SEC on the Defense in Federal Appeals Courts

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By Cameron Finch and Antoinette Gartrell

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.

Five Pivotal SEC Appeals Court Cases

  • Bennett v. SEC, 4th Cir., No. 15-02584, 12/28/15 — This case could signal a conclusion to the long-running dispute over the SEC's use of its in-house tribunal to bring enforcement actions. During the Oct. 28 oral argument, the commission will try to persuade the Fourth Circuit that its practice of suing administratively is constitutionally sound—an issue that has dogged the agency for the past several years. Although there are a number of lawsuits claiming the agency's in-house forum doesn't pass constitutional muster, only the D.C. Circuit has directly addressed—and rejected—the contention (154 SLD, 8/10/16) . If the Fourth Circuit doesn't agree, the U.S. Supreme Court may step in to resolve the circuit split, Crimmins said.

Bennett v. SEC

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.

  • Georgia Republican Party v. SEC, 6th Cir., No. 16-03732, filed 6/30/16 ; Tennessee Republican Party v. SEC, 6th Cir., No. 16-03360, filed 4/12/16 — In other constitutional challenges, two pending Sixth Circuit cases call the SEC's rulemaking authority into question. The Tennessee and Georgia Republican parties filed separate suits objecting to the commission’s approval of Municipal Securities Rulemaking Board Rule G-37 on First Amendment grounds. The rule, which became effective for municipal advisors Aug. 17, is intended to safeguard the municipal securities market against pay-to-play practices when state and local governments hire outside financial professionals.
  • According to the Republicans, the rule forces municipal advisors to choose between their First Amendment right to support candidates and their provision of advisory and dealer services. The plaintiffs also argue that Congress didn't grant the SEC and the MSRB power to set such restrictions. They say the rule doesn't meet the Supreme Court's “quid pro quo” corruption standard for determining whether the government's interest in restricting political contributions is sufficient. The commission moved to dismiss the actions for lack of jurisdiction in July.
  • SEC v. House Ways and Means, 2d Cir., No. 15-3818, filed 11/15/15 — In the enforcement arena, jurisdiction in general and insider trading in particular have been problematic for the commission in recent years. One pending Second Circuit case addresses both topics. In June, oral arguments were held on whether a congressional committee must respond to an SEC subpoena seeking documents in an insider-trading investigation (114 SLD, 6/14/16). The committee argued that the federal sovereign immunity doctrine permits it to disregard SEC document requests. Resolution of the controversy could determine whether the Stop Trading on Congressional Knowledge—STOCK—Act is enforceable. The 2012 law bans members of Congress from trading on confidential information gleaned through the course of their public service.
  • “Failure to enforce [the subpoena] will lead cynics to dismiss the Act as mere window-dressing,” Crimmins said.
  • SEC v. Wyly, 2d Cir., No. 15-2821, filed 9/4/15 — A fifth case, also pending in the Second Circuit, tests both the SEC's jurisdictional reach and its willingness to pursue high-net-worth individuals. Since 2010, the commission has been embroiled in litigation with former billionaire entrepreneur Samuel Wyly and his late brother Charles Wyly. In May 2014, a jury found both men liable for improperly using offshore trusts to trade in the securities of companies they controlled . The judge ordered Samuel Wyly and the estate of his late brother to pay $300 million in disgorgement and prejudgment interest, representing the tax advantages they secured as a result of their scheme. The Wylys countered that the move would usurp the Internal Revenue Service's “exclusive authority to assess and collect taxes.” The case is set to be argued Dec. 14.
  • “The SEC is continuing to move well beyond its twentieth century comfort zone as it expands its reach into new issues and new areas,” Crimmins said. An unfavorable outcome for the commission could increase the incentive to use offshore shelters, presenting additional enforcement challenges.

Booming Circuits
The D.C.,

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.

Upcoming Events

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.

Upcoming Events.

Data compiled for the story is current as of Sept. 6, 2016.

To contact the reporters on this story: Cameron Finch in Washington at; Antoinette Gartrell in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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