Tilton v. Sec. & Exch. Comm'n

Decision Date01 June 2016
Docket NumberDocket No. 15-2103,August Term, 2015
Citation824 F.3d 276
PartiesLynn Tilton, Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, and Patriarch Partners XV, LLC, Plaintiffs–Appellants, v. Securities and Exchange Commission, Defendant–Appellee.
CourtU.S. Court of Appeals — Second Circuit

David M. Zornow, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY (Christopher J. Gunther, on the brief), for PlaintiffsAppellants.

Susan E. Brune (on the brief), Brune & Richard LLP, New York, NY, for PlaintiffsAppellants.

Mark B. Stern, Appellate Staff Attorney (Mark R. Freeman and Megan Barbero, Appellate Staff Attorneys, on the brief), for Benjamin C. Mizer, Principal Deputy Assistant Attorney General, and Beth S. Brinkmann, Deputy Assistant Attorney General, United States Department of Justice, Washington, DC, for DefendantAppellee.

Jeannette A. Vargas (on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, for DefendantAppellee.

Before: Newman, Sac k, and Dron ey, Circuit Judges.

Judge NEWMAN

concurs in a separate opinion.

Judge DRONEY

dissents in a separate opinion.

Sack

, Circuit Judge:

The Securities and Exchange Commission (the “SEC” or the “Commission”) enforces the federal securities laws by, among other things, filing actions seeking monetary penalties against alleged transgressors. Under the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd–Frank Act”), Pub. L. No. 111-203, 124 Stat. 1376,

the SEC's enforcement actions generally may take either of two forms: a civil lawsuit in federal district court, or an administrative proceeding conducted by the Commission or an administrative law judge (“ALJ”). Where both of those alternatives are available, the choice between them belongs to the SEC without express statutory constraint.

In this case, the SEC chose to seek penalties against the appellants, Lynn Tilton and several of her investment firms, by commencing an administrative proceeding conducted by an ALJ. That proceeding is subject to two layers of review: A party that loses before the ALJ may petition for de novo review by the Commission, and a party that loses before the Commission may petition for review by a federal court of appeals. Not unlike a lawsuit in district court, therefore, the administrative proceeding ultimately offers the losing party a route to federal appellate review.

The appellants contend that the SEC's administrative proceeding is unconstitutional because the presiding ALJ's appointment violated Article II's Appointments Clause. They have raised that claim as an affirmative defense within the proceeding and will be able to argue the issue in a federal court of appeals if they lose before the Commission. The appellants nevertheless sought more immediate access to federal court: Two days after the administrative proceeding against them began, they filed a separate lawsuit in the United States District Court for the Southern District of New York asserting their Appointments Clause claim and seeking an injunction against the ALJ's adjudication based on its alleged unconstitutionality.

The district court (Ronnie Abrams, Judge ) dismissed the suit for lack of subject matter jurisdiction. Relying in part on the Supreme Court's decisions in Elgin v. Department of Treasury , ––– U.S. ––––, 132 S.Ct. 2126, 183 L.Ed.2d 1 (2012)

, Free Enterprise Fund v. Public Co. Accounting Oversight Board , 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010), and Thunder Basin Coal Co. v. Reich , 510 U.S. 200, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994), the court concluded that the appellants' Appointments Clause challenge fell within the exclusive scope of the SEC's administrative review scheme and could reach a federal court only on petition for review of a final decision by the Commission.

We agree. By enacting the SEC's comprehensive scheme of administrative and judicial review, Congress implicitly precluded federal district court jurisdiction over the appellants' constitutional challenge.

BACKGROUND

Until 2010, the SEC's authority to impose monetary penalties through administrative proceedings was relatively limited. The agency could not, for example, penalize a non-regulated person such as Tilton through administrative channels. The Dodd-Frank Act dramatically expanded the SEC's authority to impose penalties administratively, making it essentially “coextensive with [the SEC's] authority to seek penalties in Federal court.” H.R. Rep. No. 111-687, at 78

(2010). Since then, the SEC has reportedly prosecuted an increasing number of cases through administrative proceedings, with a rate of success notably higher than it has achieved in federal district courts. See Jean Eaglesham, In–House Judges Help SEC Rack Up Wins , Wall St. J., May 7, 2015, at A1.

