Jarkesy v. Sec. & Exch. Comm'n

Decision Date29 September 2015
Docket NumberNo. 14–5196.,14–5196.
Citation803 F.3d 9
PartiesGeorge R. JARKESY, Jr. and Patriot28, LLC, Appellants, v. SECURITIES and EXCHANGE COMMISSION, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

S. Michael McColloch argued the cause for appellants. With him on the briefs were Karen L. Cook and Mark B. Bierbower.

Dominick V. Freda, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for appellee. With him on the brief were Richard M. Humes, Associate General Counsel, Samuel M. Forstein, Assistant General Counsel, and Sarah E. Hancur, Senior Counsel.

Before: KAVANAUGH and SRINIVASAN, Circuit Judges, and RANDOLPH, Senior Circuit Judge.

Opinion

Opinion for the Court filed by Circuit Judge SRINIVASAN.

SRINIVASAN, Circuit Judge:

The Securities and Exchange Commission brought an administrative proceeding against George Jarkesy, Jr., charging him with securities fraud. That proceeding remains ongoing. In the meantime, Jarkesy filed this action in federal district court seeking the administrative proceeding's termination. He argues that the proceeding's initiation and conduct infringe his constitutional rights in several ways. The district court dismissed his action for lack of subject-matter jurisdiction. The court concluded that Congress, by establishing a detailed statutory scheme providing for an administrative proceeding before the Commission plus the prospect of judicial review in a court of appeals, implicitly precluded concurrent district-court jurisdiction over challenges like Jarkesy's.

We agree with the district court and affirm its judgment. In Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994), the Supreme Court set forth a framework for determining when a statutory scheme of administrative and judicial review forecloses parallel district-court jurisdiction. The ultimate question is whether Congress intended exclusivity when it established the statutory scheme. Applying the considerations outlined in Thunder Basin and its progeny, we find the answer here is yes. The result is that Jarkesy, instead of obtaining judicial review of his challenges to the Commission's administrative proceeding now, can secure judicial review in a court of appeals when (and if) the proceeding culminates in a resolution against him.

I.
A.

The SEC generally has two routes by which to enforce the federal securities laws in a civil proceeding. The agency can bring a civil action against the alleged violator in federal district court, or it can initiate an administrative enforcement proceeding. See, e.g., 15 U.S.C. §§ 78u(d), 78u–2, 78u–3. At one time, the remedies the SEC could seek against respondents in administrative proceedings were relatively limited. In 2010, however, Congress enacted the Dodd–Frank Wall Street Reform and Consumer Protection Act, which expanded the remedies available to the SEC in administrative proceedings. See Pub.L. No. 111–203, § 929P, 124 Stat. 1376, 1862–65. The practical effect, generally speaking, was to “mak[e] the SEC's authority in administrative penalty proceedings coextensive with its authority to seek penalties in Federal court.” H.R.Rep. No. 111–687, at 78 (2010). Nothing in Dodd–Frank or the securities laws explicitly constrains the SEC's discretion in choosing between a court action and an administrative proceeding when both are available. See J.A. 236.

The SEC's Enforcement Division prosecutes violations in both forums. In administrative proceedings, the SEC's Rules of Practice govern. 17 C.F.R. §§ 201.100 et seq. The Commission presides over a proceeding, or, if the Commission so decides, an administrative law judge hears the case initially. Id. § 201.110. If the latter, the ALJ holds a hearing and then renders an initial decision, which the respondent may appeal by filing a petition for review with the full Commission. Id. §§ 201.360(a)(1), 201.410(a). The Commission reviews ALJ decisions de novo, and it alone possesses the authority to issue a final order.Id. §§ 201.411(a), 201.360(d)(2).

Under the securities laws, final Commission orders can be reviewed in the courts of appeals. The Securities Exchange Act, for instance, provides that [a] person aggrieved by a final order of the Commission entered pursuant to this chapter may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit, by filing in such court ... a written petition requesting that the order be modified or set aside in whole or in part.” 15 U.S.C. § 78y(a)(1). The Securities Act, the Investment Advisers Act, and the Investment Company Act all contain similarly worded provisions. See id. § 77i(a) (Securities Act); id. § 80b–13(a) (Advisers Act); id. § 80a–42(a) (Company Act).

B.

