Hill v. Sec. & Exch. Comm'n

• Citation: 114 F.Supp.3d 1297
• Decision Date: 08 June 2015
• Docket Number: Civil Action No. 1:15–CV–1801–LMM.
• Parties: Charles L. HILL, Jr., Plaintiff, v. SECURITIES AND EXCHANGE COMMISSION, Defendant.
• Court: United States District Courts. 11th Circuit. United States District Courts. 11th Circuit. Northern District of Georgia

114 F.Supp.3d 1297

Charles L. HILL, Jr., Plaintiff,

v.SECURITIES AND EXCHANGE COMMISSION, Defendant.

Civil Action No. 1:15–CV–1801–LMM.

United States District Court, N.D. Georgia, Atlanta Division.

Signed June 8, 2015.

Akash Desai, Hillary D. Rightler, Stephen Earl Hudson, Kilpatrick Townsend & Stockton, LLP, Atlanta, GA, for Plaintiff.

Adam A. Grogg, Jean Lin, Matthew J. Berns, Steven A. Myers, United States Department of Justice, Washington, DC, for Defendant.

ORDER

LEIGH MARTIN MAY, District Judge.

This case comes before the Court on Plaintiff Charles L. Hill, Jr.'s Motion for a Temporary Restraining Order, or in the Alternative, a Preliminary Injunction [2]. On May 19, 2015, Plaintiff filed this action in federal court, seeking to (1) declare an SEC administrative proceeding unconstitutional, and (2) enjoin the administrative proceeding from occurring until the Court issues its ruling. Plaintiff seeks a stay of the administrative proceeding prior to its June 15, 2015, scheduled evidentiary hearing to allow the parties to conduct limited discovery and brief the declaratory judgment claims. The Court heard oral argument on May 27, 2015. After a review of the record and due consideration, Plaintiff's Motion [2] is GRANTED, in part and DENIED, in part for the following reasons:

I. Background¹

Plaintiff Charles L. Hill, Jr. is unregistered with the Securities and Exchange Commission ("SEC"). Am. Compl., Dkt. No. [17] ¶ 1. Plaintiff is a self-employed real estate developer. Id. ¶ 14. In June and July 2011, Plaintiff purchased and then sold a large quantity of Radiant Systems, Inc. ("Radiant") stock, making a profit of approximately $744,000. Id. ¶¶ 23–26. The SEC alleges that Plaintiff made these transactions because he received inside information about a future merger between Radiant and NCR Corporation. Id. ¶ 33.

Plaintiff contends he never received inside information and bought and sold stock based upon (1) his personal knowledge of and experience with Radiant's product and management, and (2) his stock broker's suggestion to sell. See id. ¶¶ 2, 14–28. Plaintiff argues that the SEC (1) does not have any direct evidence of insider trading, and (2) relies on a "speculative theory that Mr. Hill must have had access to inside information on Radiant merely on the timing and concentration of his purchases." Id. ¶¶ 29, 31.

The SEC conducted a "nearly two-year investigation" between March 2013 and February 2015. Id. ¶¶ 27, 30, 39. It took "12 examinations, issued at least 13 subpoenas for documents[,] and received tens of thousands of documents...." Id. ¶ 30. On February 17, 2015, the SEC served Plaintiff with an Order Instituting Cease–And–Desist Proceedings ("OIP") under Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), alleging he is liable for insider trading in violation of Section 14(e) of the Exchange Act and Rule 14e–3. Ex. 4, Dkt. No. [2–6]. The SEC seeks a cease-and-desist order, a civil penalty, and disgorgement. Id.

A. The Exchange Act

In 1990, through the Securities Enforcement Remedies and Penny Stock Reform Act, Pub.L. No. 101–429, 104 Stat. 931, 939 (1990), Congress first authorized the SEC to pursue "any person" for Exchange Act violations through an administrative cease-and-desist proceeding.See 15 U.S.C. § 78u–3. This proceeding allows the SEC to obtain an order enjoining violations of the Exchange Act. Id. In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act ("Dodd–Frank"), Pub.L. No. 111–203, 124 Stat. 1376 (2010), which authorized the SEC to seek civil monetary penalties from "any person"—both those registered and unregistered with the SEC—in an administrative hearing. See 15 U.S.C. § 78u–2.

Prior to the passage of Dodd–Frank in 2010, the SEC could not seek civil penalties from an unregistered individual like Plaintiff in an administrative proceeding; it could only have brought an administrative proceeding against "regulated person[s]" or companies. See Duka v. S.E.C., 103 F.Supp.3d 382, 386–87, No. 15 Civ. 357(RMB) (SN), 2015 WL 1943245, at *2 (S.D.N.Y. Apr. 15, 2015) (citing Gupta v. S.E.C., 796 F.Supp.2d 503, 507 (S.D.N.Y.2011) ). The earlier version of the statute allowed the SEC to pursue unregistered individuals like Plaintiff for civil penalties only in federal court where these individuals could invoke their Seventh Amendment right to jury trial. In sum, the Exchange Act currently authorizes the SEC to initiate enforcement actions against "any person" suspected of violating the Act and gives the SEC the sole discretion to decide whether to bring an enforcement action in federal court or an administrative proceeding. See 15 U.S.C. §§ 78u(d), 78u–1, 78u–2, 78u–3.

