On March 3, 2015, Eastern District of Wisconsin District Judge Rudolph Randa dismissed the action brought by Laurie Bebo, former CEO of Assisted Living Concepts, Inc., to enjoin the SEC’s administrative enforcement proceeding against her. The opinion is available here: Order Dismissing Complaint in Bebo v. SEC. We previously discussed Ms. Bebo’s complaint here: New Challenge to the Constitutionality of an SEC Administrative Proceeding Filed in Bebo v. SEC, and followed up with discussions of the merits of her claims here (In re Bebo Shows Why SEC Administrative Proceedings Have Fairness Issues) and here (SEC ALJ Cameron Elliot Shows Why In re Bebo Should Be in Federal Court).
The judge found that even if Ms. Bebo’s arguments have merit, she is required to defend the administrative action in the SEC’s administrative law court, present her arguments there, and if needed, seek review by the SEC itself, and ultimately by a federal court of appeals. Judge Renda thus adopted the same approach as SDNY Judge Lewis Kaplan in Chau v. SEC, which is discussed here: SEC Wins First Skirmish on Constitutional Challenge to Chau Administrative Proceeding. Judge Kaplan’s decision is now on appeal to the Second Circuit court of appeals.
Judge Randa concluded he was jurisdictionally bound to reject the Bebo action, but he didn’t stand totally mute. He started out his opinion by saying: “The Court finds that Bebo’s claims are compelling and meritorious, but whether that view is correct cannot be resolved here.” Slip op. at 3. But, after whetting our appetite with that comment, he proceeded to explain why he believed Ms. Bebo is required to submit to the entire administrative enforcement process and make her arguments there, rather than seeking immediate intervention by a federal court. He noted that the Securities Exchange Act of 1934 provides that “a ‘person aggrieved’ by a final SEC order ‘may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business'” (quoting 15 U.S.C. § 78y(a)(1)), and that such provisions “’generally preclude de novo review in the district courts, requiring litigants to bring challenges ‘in the Court of Appeals or not at all.’’” Id. at 3-4 (quoting Altman v. SEC, 687 F.3d 44, 45-46 (2d Cir. 2012)). Although the Supreme Court, in Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477 (2010), found that a district court could properly exercise jurisdiction over an injunctive action to address the allegedly unconstitutional proceeding in that case, that did not apply here because in Free Enterprise Fund, no proceeding had yet commenced when the action was brought in federal court. Slip op. at 5-6. The judge also found that Ms. Bebo could make an adequate record during the administrative proceeding to allow a court of appeals a sufficient basis for considering her grounds for challenging the proceeding. Id. at 6-9.
Judge Randa concluded by quoting Judge Kaplan’s decision in the Chau case:
Ultimately, 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. But as one judge observed, 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.” Chau v. SEC, No. 14-cv-1903 (LAK), — F. Supp. 3d —-, 2014 WL 6984236, at *6 (S.D.N.Y. Dec. 11, 2014). If the process is constitutionally defective, Bebo can obtain relief before the Commission, if not the court of appeals. See, e.g., Landry v. F.D.I.C., 204 F.3d 1125 (D.C. Cir. 2000) (addressing Article II challenge to FDIC’s method of appointing ALJs on appeal from a final FDIC Order). Until then, Bebo must “patiently await the denouement of proceedings within the Article II branch.” USAA Fed. Sav. Bank v. McLaughlin, 849 F.2d 1505, 1510 (D.C. Cir. 1988).
If other district courts hearing challenges to pending or threatened SEC administrative proceedings follow the same path as Judges Kaplan and Randa, it will take awhile to get any reasoned judicial analysis of the validity of the SEC’s expanded use of its administrative courts to impose sanctions under the 2010 authority provided in the Dodd Frank Act. At this point, all we have is Judge Randa’s teasing dicta “that Bebo’s claims are compelling and meritorious.”
In the meantime, our own discussion of some of the issues raised by Ms. Bebo, and other cases challenging the constitutionality of the SEC administrative proceedings under the standard laid out in Free Enterprise Fund, can be found here: Challenges to the Constitutionality of SEC Administrative Proceedings in Peixoto and Stilwell May Have Merit.
March 4, 2015
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