Tag Archives: N.D. Ga.

SEC Hit with Double Whammy Rulings Barring It from Commencing Challenged Administrative Proceedings

On the afternoon of September 17, 2015, the SEC was rebuffed by two federal courts in separate cases challenging the constitutionality of the SEC’s administrative law enforcement proceedings.  As reported here, the Court of Appeals for the Second Circuit granted Lynn Tilton an order barring the SEC from proceeding with an administrative trial on charges against her, pending that court’s resolution of a dispute over whether the federal courts have jurisdiction to consider her complaint that the administrative proceeding would violate Article II of the Constitution.  At roughly the same time, New York federal district court Judge Richard Berman rejected a motion by the SEC to allow it to proceed with an administrative action against Barbara Duka while it appealed (to the Second Circuit) Judge Berman’s preliminary injunction barring that proceeding from moving forward, on the very same constitutional grounds.  Judge Berman’s preliminary injunction order can be read here: Order Issuing Preliminary Injunction in Duka v. SEC; and his order denying the SEC’s stay motion can be read here: Decision and Order in Duka v. SEC.

The result is that two more administrative proceedings are now barred by court orders, joining two others that were barred by orders of Judge Leigh May in the federal district court in Atlanta.  See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding, and Order Enjoining SEC in Gray Financial Group v. SEC.

The Second Circuit order was brief and straightforward.  But Judge Berman’s denial of the SEC’s application for a stay is filled with meaty discussions of key issues, including reiterating that several of the SEC’s positions on jurisdiction and the merits are wrong, suggesting that the SEC plays a little fast and loose with the positions it argues, and emphasizing that the SEC might want to be more proactive in addressing allegations of potential bias in its administrative court.

Judge Richard Berman - NYLJ/Rick Kopstein 100614

Judge Richard Berman – NYLJ/Rick Kopstein

On the jurisdictional issue, Judge Berman restated his belief that his court does have jurisdiction over the Duka constitutional challenge (“The Court is, respectfully, convinced that it made the correct finding of subject matter jurisdiction,” slip op. at 3), and took the time to address the contrary position recently reached by the Seventh Circuit in Bebo v. SEC, 2015 WL 4998489 (7th Cir. Aug. 24, 2015) (see 7th Circuit Rules for SEC, Affirming Dismissal of Bebo Case on Jurisdictional Grounds).  He openly disagreed with the Seventh Circuit’s view that the Supreme Court decision in Elgin v. Dep’t. of the Treasury, 132 S. Ct. 2126 (2012), was on point because the factual circumstances differed significantly.  See slip op. at 8-9.

Judge Berman also made pointed statements elsewhere in his opinion arguing that immediate consideration of the consitutional issue was consistent with Second Circuit law and the public interest.  For example: “The SEC argues unconvincingly that a party in Ms. Duka’s shoes ‘must patiently await the denouement of proceedings within the [administrative agency],” . . . .  But Second Circuit precedent appears to refute such a notion.  See Touche Ross & Co. v. S.E.C., 609 F.2d 570, 577 (2d Cir. 1979) (‘[T]o require appellants to exhaust their administrative remedies would be to require them to submit to the very procedures which they are attacking.’).”  Slip op. at 15-16 (some cites omitted).  And: “With respect to the public interest, the Court submits that it is of the utmost importance to the public that complex constitutional questions be resolved at the outset, with finality, and by application of the expertise of the federal courts.  See, e.g., Massaro v. United States, 538 U.S. 500,504 (2003); see also Pappas v. Giuliani, 118 F. Supp. 2d 433, 442 (S.D.N.Y. 2000) affd, 290 F.3d 143 (2d Cir. 2002) (‘Although often highly competent in their designated area of law, administrative decision-makers generally have neither the training nor the experience to adjudicate complex federal constitutional issues.’); Austin v. Ford, 181 F.R.D. 283, 286 (S.D.N.Y. 1998) (‘Public interest in finality of judgment encompasses the development of decisional law, the importance of the opinion to nonparties, and the deterrence of frivolous litigation.’).”  Slip op. at 16 (some cites and footnote omitted).

