Securities Litigation

The SEC recently - and predictably - rejected a Respondents' arguments challenging the constitutionality of the agency's administrative forum. The September 17 Timbervest decision was the first of the constitutional challenges to reach the full Commission itself, on appeal from the agency's internal administrative law judges ("ALJ"). The Commissioners rejected the Article II "appointments clause" argument, holding its ALJs were indistinguishable from those of the FDIC and thus were not "inferior officers" under Landry v. FDIC. That holding conflicts with those of federal judges in Atlanta and New York - now on appeal. Similarly, the Commission rejected the "removal / tenure" argument under Article II and Free Enterprise Fund v. PCAOB for the same reason. The Commission also distinguished Free Enterprise Fund as having excluded ALJs from its holding. Moreover, the decision argued that the SEC's long-standing ALJ system was fundamentally different from the new PCAOB at issue in Free Enterprise Fund and that the Commissioners' de novo review of ALJ initial decisions mooted the point. The Commission held the Respondents had not presented any evidence of bias - recall that they asked ALJ Elliott to submit an affidavit on the point, but he refused. Nevertheless, the Commissioners added to the record a preliminary OIG report that also failed to find evidence of ALJ bias favoring the SEC. The report could not corroborate previous charges of bias leveled by a former ALJ. Overshadowed by the constitutional arguments, the Commission flatly disagreed with the D.C. Circuit's holding that the five-year limitations bar on "any civil fine, penalty, or forfeiture" prohibits other forms of sanctions. Instead, the SEC argues that it still may impose industry suspensions, lifetime bans, and disgorgement for acts having occurred over five years before they were charged. It would be hard to fault anyone barred from an industry for life for considering that a "penalty." See 28 U.S.C. § 2462. But later the same day, the Commission sua sponte stayed that remedial-sanctions portion of its Opinion, "[i]n light of the representations that Commission counsel made to the federal district court during the hearing for a motion for a preliminary injunction in connection with this administrative proceeding." See Timbervest, LLC v. SEC (N.D. Ga. 1:15-cv-2106), Dkt. 25, at 29, n.11 (Aug. 4, 2015). The SEC's administrative forum has been under attack from several fronts and the cases sit at various stages in the process. In the Hill (NDGA) and Duka (SDNY) litigations, Judges May and Berman held they had jurisdiction over challenges (on these same grounds) presenting a likelihood of success on the merits and halted SEC administrative proceedings. The SEC has appealed both rulings. Duka v. SEC, No. 15-cv-00357 (USDC - S.D.N.Y.); Hill v. S.E.C., No. 1:15-CV-1801-LMM, 2015WL 4307088 (N.D. Ga. June 8, 2015). Earlier, the Bebo Court (EDWI) dismissed that challenged for lack of jurisdiction (requiring exhaustion of the SEC process before resort to the Courts); it was affirmed by the 7^th Circuit. Bebo v. SEC, No. 15-1511 (7^th Cir. August 24, 2015). Stay tuned: Timbervest goes next to either the 11^th Circuit or D.C. Circuit Court of Appeals. The Timbervest decision, Rel. IA-4197 (Sept. 17, 2015), is here. 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).