B. SEC Administrative Process

The Administrative Procedure Act ("APA"), 5 U.S.C. § 500 et seq., authorizes executive agencies, such as the SEC, to conduct administrative proceedings before an Administrative Law Judge ("ALJ"). SEC administrative proceedings vary greatly from federal court actions.

The Federal Rules of Civil Procedure and Evidence do not apply in SEC administrative proceedings. Instead, the SEC uses its own Rules of Practice. 17 C.F.R. § 201.100(a).² "[A]ny evidence ‘that can conceivably throw any light upon the controversy, including hearsay, normally will be admitted in an administrative proceeding.’ " Am. Compl., Dkt. No. [17] ¶ 53 (quoting In re Ochanpaugh, Exchange Act Release No. 54363, 2006 WL 2482466, at *6 n. 29 (Aug. 25, 2006) ) (internal quotations omitted). And respondents such as Plaintiff "are generally barred from taking depositions under Rules of Practice 233 and 234," and can "obtain documents only through the issuance of a Subpoena under Rule of Practice 232." Am. Compl., Dkt. No. [17] ¶ 54; see also 17 C.F.R. §§ 201.232 –234.

SEC administrative proceedings also occur much more quickly than federal court actions. Following an OIP's issuance, an evidentiary hearing must occur within four months. 17 C.F.R. § 201.360(a)(2).³ The SEC also has discretion to hold the evidentiary hearing as soon as one month following the OIP. See id. Counterclaims are not permissible in administrative proceedings. Am. Compl. Dkt. No. [1] ¶ 56. And the Rules of Practice do not allow for the equivalent of 12(b) motions in federal court which test the allegations' sufficiency. Id. ¶ 57.

The SEC's Rules of Practice, 17 C.F.R. § 201.100 et seq., provide that the SEC "shall" preside over all administrative proceedings whether by the Commissioners handling the matter themselves or delegating the case to an ALJ; there is no right to a jury trial. 17 C.F.R. § 201.110. When an ALJ is selected by the SEC to preside—as was done by the SEC in Plaintiff's case—the ALJ is selected by the Chief Administrative Law Judge. Id. The ALJ then presides over the matter (including the evidentiary hearing) and issues the initial decision. 17 C.F.R. § 201.360(a)(1). However, the SEC may on its own motion or at the request of a party order interlocutory review of any matter during the ALJ proceeding; "[p]etitions by parties for interlocutory review are disfavored," though. 17 C.F.R. § 201.400(a).

The initial decision can be appealed by either the respondent or the SEC's Division of Enforcement, 17 C.F.R. § 201.410, or the SEC can review the matter "on its own initiative." 17 C.F.R. § 201.411(c). A decision is not final until the SEC issues it. If there is no appeal and the SEC elects not to review an initial order, the ALJ's decision is "deemed the action of the Commission," 15 U.S.C. § 78d–1(c), and the SEC issues an order making the ALJ's initial order final. 17 C.F.R. § 201.360(d)(2).

If the SEC grants review of the ALJ's initial decision, its review is essentially de novo and it can permit the submission of additional evidence. 17 C.F.R. §§ 201.411(a), 201.452. However, the SEC will accept the ALJ's "credibility finding, absent overwhelming evidence to the contrary." In re Clawson, Exchange Act Release No. 48143, 2003 WL 21539920, at *2 (July 9, 2003) ; In re Pelosi, Securities Act Release No. 3805, 2014 WL 1247415, at *2 (Mar. 27, 2014) ("The Commission gives considerable weight to the credibility determination of a law judge since it is based on hearing the witnesses' testimony and observing their demeanor. Such determinations can be overcome only where the record contains substantial evidence for doing so.") (footnote and internal quotation marks omitted).

If a majority of the participating Commissioners do not agree regarding the outcome, the ALJ's initial decision "shall be of no effect, and an order will be issued in accordance with this result." 17 C.F.R. § 201.411(f). Otherwise, the SEC will issue a final order at the conclusion of its review.

If a respondent such as Plaintiff loses with the SEC, he may petition for review of the SEC's order in the federal court of appeals (either his home circuit or the D.C. Circuit). 15 U.S.C. § 78y(a)(1). Once the record is filed, the court of appeals then retains "exclusive" jurisdiction to "to affirm or modify and enforce or to set aside the order in whole or in part." 15 U.S.C. § 78y(a)(3). The SEC's findings of facts are "conclusive" "if supported by substantial evidence." 15 U.S.C. § 78y(a)(4). The court of appeals may also order additional evidence to be taken before the SEC and remand the action for the SEC to conduct an additional hearing with the new evidence. 15 U.S.C. § 78y(a)(5). The SEC then files its new findings of facts based on the additional evidence with the court of appeals which will be taken as conclusive if supported by substantial evidence. Id.

C. SEC ALJs

SEC ALJs are "not appointed by the President, the Courts, or the [SEC] Commissioners. Instead, they are hired by the SEC's Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions, and the Office of Personnel Management" ("OPM"). Am. Compl., Dkt. No. [17] ¶ 80; see also 5 C.F.R. § 930.204 ("An agency may appoint an individual to an...