All of these points could be impactful as the Second Circuit considers the same jurisdictional issue in the Tilton v. SEC appeal.

On the merits, Judge Berman restated his belief that Supreme Court case law leaves little doubt that the SEC’s administrative law judges are “inferior officers” within the meaning of that term in Article II, and, as a result, their appointments are subject to limitations in Article II’s Appointments Clause.  His finding that the High Court reasoning and holding in Freytag v. Commissioner, 501 U.S. 868 (1991), yields the conclusion that SEC ALJs are inferior officers because they exercised “significant authority pursuant to the laws of the United States” was not new – as he noted, he previously reached the same conclusion when he issued the preliminary injunction.  Slip op. at 9.  But it came within two weeks of the SEC reaching the opposite conclusion in its recent decision on the petition for review in In the Matter of Raymond J. Lucia Cos., Inc., File No. 15006 (see SEC Declares All Is Okay Because Its ALJs Are Just Employees and Not “Inferior Officers”), without even mentioning that decision or its analysis, suggesting Judge Berman found the SEC reasoning unpersuasive and sees no reason to defer to SEC views on the issue.  No doubt with knowledge of the specific analysis of the SEC in Lucia, he still wrote: “the SEC will not, in the Court’s view, be able to persuade the appellate courts that ALJs are not “inferior officers.”  Slip op. at 11.  Judge Berman’s bottom line: “Duka’s constitutional (Appointments Clause) challenge is (very) likely to succeed.”  Id. at 10.

On the SEC’s nimble willingness to revise its arguments to fit the circumstances, Judge Berman noted the “irony” of the SEC’s new-found emphasis on the compelling importance of judicial efficiency after it scoffed at Ms. Duka’s similar arguments in the original preliminary injunction hearing.  He wrote: “The Court’s reference to ‘irony’ [in an earlier ruling] refers to the fact that conservation of Duka’s resources was a core argument that she raised in objecting to participating in the SEC’s administrative proceedings prior to resolution of her constitutional challenge in federal court.  The SEC flatly opposed that argument, which it now appears firmly to embrace.”  He quoted his own statement during the oral argument that “I don’t understand why you reject that argument when Ms. Duka makes it but then at the same time in this Court you make the very same argument.”  Slip op. at 3 n.2.

And Judge Berman was surely making a point when he dwelled, without any apparent need, on the SEC’s opaque handling of publicly-disclosed evidence that its own administrative court could have a latent, or even intentional, bias in favor of the prosecution.  His opinion includes the following striking paragraph:

The Court is aware of recent allegations of undue pressure said to have been applied to an SEC ALJ to cause her to make SEC-favorable rulings.  “Lillian McEwen, who was an SEC judge from 1995 to 2007, said she came under fire from [Chief Administrative Law Judge Brenda] Murray for finding too often in favor of defendants.”  See Jean Eaglesham, SEC Wins with In-House Judges, The Wall Street Journal, May 6, 2015. . . .  And, in In the Matter of Timbervest, respondents allegedly sought to depose presiding ALJ Cameron Elliot, who was then allegedly invited by the SEC “to file by July I, 2015 an affidavit addressing whether he has had any communications or experienced any pressure similar to that alleged in the May 6, 2015 The Wall Street Journal article.”. . .  On June 9, 2015, ALJ Elliot emailed the following response: “I respectfully decline to submit the affidavit requested.”  See Jean Eagelsham, SEC Judge Declines to Submit Affidavit of No Bias, The Wall Street Journal, June 11, 2015. . . .  On July 24,2015, Chief Administrative Law Judge Murray issued an Order Redesignating Presiding Judge, designating Administrative Law Judge James E. Grimes “in place and stead of the Administrative Law Judge [ALJ Cameron Elliot] heretofore designated, to preside at the hearing in these proceedings and to perform other and related duties in accordance with the Commissioner’s Rules of Practice.”  See In the Matter of Barbara Duka, File No. 3-16349 (SEC).

