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Sept. 7 — The Securities and Exchange Commission will defend the constitutionality of its in-house forum before a fourth federal appeals court this year in what could produce a circuit split requiring U.S. Supreme Court intervention.
The late October oral argument before the Fourth Circuit in Bennett v. SEC is just one of several significant cases in which the SEC is a party now pending in the federal circuits.
The agency is also entangled in expensive, long-running litigation with former Texas billionaire Sam Wyly. A loss in this appeal could prompt future caution in pursuing novel legal theories or a well-heeled defendant.
Despite these challenges, “the agency has demonstrated in recent years that it has the firepower to wage war on multiple fronts,” securities attorney Stephen J. Crimmins of Murphy & McGonigle PC, Washington, told Bloomberg BNA Aug. 31.
The commission declined to comment for this report.
Investment adviser Dawn Bennett was sued in the commission's in-house forum for allegedly overstating her firm's assets under management. She fired back with a federal court lawsuit claiming that the way the agency's administrative law judges are hired violates the Appointments Clause. The district court denied Bennett's bid to halt the administrative case pending resolution of the constitutional question, and the SEC is asking the Fourth Circuit to uphold the decision.
There are currently two other appeals based on the Appointments Clause, but Bennett is scheduled to be argued first. The Second, Seventh and Eleventh Circuits have concluded that the constitutional issue can't be resolved until the administrative case has concluded (106 SLD, 6/2/16) (164 SLD, 8/25/15) (118 SLD, 6/20/16).
The D.C. Circuit's leading role in the development of administrative law will make its views important for other circuits to consider, Crimmins said.
“If the SEC starts losing these cases in other circuits, it has an easy fix to the problem. It can simply have the SEC commissioners themselves officially appoint all of their present and future administrative law judges,” he said. They already routinely appoint at least 10 of the agency’s senior officers each year, so adding the occasional ALJ to the process wouldn't be a burden, Crimmins said.
The D.C., Second, Ninth and Eleventh Circuits have the most pending appeals involving the commission. As of Sept. 6, the Ninth Circuit surpassed all the other circuits with 30 pending appeals—50-plus percent more than the other top circuits. The D.C. Circuit had 13 pending SEC appeals, the Eleventh Circuit had 12 and the Second Circuit had 11.
“The Second and Ninth Circuits are home to many publicly traded companies, and are major financial centers,” Daniel S. Sommers, partner at Cohen Milstein Sellers & Toll PLLC, Washington, told Bloomberg BNA Aug. 18. It makes sense that more cases are filed within these circuits, and that they would have “a comparatively greater volume of appellate practice,” he said. Wall Street also is within the Second Circuit, Crimmins noted.
The D.C. Circuit, in turn, “has the job of riding herd over the federal administrative agencies, including the SEC,” he said.
The First Circuit was the only federal appeals court that didn't have any pending cases in which the SEC was a party. However, this is likely an “anomaly,” Daniel Hawke, a Washington-based partner at Arnold & Porter LLP, told Bloomberg BNA. The SEC's Boston office is very active throughout the First Circuit, so this may just be an “accident of timing,” San Francisco lawyer W. Hardy Callcott of Sidley Austin LLP added.
Data also show that the most commonly appealed issues involve disciplinary sanctions, denial of whistle-blower awards, and receivership disputes. As of Sept. 6, there were 36 active appeals involving sanctions, 13 involving receivership disputes and five involving the refusal to grant a whistle-blower award.
“Sanctions are typically the hardest fought cases because individuals will usually fight any restriction on their ability to make a living,” Hawke said.
In the coming months, the SEC is scheduled for several oral arguments to defend sanctions imposed for wrongdoing. A decision also is expected in the STOCK Act case regarding the scope of congressional immunity as it pertains to compliance with investigative subpoenas.
The agency will also face off in its first in-house court challenge based on Fifth Amendment Due Process grounds in October.
Data compiled for the story is current as of Sept. 6, 2016.
To contact the editor responsible for this story: Phyllis Diamond at firstname.lastname@example.org
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