Tag Archives: for cause removal

SEC Says It Will Appeal Hill v. SEC Decision, Seek To Stay the Case, and Try To Prevent Discovery

An SEC June 15, 2015 filing in Hill v. SEC, No. 15-cv-1801 (N.D. Ga.), informed Judge Leigh Martin May that the Commission will appeal her June 8 ruling that the administrative proceeding In the Matter of Charles L. Hill, Jr. violates the constitution because the appointment of the presiding administrative law judge, James Grimes, was unconstitutional.  See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding.  The SEC also said it would seek a stay of the entire proceeding before Judge May, including any discovery the plaintiff intends to pursue as the Hill action moves beyond the preliminary injunction stage.  The SEC’s submission can be read here: SEC June 15 Filing in Hill v. SECThe submission on behalf of plaintiff Charles Hill can be read here: Hill June 15 Filing in Hill v. SEC.

These submissions were made in response to the portion of the June 8 ruling stating that the parties should “confer on a timetable for conducting discovery and briefing the remaining issues.”

Although Judge May’s preliminary injunction was narrowly drawn to halt only the single administrative action against Mr. Hill — and ALJ Grimes has since been appointed to preside over a new proceeding — the SEC still argues that the requirements for staying the Hill Order and litigation are satisfied.  The SEC wrote: “Defendant intends to appeal the preliminary injunction issued by this Court.  Defendant also intends to move to stay all proceedings in this Court pending appeal because the Eleventh Circuit’s ruling will have a significant impact on this case, and any further proceedings in this Court could prove largely superfluous and a waste of the parties’ and the Court’s resources.”  SEC Submission at 1-2.  Typically, however, the mere possibility of some wasted resources in the event of a reversal on appeal is insufficient to support a stay of proceedings.  Such a motion normally requires a showing that in the absence of a stay the status quo could be sufficiently altered that the moving party could suffer irreparable harm.  Because Judge May’s order does not go beyond the one proceeding, and the only harm to the SEC of the litigation going forward during the appeal would relate to discovery in the case itself, obtaining a stay should be an uphill battle.

Perhaps recognizing this, the SEC’s backup plan apparently is to slow play the Hill litigation.  It argued that if a stay is not issued, there is no urgency to resolve the matter.  Instead, the normal schedule for a civil action in the Northern District of Georgia should prevail: “There is no good cause for Plaintiff’s request that the parties begin discovery immediately.  First, this Court has already issued a preliminary injunction, and thus, there is no urgency for Plaintiff to proceed faster than the normal pace set by the Federal Rules and the Local Rules [under which] the government is entitled to have until July 20, 2015, to file its answer or other response to Plaintiff’s Amended Complaint.  There is no reason that the government should be deprived of the usual time that the Federal Rules provide for responding to the Amended Complaint nor that issues regarding whether discovery is warranted need to be resolved before the government has had that opportunity.  Moreover, under Local Rule 26.2(A), the discovery period does not commence until ‘thirty (30) days after the appearance of the first defendant by answer.'”  Id. at 2.

The SEC also said that plaintiff had not indicated the nature of discovery he intended to pursue, and argued that “no discovery is necessary because all of Plaintiff’s claims involve pure issues of law,” the “case can be resolved on dispositive motions without any factual development,” and “to the extent any facts are necessary, Plaintiff already has them in his possession.”  Id. at 2-3.  Accordingly, the SEC asks “that the Court should decide the case without permitting discovery.”  Id. at 3.

Plaintiff Charles Hill presented a different proposal.  After noting that counsel for the parties conferred “on multiple occasions” without reaching agreement on a proposed schedule, he proposed, without argument, simply that discovery begin “immediately,” end “90 days after Defendant files an answer, or, if Defendant files a Motion to Dismiss, 90 days after the Court denies the Motion to Dismiss,” and the deadline for motions for summary judgment be “30 days after the close of discovery.”  He presented no argument why the schedule should depart from local rules.

The best result probably lies somewhere between the two proposals.  The SEC’s notion that this should be treated as just another ordinary case seems a little tone-deaf, and strangely out of sync with the expectation that whatever the result, the Commission should want to avoid extending the period during which there is a cloud over its administrative proceedings.  It certainly seems in the public interest to expedite a case of this nature, and try to move quickly to a final result, while allowing the parties ample time to address complex issues.  On the other hand, it is the rare case that moves “immediately” to discovery when there is no pending deadline that causes the parties and the court to need to reach a quick result.  And the SEC has a point that the nature of discovery needed is unclear with respect to the appointments clause issue because the facts of ALJ Grimes’s appointment appear not to be in dispute.  (Although there could be a need for discovery or development of expert testimony on the equitable factors bearing on whether an injunction should issue, and, if so, what its scope should be.)  The same may not be true for the other Article II issue raised in the complaint — the alleged invalidity of the double layer of “for cause” protection for SEC ALJs against removal by the President — as to which Judge May’s opinion did not address the merits.  It is also not clear whether plaintiff will try to seek discovery on the two other theories in the complaint — the alleged improper delegation of legislative authority to SEC ALJs, and the denial of a 7th Amendment jury right — which Judge May found were not likely to succeed on the merits.

In any event, whether any discovery is appropriate, and if so what it would encompass, is not really a scheduling issue.  If the plaintiff wants to pursue discovery and the SEC objects, that dispute can be raised with the court.

The inability of the parties to reach a reasonable compromise on scheduling leaves it up to Judge May to decide what she believes is reasonable under these circumstances.  That probably should be something that allows the case to move forward expeditiously, but not quite at the breakneck pace Mr. Hill is suggesting.