During the September 16, 2015 hearing, the Court noted that it was “aware that there is some sort of flap at the SEC with respect to some of the ALJs,” that it “want[ed] to get further clarification about that matter,” and that “in this very case, [ALJ] Cameron Elliot . . . has been reassigned because he was not able or would not submit an affidavit.”. . .  While acknowledging that ALJ Elliot was removed from the Duka matter, Ms. Lin contended that “Judge Elliot has a very busy docket . . . and there is no suggestion, no connection whatsoever about [The Wall Street Journal article], about that particular former ALJ’s accusations to Judge Elliot’s reassignment in this case. . . .  And it’s not true that there would be any kind of connection.”. . .  The Court assumes that the SEC will want fully to investigate these matters.

Slip op. at 14-15 (citations omitted and emphasis added).

Apparently Judge Berman is as perplexed as yours truly when the Commission seems more insouciant than concerned in its reaction to serious public questioning of the fairness of its own administrative judicial process.  See SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed; and SEC “Invites” ALJ Cameron Elliot To Provide Affidavit on Conversations “Similar” to Those Described by Former ALJ.  Indeed — although Judge Berman made no mention of this — it is downright embarrassing that 15 months ago the SEC’s General Counsel acknowledged that the Rules of Practice governing SEC administrative proceeding are archaic and need revamping and nothing has yet been done to address that issue.  See SEC Administrative Case Rules Likely Out Of Date, GC Says.  (Ms. Small said it was fair for attorneys to question whether the SEC’s rules for administrative proceedings were still appropriate, with the rules last revised “quite some time ago” when the SEC’s administrative proceedings dealt with different kinds of cases than the more complex administrative matters it now takes on or expects to take on — given the commission’s expanded authority under the Dodd-Frank Act — such as insider-trading actions.  It was “entirely reasonable to wonder” if those rules should be updated to reflect the changed situation, for instance by allowing more flexibility on current limits to trial preparation time or allowing for depositions to be taken.  “We want to make sure the process is fair and reasonable, so [changing] procedures to reflect the changes makes a lot of sense.”)

Anne Small -- SEC General Counsel

Anne Small — SEC General Counsel

When all of the dust settles on the Appointments Clause and other Article II constitutional challenges to these administrative courts, we will still be left with what every practicing securities litigator knows are vastly diminished due process rights in the SEC’s administrative courts as compared to the federal courts.  Judge Berman certainly seemed concerned about this in his opinion.  He said: “during the September 16, 2015 hearing, the SEC argued that administrative proceedings would serve the public interest because ‘it is a much faster process and it expedites the consideration and the determination of whether the underlying security violations had actually occurred and, more importantly, to impose the kind of remedy that would then help to prevent future harm.’. . .  The Court responded that ‘faster is [not] necessarily better because faster means no juries, no discovery, no declaratory relief.  In federal court you can get that . . . there’s a whole lot of protections, Ms. Duka argues, that are available in federal courts that are not available before the Commission.'”  Slip op. at 16.

If the SEC continues to be empowered to exercise effectively uncontrolled discretion over which cases are directed to the administrative courts (as a result of the expanded jurisdiction of those courts under the Dodd-Frank Act), and it continues to ignore obvious needs to modernize and balance the procedures for those proceedings to eliminate their “Star Chamber” similarities, the controversy over these actions will be unabated.

Straight Arrow

September 18, 2015

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N.D. Ga. Judge Leigh May Issues Injunction for Gray Financial and Denies One for Timbervest

Events are flowing fast and furious on the continuing litigation of the constitutionality of the SEC’s administrative enforcement proceedings.  We previously reported that S.D.N.Y. Judge Richard Berman issued a favorable ruling to Barbara Duka and withheld deciding whether to issue a preliminary injunction for seven days pending possible SEC action.  See SDNY Court Ups the Ante, Allowing Duka Injunctive Action To Proceed on Appointments Clause Issue.  Now, N.D. Ga. Judge Leigh May, who was the first to rule that the appointment of SEC administrative law judges was likely to be in violation of Article II of the Constitution in Hill v. SEC (see Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding), has issued another preliminary injunction based on the same analysis in Gray Financial Group, Inc. v. SEC.  See Order Enjoining SEC in Gray Financial Group v. SEC.

