in the united states court of appeals for the … · gray, 1:15-cv-00492-lmm, dkt. 48 (july 2,...

____________________________________________________________

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

Case: 15-13738 Date Filed: 08/28/2015 Page: 1 of 291

C-1 of 4

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.


C-2 of 4

GRAY FINANCIAL GROUP, INC., ET AL V. US SECURITIES AND EXCHANGE COMMISSION

CASE NO. 15-13738-F


(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.


C-3 of 4


CASE NO. 15-13738-F


(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


C-4 of 4


CASE NO. 15-13738-F


(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


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


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


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


ADDENDUM


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

Case 1:15-cv-00492-LMM Document 61 Filed 08/19/15 Page 1 of 22

Add. 059


2

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.


Add. 060


3

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


Add. 061


4

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


Add. 062


5

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


Add. 063


6

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


Add. 064


7

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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8

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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9

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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10

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).


Add. 068


11

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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12

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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13

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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14

“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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15

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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16

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.


Add. 074


17

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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18

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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19

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


Add. 077


20

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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21

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]


Add. 079



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


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.



Add. 080



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


Add. 081



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

Case 1:15-cv-00492-LMM Document 41-1 Filed 06/15/15 Page 1 of 26

Add. 082


i

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


Add. 083


ii

C. The Court Also Found that the Remaining Preliminary Injunction Factors Weigh in Favor of Granting the Motion. .............. 17

CONCLUSION ........................................................................................................ 17


Add. 084


i

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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ii

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


Add. 086


1

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


Add. 087


2

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


Add. 088


3

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.


Add. 089


4

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.”).


Add. 090


5

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.


Add. 091


6

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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7

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


Add. 093


8

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.


Add. 094


9

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.


Add. 095


10

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.


Add. 096


11

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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12

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


Add. 098


13

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


Add. 099


14

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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15

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


Add. 101


16

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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17

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


Add. 103


18

Telephone: (678) 553-2603 Facsimile: (678) 553-2604 Email: [email protected] [email protected] Attorneys for Plaintiffs


Add. 104


19

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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20


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. )


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


Add. 106


21

[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


Add. 107



GRAY FINANCIAL GROUP, INC., et al., Plaintiffs, v.


No. 15-cv-492 (LMM)

DEFENDANT’S OPPOSITION TO PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION


Add. 108


i

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


Add. 109


ii

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


Add. 110


iii

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


Add. 111


iv

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


Add. 112


v

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


Add. 113


vi

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


Add. 114


vii

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


Add. 115


viii

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


Add. 116


ix

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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x

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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13

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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22

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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25

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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26

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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27

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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33

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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34

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


Add. 152


35

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,



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



Add. 154





Local Rule 5.1(C).

/s/ Jean Lin Jean Lin


I hereby certify that on July 2, 2015, I electronically filed a copy of the




/s/ Jean Lin Jean Lin


Add. 155


UNITED STATES DISTRICT COURT OFFICIAL CERTIFIED TRANSCRIPT


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

Add. 156


2


(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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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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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

Add. 174



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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5

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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13

§ 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


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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14

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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16

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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17

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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18

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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19

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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20

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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21

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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22

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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23

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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25

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



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


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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26

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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28

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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29

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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30

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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32

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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33

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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34

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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35

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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36

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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37

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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38

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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39

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.


Add. 213



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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2

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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3

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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4

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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5

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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6

“[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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7

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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8

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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9

(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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10

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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11

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


Add. 224


12

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


Add. 225


13

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.


Add. 226


14

Here, the Court finds that because Congress created a statutory scheme


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.


Add. 227


15

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


Add. 228


16

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


Add. 229


17

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


Add. 230


18

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”).


Add. 231


19

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)).


Add. 232


20

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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21

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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22

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



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


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.


Add. 235


23

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).


Add. 236


24

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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25

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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26

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.”).


Add. 239


27

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.


Add. 240


28

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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29

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


Add. 242


30

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


Add. 243


31

(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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32

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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33

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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34

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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35

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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36

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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37

(“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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38

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.


Add. 251


39

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


Add. 252


40

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).


Add. 253


41

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


Add. 254


42

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.


Add. 255


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


Add. 256


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


Add. 257


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.


Add. 258


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

Page 1 of 715-12831 Docket

8/27/2015https://ecf.ca11.uscourts.gov/cmecf/servlet/TransportRoom

Add. 259


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



Add. 260


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



Add. 261


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

08/27/20151 pg, 26.79 KB

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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GRAY FINANCIAL GROUP, INC., et al., Plaintiff, v.


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



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



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Local Rule 5.1(C).



I hereby certify that on August 19, 2015, I electronically filed a copy of the






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in the united states court of appeals for the … · gray, 1:15-cv-00492-lmm, dkt. 48 (july 2,...

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