Patriot28, LLC (formerly known as John Thomas Capital Management) is an unregistered investment adviser and general partner of two hedge funds. George Jarkesy, Jr., is the manager of Patriot28. On March 22, 2013, the SEC issued an Order Instituting Administrative and Cease–and–Desist Proceedings against Jarkesy and Patriot28 along with two other respondents. The SEC alleged that they engaged in fraudulent conduct in connection with the offer, purchase, and sale of securities, and charged them with violations of the Exchange Act, the Securities Act, the Advisers Act, and the Company Act. Jarkesy's and Patriot28's two co-respondents—John Thomas Financial, Inc. (a broker-dealer) and Anastasios Belesis (the founder and CEO of John Thomas Financial)—were alleged to have aided and abetted Jarkesy's violations of the securities laws. The SEC sought disgorgement of fees, civil penalties, a cease-and-desist order, and securities-industry and officer-and-director bars against Jarkesy.

The matter was set for a hearing to take place before an ALJ. In the fall of 2013, John Thomas Financial and Belesis settled with the Commission, and on December 5, 2013, the Commission issued an order approving the settlement. That order included factual and legal findings concerning John Thomas Financial's and Belesis's misconduct. Those findings, in turn, discussed the fraudulent conduct of the “Manager” and the “Adviser” of the hedge funds—references to Jarkesy and Patriot28. The Commission's order noted, however, that its findings had been “made pursuant to Respondents' Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.” John Thomas Capital Mgmt. Grp., Exchange Act Release No. 70,989, 2013 WL 6327500, at *1 n. 1 (Dec. 5, 2013).

In response, Jarkesy and Patriot28 took two actions. First, in a petition for interlocutory review filed with the Commission, they sought to disqualify the Commissioners and obtain a dismissal of the administrative proceeding on the ground that the Commission had “conclusively prejudiced the case against them. John Thomas Capital Mgmt. Grp., Securities Act Release No. 9519, 2014 WL 294551, at *1 (Jan. 28, 2014). Second, on January 29, 2014, days before the hearing before the ALJ was set to begin on February 3, they filed an action in the United States District Court for the District of Columbia. The action seeks injunctive and declaratory relief “to prevent the SEC from proceeding with an administrative proceeding” that, in their view, “has violated, and will continue to violate, [their] fundamental constitutional rights.” Compl. ¶ 1 (J.A. 8).

Jarkesy and Patriot28's district-court complaint included several claims. Because the nature of those arguments bears on the jurisdictional analysis in some measure, we relay the complaint's contents with precision.

First, Jarkesy and Patriot28 alleged a Fifth Amendment Due Process Clause violation based on the Commission's supposed prejudgment of their charges, arguing that the administrative proceeding should be nullified as a result. Compl. ¶¶ 17–24 (J.A. 13–14). Second, they alleged that the Commission's decision to place them in an administrative proceeding violated their rights under the Equal Protection Clause by denying them the “fundamental right to [a] jury trial.” Id. ¶¶ 25–30 (J.A. 14–15). Explaining that the SEC “chooses whether to bring cases in [administrative proceedings] or in federal court on a case-by-case basis, subject to no standard,” they alleged that parties charged by the SEC have their fundamental Seventh Amendment right to jury trial preserved, or denied, based on the arbitrary, capricious or malicious decision of the Commission.” Id. ¶¶ 25, 27 (J.A. 14–15). Third, they alleged another equal protection argument under a “class-of-one” theory, asserting that, while the Commission had taken similarly situated individuals to court, the Commission's decision to charge Jarkesy and Patriot28 in an agency proceeding was motivated by animus. Id. ¶¶ 31–38 (J.A. 16–17). Fourth, they alleged improper ex parte communications between the SEC Enforcement Division and the Commissioners regarding their co-respondents' settlement, in violation of the Administrative Procedure Act. Id. ¶¶ 39–46 (J.A. 17–19). Fifth and finally, they alleged another due process violation based on the Commission's ostensible failure to comply with its Brady obligations under the SEC's Rules of Practice. Id. ¶¶ 47–59 (J.A. 19–22).

The district court denied the plaintiffs' request for a temporary restraining order that would have barred the SEC from proceeding with the scheduled hearing. Jarkesy v. SEC, 48 F.Supp.3d 32, 34, 36 (D.D.C.2014). The court subsequently dismissed the complaint, finding that the “statutory and regulatory regime under which the SEC's Enforcement Division brought the instant matter against the plaintiffs preclude[d] the court from hearing their claims. Id. at 37. “Although the plaintiffs raise various allegations of violations of their constitutional rights,” the court explained, “those claims are inextricably intertwined with the conduct of the...

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