Ironridge Global IV, Ltd. v. Sec. & Exch. Comm'n
| Decision Date | 17 November 2015 |
| Docket Number | CIVIL ACTION NO. 1:15–CV–2512–LMM |
| Citation | 146 F.Supp.3d 1294 |
| Parties | Ironridge Global IV, Ltd., et al., Plaintiffs, v. Securities and Exchange Commission, Defendant. |
| Court | U.S. District Court — Northern District of Georgia |
Akash Desai, Hillary D. Rightler, Joshua Cole Hess, Stephen Earl Hudson, Kilpatrick Townsend & Stockton, LLP, Atlanta, GA, for Plaintiffs.
Jean Lin, Matthew J. Berns, United States Department of Justice, Washington, DC, for Defendant.
LEIGH MARTIN MAY
This case comes before the Court on Plaintiffs Ironridge Global IV, Ltd. and Ironridge Global Partners, LLC's Motion for Preliminary Injunction [2]. On July 14, 2015, Plaintiffs filed their Complaint, seeking to (1) declare the SEC's administrative procedure, including appointment and removal processes for its Administrative Law Judges (“ALJ”), unconstitutional, and (2) enjoin Plaintiffs' administrative proceeding. The parties waived their right to a hearing on this matter. See Minute Order, Oct. 23, 2015. After a review of the record and due consideration, Plaintiffs' Motion [2] is GRANTED for the following reasons.
Plaintiffs Ironridge Global IV, Ltd. and Ironridge Global Partners, LLC engage in “investment activities” that they claim are exempt from the Securities Act of 1933 and its registration requirement pursuant to Section 3(a)(10). Compl., Dkt. No. [1] ¶¶ 6–7, 14–15. Plaintiffs are not registered with the SEC. Id. ¶ 1.
On June 23, 2015, the SEC served Plaintiffs with an Order Instituting Cease–and–Desist Proceedings (“OIP”), which initiated the SEC's administrative enforcement action against Plaintiffs. Id. ¶ 19. The SEC alleges Plaintiffs have violated Sections 15(a) and 20(b) of the Exchange Act by acting as a “broker” or “dealer” without registering with the SEC. Id. ¶¶ 17, 19.
The Exchange Act 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. 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 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 Plaintiffs' 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. However, “[p]etitions by parties for interlocutory review are disfavored.” 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) ( ) (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 respondents such as Plaintiffs lose with the SEC, they may petition for review of the SEC's order in the federal court of appeals (either their 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 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.
SEC ALJs, including ALJ James Grimes who presides over Plaintiffs' case, are “not appointed by the SEC Commissioners.” SEC Br., Dkt. No. [2–5] at 3; see also 5 C.F.R. § 930.204
( ). An ALJ's salary is set by statute. 5 U.S.C. § 5372.
Congress has authorized the SEC to delegate its functions to an ALJ. 15 U.S.C. §§ 78d–1(a)
, 80b–12. Pursuant to that authority, the SEC has promulgated regulations, which set out its ALJ's powers. 17 C.F.R. § 200.14 makes ALJs responsible for the “fair and orderly conduct of [administrative] proceedings” and gives them the authority to: “(1) Administer oaths and affirmations; (2) Issue subpoenas; (3) Rule on offers of proof; (4) Examine witnesses; (5) Regulate the course of a hearing; (6) Hold pre-hearing conferences; (7) Rule upon motions; and (8) Unless waived by the parties, prepare an initial decision containing the conclusions as to the factual and legal issues presented, and issue an appropriate order.” 17 C.F.R. § 200.14(a) ;2
see also
().
The SEC's website also previously described SEC ALJs in the following manner:
Administrative Law Judges are independent judicial officers who in most cases conduct hearings and rule on allegations of securities law violations initiated by the Commission's Division of Enforcement. They conduct public hearings at locations throughout the United States in a manner similar to non-jury trials in the federal district courts. Among other actions, they issue subpoenas, conduct prehearing conferences, issue defaults, and rule on motions and the admissibility of evidence. At the conclusion of the public hearing, the parties submit proposed findings of fact and conclusions of law. The Administrative Law Judge prepares an Initial Decision that includes factual findings, legal conclusions, and, where appropriate, orders relief.
...
An Administrative Law Judge may order sanctions that include suspending or revoking the registrations of registered securities, as well as the registrations of brokers, dealers, investment companies, investment advisers, municipal securities dealers, municipal advisors, transfer agents, and nationally recognized statistical rating organizations. In addition, Commission Administrative Law Judges can order disgorgement of ill-gotten gains, civil penalties, censures, and cease-and-desist orders against these entities, as well as individuals, and can suspend or bar persons from association with these entities or from participating in an offering of a penny stock.
SEC Office of Administrative Law Judges, http://www.sec.gov/alj (Aug. 3, 2015). The SEC rewrote its website description sometime after August 2015 and removed its reference to “judicial officers,” inter alia.3
As stated supra, the SEC filed an OIP against Plaintiffs on June 23, 2015. The ALJ has denied Plaintiffs' motion for summary disposition, and Plaintiffs' administrative evidentiary hearing is scheduled for December 7, 2015, before the ALJ. Status Notice, Dkt. No. [22] ¶¶ 2–3.
On July 14, 2015, Plaintiffs filed the instant motion, asking this Court to (1) declare the SEC's appointment process for its Administrative Law Judges (“ALJ”) unconstitutional, and (2) enjoin Plaintiffs' administrative proceeding. The SEC opposes Plaintiffs' Motion, arguing that (1) this Court does not have subject matter jurisdiction, and (2) even if it does, Plaintiffs have failed to meet their burden under the preliminary injunction standard.
The SEC first contends that this Court does not have subject matter jurisdiction because the administrative proceeding, with its eventual review from a court of appeals, has exclusive jurisdiction over Plaintiffs' constitutional claims. In other words, the SEC contends that its election to pursue claims against Plaintiffs in an administrative proceeding, “channels...
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