But the respondents in the administrative proceeding In the Matter of Timbervest, LLC et al.were denied a preliminary injunction by Judge May.  See Order Denying Preliminary Injunction in Timbervest v. SEC.  Unlike the Hill and Gray Financial cases, the administrative trial in the Timbervest administrative proceeding was already completed — and petitions for review from both the Timbervest respondents and the Division of Enforcement were in the midst of consideration by the Commission — when the Timbervest parties commenced their action seeking preliminary relief after Hill v. SEC was decided.  The fact that the case was at a different stage was critical to Judge May, who find that becuase the burden of an extensive administrative trial could no longer be avoided, the justification for a preliminary injunction was far less compelling for Timbervest as compared to the other cases.

Judge May still found that, like the other cases, Timbervest was likely to succeed on the merits of its case, but that was not enough to support the issuance of the preliminary injunction.  Here is what she said on that:

The Court finds that Plaintiffs have not satisfied the remaining preliminary injunction factors as Plaintiffs have failed to meet their burden that they will be irreparably harmed if this injunction does not issue.  Plaintiffs seek limited relief: they request the Court enjoin the SEC’s ability to publish its decisions or enforce those decisions against them until this matter is resolved; they do not seek to enjoin the proceeding or prevent the SEC from issuing its final order. However, unlike the procedural posture in the Court’s prior decisions in Gray and Hill, Plaintiffs waited until the ALJ had issued his initial decision and this case was before the SEC itself before filing this motion.  Plaintiffs have already gone through the entirety of the administrative procedure before the ALJ—thus, no injunction will cure or prevent Plaintiffs’ prior obligation to defend itself before
the ALJ.  And any harm which Plaintiffs have already suffered by virtue of the initial decision being published has already been experienced; removing the ALJ’s initial decision from the website would not prevent a future harm.

Plaintiffs argue that by virtue of the initial decision being posted, they are subject to the results of an unconstitutional procedure. . . .  But even if the Court were to order the initial decision to be taken down, the initial decision has been publicly available since August 2014 and articles have been published about it.  Reality dictates that the results of the initial decision will still be available in the public domain even if the decision is removed, albeit not in its most formal version.

Plaintiffs also argue that they may be subject to additional harm if the SEC publishes a final order or imposes additional future action against them while their appeal from the SEC’s final order is pending.  The Court finds that any future harm as to the judgment is speculative at this point as it has not yet been imposed.  See Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 22 (2008) (noting that plaintiffs must show “irreparable injury is likely in the absence of an injunction” and stating that “[i]ssuing a preliminary injunction based only on a possibility of irreparable harm is inconsistent with our characterization of injunctive relief as an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.”) (emphasis in original).  And the SEC stated at the hearing that the SEC often stays its final orders pending appeal, so even if the SEC decides to impose future action against Plaintiffs, the SEC could agree to stay that harm (e.g., any bars, fines, or suspensions) pending appeal.  Therefore, the Court DENIES Plaintiffs’ Motion.

Slip op. at 27-29.

Finally, in connection with the appeal of the preliminary injunction issued in Hill v. SEC, Judge denied the SEC’s request for a stay of her order pending appeal.  See Order Denying SEC Stay Motion in Hill v. SEC.  She said:

The Court finds that a stay of the preliminary injunction pending appeal is not warranted. First, for the reasons stated in this Court’s Order in this case, . . . and the reasons the Court has since stated in two other very similar cases, Gray Financial Group, Inc. v. SEC, No. 1:15-cv-492-LMM, and Timbervest, LLC v. SEC, 1:15-cv-2106, the Court finds that the SEC has not made a strong showing it is likely to succeed on the merits.  As well, the Court notes that the SEC is only foreclosed from conducting an administrative proceeding in front of an ALJ who was not appointed by the SEC itself—the SEC Commissioners may conduct the hearing against Plaintiff at any time or appoint the SEC ALJ directly.  They may also elect to bring their claims in district court. Thus, the Court does not find the SEC is irreparably injured or the public interest is affected as the SEC still has a channel to pursue Plaintiff—even through an administrative proceeding if it chooses.  However, if the stay is lifted, Plaintiff would have to participate in a likely unconstitutional proceeding which would cause a substantial injury. Thus, the SEC’s Motion to Stay is DENIED.

