Big Win for SEC in Challenge to in-House Court

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By Rob Tricchinelli

Sept. 29 — The D.C. Circuit gave a boost to the SEC's defense of its administrative forum Sept. 29, holding that a defendant in the agency's in-house courts must completely litigate a case there before making a constitutional challenge in federal court.

The U.S. Court of Appeals for the District of Columbia Circuit affirmed that a district court didn't have jurisdiction to hear the challenge while the administrative case was pending. The federal case was brought by George Jarkesy, a Texas hedge fund manager who faced fraud charges in the Securities and Exchange Commission's administrative court.

The decision gives the agency another victory in its defense of the system, but it might only delay a constitutional challenge—if Jarkesy loses his administrative case, he has a path to make his case in a federal court of appeals.

Brought Later

Jarkesy argued that the in-house proceedings were unconstitutional, but the D.C. Circuit's three-judge panel held that his challenges may only be brought later, under federal laws that allow review by an appeals court after the in-house case wraps up. Final decisions by the commission may be appealed to a federal circuit court.

“Instead of obtaining judicial review of his challenges to the Commission’s administrative proceeding now,” Judge Sri Srinivasan wrote for the panel, an in-house defendant “can secure judicial review in a court of appeals when (and if) the proceeding culminates in a resolution against him.”

Judges A. Raymond Randolph and Brett Kavanaugh also sat on the case.

Choice of Forum

Jarkesy claimed it was unfair for SEC registrants to be named in an administrative proceeding when the SEC itself has the choice of bringing a case in-house or in federal court, but the court pointed to the Dodd-Frank Act in batting away that claim.

“Congress, though, gave the SEC the option to pursue violations in district court,” the court said. “Congress did not thereby necessarily enable respondents in administrative proceedings to collaterally attack those proceedings in court.”

“In other words, Congress granted the choice of forum to the Commission, and that authority could be for naught if respondents like Jarkesy could countermand the Commission’s choice by filing a court action,” the court continued.

Defense attorneys and even some lawmakers have criticized the SEC's choice of forum since Dodd-Frank's enactment, but the SEC has defended both the legality and strategic value of its enforcement decisions. Dodd-Frank expanded the jurisdiction of the in-house courts.

Challenges

The D.C. Circuit, however, didn't specifically reject Jarkesy's arguments claiming the in-house forum itself is constitutional.

In his brief, he argued that Congress' delegation of new administrative powers to the SEC under Dodd-Frank violated separation of powers and the Seventh Amendment, among other rights.

The D.C. Circuit's decision merely hits the pause button on those claims, Jarkesy's lawyer told Bloomberg BNA.

“All of those claims will be heard by the D.C. Circuit in the coming months—if the Commission’s final decision is adverse to Jarkesy,” S. Michael McColloch, of S. Michael McColloch PLLC in Dallas, said.

Forum Attacks

The agency has been hounded by lawsuits attacking the in-house forum, on various procedural and constitutional grounds.

In August, the Seventh Circuit reached a similar conclusion to the D.C. Circuit in affirming a district court's dismissal of a challenge to the forum while the case against defendant Laurie Bebo, a former assisted living company executive, proceeded. In both cases, the district courts said they didn't have subject matter jurisdiction to hear the claims.

Other federal courts, including the Southern District of New York and Northern District of Georgia, have not only found jurisdiction but also halted the administrative cases to let the constitutional challenges proceed.

Next Steps

“The case law on subject matter jurisdiction is hardly a model of clarity, and we remain convinced that federal courts should be permitted to hear claims and stop proceedings when an agency’s authority can be shown to be unconstitutional, as other courts have held,” McColloch told Bloomberg BNA.

The SEC didn't reply to a request for comment.

“We are still studying the court’s lengthy opinion and have not yet determined the next procedural steps,” McColloch said. “These issues will likely be resolved at some point soon by the U.S. Supreme Court.”

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

For the D.C. Circuit's opinion, visit http://www.bloomberglaw.com/public/document/George_Jarkesy_Jr_et_al_v_SEC_Docket_No_1405196_DC_Cir_Aug_12_201/7