request to stay proceedings, then
Defendant respectfully requests that it be given fourteen (14) days following this
Court’s order to answer or otherwise respond to the Complaint. Dated: August 19, 2015 Respectfully submitted
BENJAMIN C. MIZER Principal Deputy Assistant Attorney
General JOHN A. HORN Acting United States Attorney KATHLEEN R. HARTNETT Deputy Assistant Attorney General JENNIFER D. RICKETTS Director, Federal Programs Branch SUSAN K. RUDY Assistant Director, Federal Programs
Branch
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5
/s/ Jean Lin . JEAN LIN JUSTIN M. SANDBERG ADAM GROGG STEVEN A. MYERS MATTHEW J. BERNS U.S. Department of Justice Civil Division, Federal Programs
Branch 20 Massachusetts Ave. NW Washington, DC 20530 Phone: (202) 514-3716 Fax: (202) 616-8202 Email: [email protected]
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CERTIFICATE OF COMPLIANCE
I hereby certify, pursuant to Local Rule 7.1(D), that the foregoing has been
prepared with one of the font and point selections approved by the Court in
Local Rule 5.1(C).
/s/ Jean Lin JEAN LIN
CERTIFICATE OF SERVICE
I hereby certify that on August 19, 2015, I electronically filed a copy of the
foregoing. Notice of this filing will be sent via email to all parties by operation of
the Court’s electronic filing system. Parties may access this filing through the
Court’s CM/ECF System.
/s/ Jean Lin JEAN LIN
Case 1:15-cv-00492-LMM Document 62 Filed 08/19/15 Page 6 of 6
Add. 276
Case: 15-13738 Date Filed: 08/28/2015 Page: 291 of 291