Order at 4.

In showing she is willing to parse through the different factors in these cases and reach varying decision based on the applicable standards, Judge May gains credibility for a reasoned approach to this volatile issue.

Straight Arrow

August 6, 2015

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SDNY Court Ups the Ante, Allowing Duka Injunctive Action To Proceed on Appointments Clause Issue

Today, August 3, 2015, Judge Richard Berman rules that Barbara Duka’s action to enjoin an SEC administrative proceeding against her could proceed in his court.  In doing so, he endorsed the reasoning of Judge Leigh May in SEC v. Hill, on the issues of jurisdiction and whether the SEC ALJs are “inferior officers” for purposes of the Appointments Clause of Article II of the Constitution.  Judge Hill’s decision is discussed here: Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC ProceedingJudge Berman’s decision can be read here: Decision & Order in SEC v. Duka.  Judge Berman previously addressed the jurisdiction issue, ruling in Ms. Duka’s favor, but nevertheless denied her request for a preliminary injunction because he found she was unlikely to succeed in showing that the removal limitations protecting SEC administrative law judges from removal by the President violated the separation of powers.  See In Duka v. SEC, SDNY Judge Berman Finds SEC Administrative Law Enforcement Proceedings Constitutional in a Less than Compelling Opinion.  That decision can be read here: Order Denying Relief in Duka v. SEC.  The issue in this case, and others filed since then, has turned to whether the appointment of SEC ALJs violates Article II’s Appointments Clause.  Judge Berman was not prepared to dismiss an action on that issue, and seemed to be leaning in favor of Ms. Duka on the merits of the violations and the issue of relief.

Today, he did not address Ms. Duka’s motion for a preliminary injunction; he simply denied the SEC’s motion to dismiss the action.  The courts are badly split on the jurisdictional dispute over whether an SEC enforcement respondent may bring a court action to enforce a proceeding alleged to be unconstitutional, rather than litigation the case to completion and raising the constitutionality issue before the SEC and, eventually, likely years later, before a court of appeals.  On the other hand, the courts that have addressed the issue of whether SEC administrative law judges are “inferior officers” from a constitutional standpoint — and therefore subject to the constitution’s Article II appointment (and presumably other) restrictions — seem to be less divided.  The decisions seem to favor the view that these ALJs are to be treated as “inferior officers” under binding Supreme Court precedent.  They generally appear to favor the analysis laid out in our earlier discussion of this issue here: Challenges to the Constitutionality of SEC Administrative Proceedings in Peixoto and Stilwell May Have Merit.

Judge Berman’s decision was short and direct.  He reiterated that he found no reason to alter the jurisdictional analysis in his April 15 Order, despite the later differing views of SDNY judges expressed in other cases (Tilton v. SEC and Spring Hill Capital Partners, LLC v. SEC): “This Court confirms the reasoning and conclusions set forth in its Decision & Order.  The Court perceives no new facts or legal authorities that would warrant reconsideration, including, most respectfully, two recent decisions in the Southern District of New York in Tilton v. S.E.C., No. 15-CV-2472 RA, 2015 WL 4006165 (S.D.N.Y. June 30, 2015) and Spring Hill Capital Partners, LLC, et al. v. SEC, 1 :15-cv-04542, ECF No. 24 (S.D.N.Y June 29, 2015).”  Slip op. at 2.  Instead, he endorsed the reasoning of Judge May in Hill v. SEC: “The Court finds persuasive the reasoning in Hill v. S.E.C., No. 1 :15-CV-1801-LMM, 2015 WL 4307088, at *6 (N.D. Ga. June 8, 2015) (“Congress did not intend to . . . prevent Plaintiff from raising his collateral constitutional claims in the district court.”).”

