SEC, Desperate To Avoid Judge May, Challenges Related Case Designation in Timbervest Action

The SEC really wants to avoid Judge Leigh Martin May — the Northern District of Georgia judge who ruled in Hill v. SEC that the appointment of SEC ALJ James Grimes violated the appointments clause of Article II of the Constitution — like the plague.  The Commission filed a motion in Timbervest, LLC v. SEC seeking nullification of the assignment of the Timbervest action to Judge May as a case related to Hill v. SEC because it does not properly fit the definition of a “related case.”  The Timbervest complaint was filed after another case in that district making the same constitutional argument, Gray Financial Group v. SEC, was reassigned to Judge May as a related case.  See Timbervest Files Complaint and TRO Motion To Halt SEC Proceeding.  Timbervest identified it as a case related to Hill and Gray Financial in the cover sheet for its complaint, and the Timbervest action was assigned to Judge May, but the SEC’s papers do not address the actual process and rationale leading to the assignment of the case to Judge May.  Instead, the SEC accused Timbervest of “judge shopping” by checking the “related case” box.  By all appearances, however, it is the SEC that is “judge shopping” with this motion — shopping for any N.D. Ga. judge other than Judge Leigh Martin May.

The SEC’s motion can be read here: SEC motion opposing related case designation in Timbervest case.  Plaintiff’s response can be read here: Plaintiff’s response to SEC reassignment motion in Timbervest.

The SEC’s argument is that cases are “related” for purposes of judicial assignment in the Northern District of Georgia only if they arise out of common facts (“Plaintiffs noted the supposed relationship between their case, on the one hand, and Hill and Gray on the other, by checking a box on their civil cover sheet allowing for the designation of cases as related if they ‘involve the same issue of fact or arise[] out of the same event or transaction included in an earlier numbered pending suit.’”)  But, the SEC argues, the court’s Internal Operating Procedures establish that “a case is NOT related if it has the same LEGAL issue. . . .”  (quoting Rule 905-2(a)).  The SEC contends that Hill, Gray Financial, and Timbervest all present a common legal issue about the validity of the appointment of ALJs, but they arise out of very different facts (i.e., the SEC’s factual contentions of law violations are different in each case): “the cases do not arise out of the same event or transaction. To the contrary, the cases arise out of different administrative proceedings involving different respondents.”

This argument conflates the facts relevant to the SEC’s charges in the administrative cases with those relevant to the plaintiffs’ complaints pending before the district court.  Each of these cases — that is, each of the federal court complaints — turn on essentially identical facts about the appointments of, powers granted to, and removal limitations for, the ALJs presiding over the proceedings.  The critical facts at issue are not the underlying violations of law charged by the SEC, but the nearly identical facts surrounding the appointment of the ALJs assigned to hear the three administrative cases, the President’s control (or lack thereof) over those ALJs, and the powers they exercise as ALJs.

In fact, the SEC itself previously argued to Judge May that the only relevant facts in the Hill case are the circumstances of the appointment of ALJ James Grimes (see SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery).  Since the Timbervest complaint alleges that the same circumstances apply to the appointment of ALJ Cameron Elliot, who presided over the Timbervest administrative trial, the SEC should be in agreement that the material issues in each of those cases “involve the same issue of fact.” 

But putting aside the merits of the SEC’s argument, it is difficult to understand why the SEC cares about whether the Timbervest case is assigned to the same or a different judge than the Hill and Gray Financial cases.  The SEC already informed Judge May that it will be appealing her preliminary injunction order to the 11th Circuit.  See SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery.  Given the fact that this issue is going up on appeal no matter what, why make a desperate motion to reassign a case turning on what is acknowledged to be an identical legal issue to another judge in the same district?  The legal issue is going to be heard de novo by the court of appeals; there is little or no value in trying to force another judge to labor on another opinion.  And even if the case were reassigned, the strong likelihood is that a different judge in the same district would defer to Judge May’s opinion — which, whether ultimately right or wrong, is thoughtful and certainly not off the wall — rather than labor through the complex analysis again, knowing that the 11th Circuit will be ruling soon in any event.

So, even putting aside the questionable legal arguments made by the Commission, the problem with this motion to reassign the Timbervest case is that it just doesn’t make a lot of tactical, strategic, or common sense.  The filing of the motion, together with a bevy of other questionable recent decisions made by the Commission on the issues raised over the last year about the SEC’s administrative enforcement practices, leaves the impression that very little thought is being given to an overall plan for dealing with what is plainly an important problem.  (Three examples come immediately to mind: the publication without hearings or comment of slapdash and plainly meaningless guidelines for bringing cases administratively, which have been roundly ridiculed by commentators; the recent debacle where the Commission asked ALJ Elliot for an affidavit on bias issues and Mr. Elliot declined to do so; and the Commission’s apparent paralysis in responding to remarks by former ALJ Lillian McEwen about possible systemic biases in the administrative court.)  See Upon Further Review, SEC Memo on Use of Administrative Courts Was Indeed a Fumble; SEC ALJ Cameron Elliot Declines To Submit Affidavit “Invited” by the Commission; and Fairness Concerns About Proliferation of SEC Administrative Prosecutions Documented by Wall Street Journal.

Most everything the SEC is doing now with these cases, and on the critical issues raised by the Commission’s increased use of administrative enforcement actions, seems without rhyme or reason.  The Commission and its staff need to sit back, take a deep breath, and figure out how to get to a resolution of these serious concerns with minimal chaos and upheaval, both in the courts and in its own administrative court.  Right now, that is just not happening, and the resulting turmoil is saddening and a bit frightening.

Straight Arrow

June 17, 2015

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2 thoughts on “SEC, Desperate To Avoid Judge May, Challenges Related Case Designation in Timbervest Action

  1. Pingback: SEC Argues Common “Facts” Are Not Common “Issues of Fact” — I Kid You Not | Securities Diary

  2. Pingback: SEC Gambit To Avoid Judge May in Timbervest Case Seems To Have Failed | Securities Diary

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