When the Commission chooses to seek penalties administratively, it must either preside over the proceeding itself or designate a hearing officer—usually an ALJ—to do so. See 17 C.F.R. § 201.110

. A presiding ALJ has authority to issue an initial decision, which may become final only by order of the Commission. See id. § 201.360. If a party petitions for review of the ALJ's initial decision, the Commission ordinarily reviews the decision de novo before issuing a final order. See id. § 201.411. And a final order issued under the securities laws, including the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq. , is in turn subject to judicial review by a federal court of appeals, see id. § 80b–13(a) (providing that [a]ny person or party aggrieved by an order issued by the Commission under [the Investment Advisers Act] may obtain a review of such order in the United States court of appeals within any circuit wherein such person resides or has his principal office or place of business, or in the United States Court of Appeals for the District of Columbia).

During the past year or so, several respondents in ongoing SEC administrative proceedings have asserted that Article II of the United States Constitution bars the agency's ALJs from acting as hearing officers. These respondents have made two distinct constitutional arguments: that the ALJs are impermissibly insulated from presidential removal, and that they were not appointed in accordance with the Appointments Clause.1 Respondents may raise those arguments as affirmative defenses during the course of their administrative proceedings, subject to potential judicial review in the event of an adverse decision by the Commission. Seeking more immediate judicial scrutiny, however, some respondents—the appellants among them—attempted to raise their Article II claims in parallel actions brought in federal district courts before their administrative proceedings concluded. See Spring Hill Capital Partners, LLC v. SEC, No. 15-CV-4542 (S.D.N.Y. 2015) (challenging ALJ's appointment); Hill v. SEC, 114 F.Supp.3d 1297 (N.D. Ga. 2015)

(challenging ALJ's appointment and insulation from removal); Duka v. SEC, 103 F.Supp.3d 382 (S.D.N.Y. 2015) (challenging ALJ's appointment and insulation from removal); Bebo v. SEC, No. 15-C-3, 2015 WL 905349 (E.D. Wis. 2015) (challenging ALJ's insulation from removal).

In the case at bar, the SEC initiated an administrative proceeding before an ALJ in March 2015, alleging that the appellants had violated the Investment Advisers Act. Two days later, the appellants filed this lawsuit in the United States District Court for the Southern District of New York. They sought to enjoin the SEC's administrative proceeding on the ground that, among other things, the presiding ALJ's appointment violated the Appointments Clause.2 The SEC moved to dismiss the suit, arguing in part—as it has in cases brought by similarly situated respondents—that the district court lacked subject matter jurisdiction over the lawsuit. In the Commission's view, the administrative proceeding at issue, once begun, precluded the appellants' collateral Appointments Clause challenge.

While the district court heard argument and deliberated, several other federal judges reached conflicting decisions on the same jurisdictional issue, creating a split both within and outside the Southern District. Compare Spring Hill, No. 15-CV-4542 (S.D.N.Y. June 26, 2015) (bench ruling) (Ramos, J. ) (concluding that the court lacked jurisdiction over a respondent's Article II challenge to the ALJ conducting an ongoing administrative proceeding), with Hill v. SEC, 114 F.Supp.3d 1297 (N.D. Ga. 2015)

(concluding that there was such jurisdiction), and

Duka v. SEC, 103 F.Supp.3d 382, 392 (S.D.N.Y. 2015) (same); see also

Bebo v. SEC, 2015 WL 905349, at *4, 2015 U.S. Dist. LEXIS 25660, at *10 (E.D. Wis. Mar. 3, 2015) (concluding, before the case at bar was filed, that the court lacked jurisdiction over a respondent's Article II challenge to the ALJ conducting an ongoing administrative proceeding), aff'd, 799 F.3d 765 (7th Cir. 2015). On June 30, 2015, after weighing the merits of those intervening decisions, the district court decided in favor of the SEC, dismissing the appellants' suit as implicitly precluded by the Commission's statutory scheme of administrative and judicial review. Tilton v. SEC, No. 15–CV–2472, 2015 WL 4006165, at * 1, 2015 U.S. Dist. LEXIS 85015, at *2–3 (S.D.N.Y. June 30, 2015)

.

The appellants now ask us to reverse the district court's jurisdictional dismissal of their Appointments Clause claim and rule, on the merits, that the ALJ presiding over their administrative proceeding was unconstitutionally appointed. At the appellants' request, we have stayed the SEC's proceeding pending our decision in this appeal. We review the district court's determination of subject matter jurisdiction de novo. Scelsa v. City Univ. of N.Y., 76 F.3d 37, 40 (2d Cir. 1996)

.

DISCUSSION

The statutes that establish the SEC's scheme of administrative and judicial review, including the Dodd-Frank Act and the Investment Advisers Act, do not...

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