Bebo v. Sec. & Exch. Comm'n

• Decision Date: 24 August 2015
• Docket Number: No. 15–1511.,15–1511.
• Parties: Laurie A. BEBO, Plaintiff–Appellant, v. SECURITIES AND EXCHANGE COMMISSION, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

799 F.3d 765

Laurie A. BEBO, Plaintiff–Appellant

v.SECURITIES AND EXCHANGE COMMISSION, Defendant–Appellee.

No. 15–1511.

United States Court of Appeals, Seventh Circuit.

Argued June 4, 2015.

Decided Aug. 24, 2015.

Rehearing and Rehearing En Banc Denied Nov. 5, 2015.

Mark A. Cameli, Attorney, Kate Maternowski, Attorney, Reinhart Boerner Doors SC, Milwaukee, WI, for Plaintiff–Appellant.

Mark B. Stern, Attorney, Megan Barbero, Attorney, Mark R. Freeman, Attorney, Department of Justice, Washington, DC, for Defendant–Appellee.

Before BAUER, ROVNER, and HAMILTON, Circuit Judges.

Opinion

HAMILTON, Circuit Judge.

Plaintiff Laurie Bebo is the respondent in a pending administrative enforcement proceeding before the Securities and Exchange Commission. The administrative law judge assigned to the case is expected to issue an initial decision within the coming months. If the decision is adverse to Bebo, she will have the right to file a petition for review with the SEC. The SEC will then have the power either to adopt the ALJ's initial decision as the final decision of the agency or to grant the petition and conduct de novo review. If the SEC's final decision is adverse, Bebo will then have the right under 15 U.S.C. § 78y(a)(1) to seek judicial review either in this circuit or in the United States Court of Appeals for the District of Columbia Circuit.

Rather than wait for a final decision in the administrative enforcement proceeding and pursue review in the court of appeals, Bebo filed suit in federal district court challenging on constitutional grounds the authority of the SEC to conduct the proceeding. She invoked the district court's federal question jurisdiction under 28 U.S.C. § 1331. The district court granted the SEC's motion to dismiss for lack of subject matter jurisdiction, holding that the administrative review scheme established by Congress stripped it of jurisdiction to hear this type of challenge.

We affirm. It is “fairly discernible” from the statute that Congress intended plaintiffs in Bebo's position “to proceed exclusively through the statutory review scheme” set forth in 15 U.S.C. § 78y. See Elgin v. Dep't of Treasury, 567 U.S. ––––, 132 S.Ct. 2126, 2132–33, 183 L.Ed.2d 1 (2012). Although § 78y is not “an exclusive route to review” for all types of constitutional challenges, the relevant factors identified by the Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 489, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010), do not adequately support Bebo's attempt to skip the administrative and judicial review process here. Although Bebo's suit can reasonably be characterized as “wholly collateral” to the statute's review provisions and outside the scope of the agency's expertise, a finding of preclusion does not foreclose all meaningful judicial review. If aggrieved by the SEC's final decision, Bebo will be able to raise her constitutional claims in this circuit or in the D.C. Circuit. Both courts are fully capable of addressing her claims. And because she is already a respondent in a pending administrative proceeding, she would not have to “ ‘bet the farm ... by taking the violative action’ before ‘testing the validity of the law.’ ” Id. at 490, 130 S.Ct. 3138, quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129, 127 S.Ct. 764, 166 L.Ed.2d 604 (2007). Unlike the plaintiffs in Free Enterprise Fund, Bebo can find meaningful review of her claims under § 78y. As a result, she must pursue judicial review in the manner prescribed by the statute.

I. Factual and Procedural Background

In December 2014 the SEC brought an administrative cease-and-desist proceeding against plaintiff Laurie Bebo. The order alleges that Bebo, the former CEO of Assisted Living Concepts, Inc., violated federal securities laws by manipulating internal books and records, making false representations to auditors, and making false disclosures to the SEC. Bebo's answer in the administrative enforcement proceeding asserts as affirmative defenses the same constitutional claims, discussed below, that she asserts in this lawsuit.

The SEC designated an administrative law judge to conduct the proceeding. See 17 C.F.R. § 201.110. The hearing took place over several weeks and was scheduled to conclude by June 19, 2015. As far as we know, the ALJ has not yet issued an initial decision. See id., § 201.360.