In the meantime, as reported in Law 360 (SEC To Appeal District Judge’s Admin Court Injunction) the SEC informed Judge Richard Berman in a letter to the court in Duka v. SEC “that the agency has no plans to change the way it appoints its judges while it waits for the solicitor general to approve the appeal to the Eleventh Circuit it was not considering an effort to cure the appointments clause violation found by Judge May.”  The letter supports this position because “the SEC has over 100 litigated proceedings at various stages of the administrative process and the ALJ scheme has been in use for seven decades and is grounded in a highly-regulated competitive service system that Congress created for the selection, hiring and appointment of ALJs in the executive branch.”  That suggests that it may not be as straightforward as Judge May speculated that the appointments clause violation might be easily cured.

Straight Arrow

June 16, 2015

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Gray Financial Group v. SEC Is SEC’s Latest Constitutional Challenge

The latest constitutional challenge to an SEC administrative enforcement proceeding was filed in the United States District Court for the Northern District of Georgia on February 19, 2015 in a case captioned Gray Financial Group, Inc. v. SEC, No. 1:15-cv-0492 (N.D. Ga.).  Gray Financial is a registered investment advisor subject to SEC regulatory oversight, and, as a result, has not been newly subjected to SEC administrative proceedings by the Dodd Frank Act’s 2010 expansion of jurisdiction of SEC administrative law judges to non-regulated persons.  As a result, the theory of the case is limited to alleged constitutional shortcomings that are unaffected by whether or not the putative respondent is an SEC-regulated entity.  In this respect, of the recent cases challenging SEC administrative enforcement actions, Gray Financial most resembles Stilwell v. SEC, previously filed the Southern District of New York.  See Stilwell v. SEC.

The complaint alleges that Gray Financial is a small investment advisory firm registered with the SEC, and in Georgia and Michigan.  It established as an investment alternative for Georgia-based pension funds, and with advice of counsel, an “alternative investment” in the form of a fund of funds.  Georgia recently adopted a new pension law permitting alternative investments by public pension funds.  The SEC commenced an investigation of whether the new fund complied with the Georgia law.  The SEC staff thereafter issued a “Wells notice” on the theory that the fund was not in compliance with the Georgia pension law.  Gray Financial contends that the Georgia law is unclear, has never been interpreted by Georgia courts, and that it acted only on the advice of experienced counsel.  Nonetheless, the SEC argued the firm intentionally violated the Georgia law and insisted on a “draconian” settlement to avoid an administrative enforcement proceeding.  A copy of the complaint is available here: Gray Financial Group v. SEC Complaint.

The complaint describes the SEC administrative proceeding process and the role of SEC ALJ’s in detail, including the insulation of the ALJ’s from removal by the SEC or the President for other than good cause.  It then lays out its constitutional argument that the SEC administrative law judges are executive officers outside of the control of the President, in violation of Article II of the Constitution:

Article II’s vesting authority requires that the principal and inferior officers of the Executive Branch be answerable to the President and not be separated from the President by attenuated chains of accountability.  Specifically, as the Supreme Court held in Free Enterprise, Article II requires that executive officers, who exercise significant executive power, not be protected from being removed by their superiors at will, when those superiors are themselves protected from being removed by the President at will.

The SEC ALJs’ removal scheme is contrary to this constitutional requirement because SEC ALJs are inferior officers for the purposes of Article II, Section 2 of the U.S. Constitution, and because:

a. SEC ALJs are protected from removal by a statutory “good cause” standard; and

b. The SEC Commissioners who are empowered to seek removal of SEC ALJs – within the constraints of the “good cause” standard – are themselves protected from removal by an “inefficiency, neglect of duty, or malfeasance in office” standard; and

c. The MSPB members who are empowered to effectuate the removal decision – again limited by a “good cause” standard – are themselves protected from removal by an “inefficiency, neglect of duty, or malfeasance in office” standard.

Under this attenuated removal scheme, “the President cannot remove an officer who enjoys more than one level of good-cause protection, even if the President determines that the officer is neglecting his duties or discharging them improperly.  That judgment is instead committed to another officer, who may or may not agree with the President’s determination, and whom the President cannot remove simply because that officer disagrees with him.  This contravenes the President’s ‘constitutional obligation to ensure the faithful execution of the laws.’”  Free Enterprise [Fund v. Pub. Co. Accounting Oversight Bd.], 130 S. Ct. at 3147 (quoting Morrison v. Olson, 487 U.S. 654, 693 (1988)).

Because the President cannot oversee SEC ALJs in accordance with Article II, SEC administrative proceedings violate the Constitution.

Complaint, ¶¶ 60-63.  The relief sought is an injunction barring an SEC administrative proceeding.

Although the complaint describes many respects in which SEC administrative proceedings are less fair to respondents than federal court actions, it does not explicitly contend that the SEC’s threatened administrative proceeding would violate due process, the equal protection clause, the Seventh Amendment right to a jury trial in civil actions, or be an arbitrary and capricious agency action under the Administrative Procedure Act.  That likely is because SEC-regulated entities like Gray Financial have long been subject to administrative enforcement actions as part of the SEC’s overall authority over regulated entities.

The merits of the Article II theory laid out in the complaint were previously discussed in the earlier post: Challenges to the Constitutionality of SEC Administrative Proceedings in Peixoto and Stilwell May Have Merit.

Straight Arrow

February 24, 2015

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