Dembski v. Sec. & Exch. Comm'n, 1:19-CV-00358 EAW
| Decision Date | 04 February 2020 |
| Docket Number | 1:19-CV-00358 EAW |
| Citation | 437 F.Supp.3d 286 |
| Parties | Timothy S. DEMBSKI, Plaintiff, v. SECURITIES AND EXCHANGE COMMISSION, Defendants. |
| Court | U.S. District Court — Western District of New York |
Eric Michael Soehnlein, Carson R. Cooper, Lippes Mathias Wexler Friedman LLP, Buffalo, NY, for Plaintiff.
David M. Coriell, Mary Pat Fleming, U.S. Attorney's Office, Buffalo, NY, Jonathan D. Kossak, U.S. Department of Justice, Washington, DC, for Defendants.
DECISION AND ORDER
Plaintiff Timothy M. Dembski ("Plaintiff") filed this action against the Securities and Exchange Commission ("SEC" or "Defendant") seeking a declaration that Defendant's decision regarding Plaintiff violated the Appointments Clause of the Constitution and an order reinstating Plaintiff's ability to participate in the securities industry. (Dkt. 2). Presently before the Court is Defendant's motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt 10). Because the Court lacks subject matter jurisdiction over Plaintiff's claims—an issue not raised by either party—the Complaint is dismissed. However, even if the Court possessed subject matter jurisdiction, Defendant's motion to dismiss (Dkt. 10) would be granted.
The following facts are taken from Plaintiff's Complaint (Dkt. 2) and the documents submitted from the underlying SEC proceeding (Dkt. 12).1 As is required at this stage of the proceedings, the Court has treated Plaintiff's factual allegations as true.
Plaintiff was the owner and managing partner of Reliance Financial Advisors, LLC ("Reliance"), an investment advisor business located in Buffalo, New York. (Dkt. 2 at ¶ 1). In September 2014, SEC staff members hired Jason S. Patil ("Patil") as an administrative law judge ("ALJ") at the SEC. (Id. at ¶ 26). On December 10, 2014, the SEC initiated proceedings against Plaintiff, Reliance, and a co-owner of Reliance under SEC Administrative Proceeding File No. 3-16311 (the "SEC Proceeding"). (Id. at ¶ 19). The SEC also issued a consent order on the same day against a Reliance employee in a separate proceeding. (Id. at ¶ 20). On January 9, 2015, ALJ Patil consolidated the two proceedings, and a hearing on the proceedings was held before ALJ Patil in May 2015. (Id. at ¶¶ 28-29). Reliance and Reliance's co-owner later settled with the SEC. (Id. at ¶ 30). On January 11, 2016, ALJ Patil found that Plaintiff violated federal securities laws and permanently disbarred Plaintiff from the securities industry. (Id. at ¶¶ 36-37). Plaintiff appealed the ALJ's decision to the Commission, which affirmed the ALJ's decision on March 24, 2017. (Id. at ¶¶ 39-40).
Plaintiff filed a petition for review with the Second Circuit Court of Appeals seeking reversal of the SEC Opinion. (Id. at ¶ 41). Plaintiff's petition for review did not raise any constitutional issues related to ALJ Patil presiding over the initial hearing. (Id. at ¶ 42). On February 27, 2018, the Second Circuit denied Plaintiff's petition for review. (Id. at ¶ 43).
Several months later, on June 21, 2018, the Supreme Court issued a decision in Lucia v. Securities and Exchange Commission , ––– U.S. ––––, 138 S. Ct. 2044, 201 L.Ed.2d 464 (2018), holding that SEC ALJs are "Officers of the United States," and as such they must be appointed by the procedures prescribed in Article II's Appointments Clause. Id. at 2051, 2053. In other words, an SEC ALJ must be appointed by either the president, a court of law, or a head of department. See U.S. Const. Art. II, § 2, cl. 2. The Supreme Court found that the SEC ALJs were not appropriately appointed because SEC staff had hired them, and that the Lucia plaintiff had made a timely challenge to the validity of the ALJ's appointment. Lucia , 138 S. Ct. at 2055. Accordingly, the Court found the plaintiff was entitled to a new hearing before a different ALJ. Id.
On July 6, 2018, Plaintiff filed a motion to recall the mandate and vacate the judgment with the Second Circuit. Motion to Recall, Dembski v. SEC , No. 17-1553, Dkt. 84 (2d. Cir. July 6, 2018). Plaintiff requested that, in light of Lucia , the Circuit revoke its denial of review of Defendant's decision, issue a mandate nullifying Defendant's decision, and preclude Defendant from taking any steps to enforce any portion of the sanctions the SEC imposed on Plaintiff. Id. at 9. Defendant responded, arguing that Plaintiff had forfeited his Appointments Clause challenge by failing to raise it at any point prior to the Second Circuit's February 2018 order denying Plaintiff's petition for review. Response to Motion to Recall, Dembski v. SEC , No. 17-1553, Dkt. 87 (2d Cir. July 12, 2018). On July 20, 2018, the Second Circuit issued an order denying Plaintiff's motion to recall and motion to vacate. Dembski v. SEC , No. 17-1553, Dkt. 91 (2d Cir. July 20, 2018).
