District Court Says It Lacks Authority Over Challenge to SEC Administrative Action

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By Phyllis Diamond

March 4 — The U.S. District Court for the Eastern District of Wisconsin March 3 dismissed a corporate executive's lawsuit against the Securities and Exchange Commission for suing her in an administrative forum rather than in federal district court.

According to Judge Rudolph Randa, plaintiff Laurie Bebo's must litigate her claims before the SEC and—if necessary—the U.S. Court of Appeals for the Seventh Circuit because the district court doesn't have subject matter jurisdiction.

Neither Bebo's counsel nor the SEC responded to a request for comment.

Due Process Violated

In December, the agency alleged that Bebo, formerly the chief executive officer of Assisted Living Concepts Inc., and another former ALC official listed phony occupants at senior residences in order to meet certain occupancy covenants and avoid defaulting on the leases for the facilities. It contended that a default would have required ALC to pay the full remaining rent due on the lease—“tens of millions of dollars at the time.”

In January, Bebo fired back with this lawsuit in federal district court; she contended that the commission's “unlimited ability” to sue administratively violates her constitutional due process and equal protection rights.

Dismissing the allegations, the court found that Bebo's claims “are compelling and meritorious.” However, it said, “whether that view is correct cannot be resolved here.”

Rather, the court held, Bebo's allegations “are subject to the exclusive remedial scheme set forth in the [1934] Securities Exchange Act,” whereby she must litigate them before the SEC “and then, if necessary, on appeal to the [U.S.] Court of Appeals for the Seventh Circuit.”

The court said Bebo's argument regarding the lack of meaningful judicial review “lies in her objection to being subject to a procedure that she contends is wholly unconstitutional.”

However, the court rejoined, district court jurisdiction “`is not an escape hatch for litigants to delay or derail an administrative action when statutory channels of review are entirely adequate.'”

“If the process is constitutionally defective,” the court reasoned, “Bebo can obtain relief before the Commission, if not the court of appeals.”

To contact the reporter on this story: Phyllis Diamond at pdiamond@bna.com

To contact the editor responsible for this story: Susan Jenkins at sjenkins@bna.com

The decision is available at http://www.bloomberglaw.com/public/document/Bebo_v_Securities_and_Exchange_Commission_Docket_No_215cv00003_ED.