On the Appointments Clause issue he wrote:

The Court stated in its Decision & Order that “[t]he Supreme Court’s decision in Freytag v. Commissioner, 501 U.S. 868 (1991), which held that a Special Trial Judge of the Tax Court was an ‘ inferior officer’ under Article II, would appear to support the conclusion that SEC ALJs are also inferior officers.” . . .  The Court here concludes that SEC ALJs are “inferior officers” because they exercise “significant authority pursuant to the laws of the United States.”  Freytag, 501 U.S. at 881. . . .  The SEC ALJs’ positions are “established by [l]aw,” including 5 U.S.C. §§ 556, 557 and 15 U.S.C. § 78d-1(a), and “the duties, salary, and means of appointment for that office are specified by statute.” . . .  And, ALJs “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.”  Freytag, 501 U.S. at 881.  “In the course of carrying out these important functions, the [ ALJ s] exercise significant discretion.” Id.; see also Hill, 2015 WL 4307088, at *17 (“like the STJs in Freytag, SEC ALJs exercise ‘significant authority.”‘).  The Court is aware that Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) is to the contrary.

The Appointments Clause in Article II provides: “[T]he Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts ofLaw, or in the Heads of Departments.”  Constitution, Art. II,§ 2, cl. 2.  It is well-settled that the Appointments Clause provides the exclusive means by which inferior officers may be appointed. . . .  For purposes of the Appointments Clause, the SEC is a “Department” of the Executive Branch, and the Commissioners function as the “Head” of that Department. . . .

There appears to be no dispute that the ALJs at issue in this case are not appointed by the SEC Commissioners. . . .

As noted above, after thoroughly reviewing facts quite similar to those presented here, United States District Judge Leigh Martin May concluded that “Freytag mandates a finding that the SEC ALJs exercise ‘ significant authority’ and are thus inferior officers” and that, because SEC ALJs are “not appropriately appointed pursuant to Article II, [their] appointment is likely unconstitutional in violation of the Appointments Clause.”

Slip op. at 4-5.

Judge Berman also addressed a question that has been studiously avoided by the SEC — whether the infirmity in the appointments of ALJs can be easily remedied: “Judge May also determined that ‘the ALJ’s appointment could be easily cured by having the SEC Commissioners issue an appointment or preside over the matter themselves.’ . . .  Plaintiffs counsel in the instant case reached the same conclusion at a conference held on June 17, 2015, stating that ‘I think that [having the Commissioners appoint the ALJ s] is one of [the easy cures] .’ . . .  And, it appears that the Commission is reviewing its options regarding potential ‘cures’ of any Appointments Clause violation(s).” . . .  The SEC has generally declined to address this issue, noting a quick fix may not be available, and preferring instead to focus on beating back the court challenges.

Judge Berman, however, gave the SEC a chance to address the issue in his court before deciding the preliminary injunction motion: “The Court reserves judgment on Plaintiffs application for a preliminary injunction and/or imposition of such an injunction for 7 days from the date hereof to allow the SEC the opportunity to notify the Court of its intention to cure any violation of the Appointments Clause.  The parties are directed not to proceed with Duka’ s SEC proceeding in the interim.”  Slip op. at 6.

The SEC is unlikely to change course in response to this invitation (which also came up previously with him in the course of oral argument).  Judge Berman’s decision. however, adds fuel to the fire.  It seems unlikely that the issue will be resolved until it gets through the appellate courts, and possibly the Supreme Court.  That’s a long time to wait and see whether judges current adjudicating SEC administrative cases are doing so lawfully.  It also creates a risk that adjudicative decisions made in the interim may have to be vacated in the future if the appointment of these ALJs is ultimately found invalid.  There could be a better, less wasteful, and less risky approach if the SEC would address the issue as a problem to be solved rather than a challenge to be rebuffed.

Straight Arrow

August 3, 2105

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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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