If the ALJ issues an initial decision adverse to Bebo, she may file with the SEC a petition to review the ALJ's decision. See id., § 201.410(a). The SEC could then adopt the ALJ's decision as the final decision of the agency or grant the petition and conduct de novo review. See id.,§§ 201.411(a)-(c), 201.452. Either way, if Bebo is aggrieved by the SEC's final decision, she will have the right to seek judicial review in this court or in the D.C. Circuit. See 15 U.S.C. § 78y(a)(1). Upon filing the record in the court of appeals, the court's jurisdiction would become “exclusive,” and it would have the power to “affirm or modify and enforce or to set aside the order in whole or in part.” Id., § 78y(a)(3).

Rather than wait for the administrative process to end and pursue judicial review as prescribed by § 78y, Bebo filed suit in a federal district court alleging that the SEC lacks the constitutional authority to continue the administrative proceeding because certain provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Pub.L. No. 111–203, 124 Stat. 1376, 1862–65 (2010) (“Dodd–Frank”), are unconstitutional.

Prior to Dodd–Frank, if the SEC sought a monetary penalty against a non-regulated individual like Bebo, it had to file suit in federal district court. Section 929P(a) of Dodd–Frank changed this by giving the SEC a choice of forums: it can either proceed in federal district court or conduct its own administrative enforcement proceeding. See 15 U.S.C. § 78u–2.

The SEC's choice of forum has procedural consequences. Administrative enforcement proceedings are governed by the SEC's Rules of Practice, not the Federal Rules of Evidence and Civil Procedure. Accordingly, the respondent in an administrative enforcement proceeding has fewer rights to discovery than she would if the SEC had filed suit in district court. She also has no right to a jury trial before the SEC.

Bebo contends that § 929P(a) of Dodd–Frank is facially unconstitutional under the Fifth Amendment because it provides the SEC “unguided” authority to choose which respondents will and which will not receive the procedural protections of a federal district court, in violation of equal protection and due process guarantees. She also contends that the SEC's administrative proceedings are unconstitutional under Article II because the ALJs who preside over SEC enforcement proceedings are protected from removal by multiple layers of for-cause protection. This set-up violates Article II, Bebo argues, because it interferes with the President's obligation to ensure the faithful execution of the laws. Cf. Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477, 483–84, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (dual for-cause limitations on removal of members of special oversight board unconstitutional under Article II).

The district court dismissed the case for lack of subject matter jurisdiction. Bebo v. SEC, No. 15–C–3, 2015 WL 905349 (E.D.Wis. Mar. 3, 2015). That decision was based on legal determinations rather than factual ones, so we review that decision de novo. E.g., Center for Dermatology & Skin Cancer, Ltd. v. Burwell, 770 F.3d 586, 589 (7th Cir.2014).

II. Analysis

The statutory issue here is a jurisdictional one: whether the statutory judicial review process under 15 U.S.C. § 78y bars district court jurisdiction over a constitutional challenge to the SEC's authority when the plaintiff is the respondent in a pending enforcement proceeding. Where the statutory review scheme does not foreclose all judicial review but merely directs that judicial review occur in a particular forum, as in this case, the appropriate inquiry is whether it is “fairly discernible” from the statute that Congress intended the plaintiff “to proceed exclusively through the statutory review scheme.” Elgin v. Dep't of Treasury, 567 U.S. ––––, 132 S.Ct. 2126, 2132–33, 183 L.Ed.2d 1 (2012).¹

This inquiry is claim-specific. To find congressional intent to limit district court jurisdiction, we must conclude that the claims at issue “are of the type Congress intended to be reviewed within th[e] statutory structure.” Free Enterprise Fund, 561 U.S. at 489, 130 S.Ct. 3138, quoting Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 212, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994). We examine the statute's text, structure, and purpose. Elgin, 132 S.Ct. at 2133 ; see also Thunder Basin Coal, 510 U.S. at 207, 114 S.Ct. 771.

The Supreme Court has already considered whether Congress, by establishing a judicial review process in § 78y, intended to foreclose judicial review in the district courts for all types of claims involving the SEC. In Free Enterprise Fund the Court held that § 78y does not strip district courts of jurisdiction to hear at least certain types of constitutional claims. 561 U.S. at 489–91, 130 S.Ct. 3138. Our focus in this appeal is whether Bebo's case is sufficiently similar to Free Enterprise Fund to allow her to bypass the ALJ and judicial review under § 78y. Based on the Supreme Court's further guidance in Elgin, we believe the answer is no.

The Free Enterprise Fund plaintiffs were an accounting firm and a nonprofit organization of which the firm was a member. Unlike Bebo, neither plaintiff was subject to a pending enforcement action when they filed their complaint. They brought suit in district court challenging the constitutionality of the Sarbanes–Oxley Act of 2002 provisions establishing a special oversight board whose members were appointed by the SEC. The special oversight board had the powers to inspect registered accounting firms, to initiate formal...