Almost eight months later, on March 15, 2019, Plaintiff brought the present proceeding in district court. (Dkt. 1; Dkt. 2). After being granted an extension of time within which to respond to the Complaint (Dkt. 9), Defendant timely filed a motion to dismiss on July 12, 2019 (Dkt. 10). Plaintiff filed his response on August 16, 2019 (Dkt. 16), and Defendant replied on August 30, 2019 (Dkt. 17). Oral argument was heard before the undersigned on November 12, 2019, at which time the Court reserved decision. (Dkt. 21).
"When a requirement goes to subject-matter jurisdiction, courts are obligated to consider sua sponte issues that the parties have disclaimed or have not presented." Gonzalez v. Thaler , 565 U.S. 134, 141, 132 S.Ct. 641, 181 L.Ed.2d 619 (2012). "A plaintiff asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists." Makarova v. United States , 201 F.3d 110, 113 (2d Cir. 2000). Subject matter jurisdiction is a threshold issue that a court must consider before addressing the merits of any particular case. Rhulen Agency, Inc. v. Ala. Ins. Guar. Ass'n , 896 F.2d 674, 678 (2d Cir. 1990).
Pursuant to the Securities Act, when bringing an enforcement action, the SEC may elect to do so by either initiating an administrative action or an injunctive action in a federal district court. 15 U.S.C. §§ 77h-1, 78u-2, 78u-3. For administrative actions, the SEC has implemented a framework wherein it delegates its adjudicative functions to an ALJ while "retain[ing] a discretionary right to review the action of any such" ALJ on "its own initiative" or at a party's request. Id. § 78d-1(a)-(b); 17 C.F.R. § 201.110. When the SEC initially assigns enforcement proceedings to an ALJ, the ALJ holds a hearing and issues a decision, which can be appealed for review before the Commission. 17 C.F.R. §§ 201.360(a)(1), 201.410(a). Only the Commission has the authority to issue a final agency decision in the proceeding. Id. § 201.360(d)(2). After the Commission issues a final decision, the aggrieved person may file a petition for review of that decision with a court of appeals. 15 U.S.C. § 78y(a)(1). Once the petition for review is filed, the court of appeals "has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part." Id. § 78y(a)(3).
This Court lacks subject matter jurisdiction over Plaintiff's claims under the statutory scheme outlined above pursuant to binding Second Circuit precedent. In Tilton v. Securities and Exchange Commission , 824 F.3d 276 (2d Cir. 2016), the Second Circuit affirmed a district court's holding that it did not have jurisdiction to hear the plaintiff's Appointments Clause claim, finding that "Congress intended the SEC's administrative review scheme to encompass the appellants' Appointments Clause claim, to the exclusion of federal district court jurisdiction." Id. at 281-82. The Tilton court held that under the test outlined by the Supreme Court in Thunder Basin Coal Co. v. Reich , 510 U.S. 200, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994), an Appointments Clause challenge to an SEC ALJ falls "within the exclusive scope of the SEC's administrative review scheme and [can] reach a federal court only on petition for review of a final decision by the Commission." 824 F.3d at 279. In other words, federal district court jurisdiction does not exist for an Appointments Clause challenge to an SEC ALJ, according to Tilton. Here, Plaintiff brings a collateral attack of a final order issued by the SEC, raising an Appointments Clause claim. Accordingly, under Tilton , the Court is bound to dismiss Plaintiff's claims for lack of subject matter jurisdiction.
Plaintiff argues that Tilton is not dispositive because Tilton "addresses an aggrieved party's standing to collaterally attack an ongoing administrative proceeding in which the Commission had not yet made an order, and thus, the claimant had not yet suffered a grave constitutional injury." (Dkt. 16 at 9 (quotations omitted)). However, the Second Circuit did not rule on standing grounds in Tilton , nor is the concept of standing even mentioned in the decision. To the contrary, when put in context, the passage Plaintiff references undercuts his argument. The Tilton plaintiffs argued that the SEC's administrative scheme did not offer them meaningful judicial review for an Appointments Clause claim because it only provides judicial review for an adverse ruling by the Commission, whereas Appointments Clause claims address a "grave constitutional injury" suffered just by being exposed to the SEC proceedings before an ALJ. 824 F.3d at 283. However, the Second Circuit was "not convinced" by the plaintiffs' argument, and ultimately found that the Appointments Clause claim did not fall outside the scope of the SEC's statutory scheme. Id. at 282-83.
Moreover, the overwhelming majority of courts have ruled that the statutory scheme established by Congress in the Securities Act entirely deprives federal...
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