May defendants charged in SEC administrative proceedings challenge the constitutionality of those proceedings in federal district court? The determination of whether district courts have subject matter jurisdiction over such challenges has become the critical prelude in the ongoing controversy over the SEC’s seemingly arbitrary use of its “home court” alternative to pursue claims and remedies against violators of the federal securities laws.
Dodd Frank gives the SEC the power to impose civil penalties in cease-and-desist proceedings before an administrative law judge (ALJ) against any person who violates federal securities laws. Previously, the SEC could only bring such cases in federal court, except against persons associated with regulated entities. Now, the SEC has the ability, and complete discretion, to prosecute these claims and seek the same relief administratively or in district court. Administrative proceedings create significant disadvantages for defendants who face accelerated hearing schedules and lack important procedural rights they would have the ability to assert in district court.
Defendants seeking to challenge the constitutionality of such proceedings in district court have run into a significant obstacle: the assertion by the SEC that district courts lack subject matter jurisdiction. The Commission has continually, and for the most part successfully, argued that Congress granted exclusive authority to review orders entered in SEC administrative proceedings to courts of appeal. Therefore, defendants who wish to challenge the constitutionality of SEC administrative proceedings, must submit to those proceedings and pursue an initial appeal to the Commission before their constitutional challenges are considered by an independent judicial body.
One notable exception to the SEC’s successful efforts to avoid district court consideration of these cases is Gupta v. SEC, 795 F.Supp.2d 503 (SDNY 2011), where Judge Jed Rakoff found that plaintiffs may challenge SEC actions in district court “if the statutorily-provided review of final SEC orders by the courts of appeal is in some relevant respect inadequate.” Rakoff held that such a review was inadequate in the case before him where a plaintiff, the only one of twenty-nine related defendants whose case was brought administratively, sought to challenge that action as a violation of equal protection. Even while doing so, Rakoff wrote that this was an unusual case and not every defendant should be allowed to challenge the constitutionality of the SEC’s choice of forum. Since then, other Judges have distinguished Gupta and dismissed such challenges. See Chau v. SEC, 2014 WL 6984236 (SDNY, Dec. 11, 2014); Arjent v. SEC, 7 F.Supp.3d 378 (S.D.N.Y. 2014).
The most recent of these cases, Bebo v. SEC, 2015 WL 905349 (E.D. Wis., March 3, 2015) (Judge Rudolph Randa), is now being appealed to the U.S. Court of Appeals for the Seventh Circuit. Whatever the Seventh Circuit decides may not be the end of the road as this issue seems ripe for consideration by the Supreme Court.
For a full analysis of these issues please see the recently published article by Sarah Gold and Richard Spinogatti located here.