Securities Litigation

The citadel of the SEC's administrative forum has been under assault from several vectors over the past year or so, as a chorus of dissenting Respondents have mounted increasing challenges to its constitutional legitimacy, as well as it policy wisdom. The arguments were starting to get some traction, but two recent appellate decisions have repulsed the attack, including the D.C. Circuit's September 29 Jarkesy opinion. The arguments were gaining some momentum. First, they elevated the policy discussion to new prominence. SDNY Judge Jed Rakoff weighed in expressing doubt about the wisdom of developing federal securities law within the agency's confines. Then Justice Scalia expressed doubt about the SEC's insider-trading theories and their adherence to long-established principles of criminal law. Indeed, Commissioner Piwowar even urged greater transparency in the use of the administrative forum. The US Chamber of Commerce issued a white paper recommending far-reaching reforms. And most recently, the Commission itself took a hesitate step down the road, proposing some updates to its Rules of Practice (mostly as to docket speed and limited depositions). Second, Respondents kept hammering on the door. Early attempts were rebuffed for lack of jurisdiction (Jarkesy and Bebo), but Hill and Duka broke through - overcoming the jurisdictional hurdle and obtaining stays of administrative proceedings as "likely unconstitutional." Jarkesy v. SEC, 48 F. Supp. 3d 32 (D.D.C. 2014); Bebo v. SEC, No. 15-1511, 2015 WL 4998489 (7^th Cir. Aug. 24, 2015); Hill v. SEC, No. 1:15-CV-1801, 2015 WL 4307088 (N.D. GA June 8, 2015)(app. pending); Duka v. SEC, No. 15 Civ. 357, 2015 WL 1943245 (S.D.N.Y. Apr. 15, 2015)(app. pending). But the first two appellate decisions have repulsed the assault. In Bebo, the Seventh Circuit affirmed dismissal for lack of jurisdiction. Then on September 29^th, the D.C. Circuit became the second appellate court to hold that, in the '34 Act, Congress intended the SEC's administrative-then-judicial review in-house process to "provide an exclusive avenue for judicial review" that cannot be bypass by a pre-emptive assault in district court. Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015). The Jarkesy panel held that Congress intended post-Commission judicial review to be the exclusive avenue for defense against Commission administrative actions, under the long-standing rationale of Thunder Basin Coal co. v. Reich, 510 U.S. 200 (1994). The panel left the door open just a crack, in that its holding applies to Jarkesy's facts and arguments - the "mine-run" of common cases - and noting that a facial, more "structural," challenge under the Art. II non-delegation argument "presents a closer question." Jarkesy's challenges (Fifth Amendment Due Process, Equal Protection and Brady challenges) were more in the realm of "as-applied" than structural. And indeed, the opinion hints that as the case progressed, Jarkesy attempted to refine and "bend" those arguments more toward the "structural" theories of attack that succeeded in Hill and Duka. Nevertheless, the Jarkesy Court held that issue pretermitted by the statutory scheme prescribing appeal from Commission decisions to the Respondent's choice of her home Circuit or the D.C. Circuit. Finally, the Court distinguished Free Enterprise, because these "mine-run" cases do not require a "bet-the-farm" "Trojan-challenge" in order to obtain judicial review. But the opinion left unaddressed what it takes a Respondent in resources and the will to sustain collateral consequences long-enough to get there. In the meantime, the SEC held that its administrative forum isn't unconstitutional. On September 17, the Commission's Timbervest decision rebuffed the "structural" arguments now pending appeal at the 11^th and 2^nd Circuits in Hill and Duka. Timbervest's next stop is either the 11^th or D.C. Circuit. Stay tuned. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 29 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2015 by Thomas K. Potter, III (all rights reserved).