Jalbert v. U.S. Sec. & Exch. Comm'n

• Decision Date: 20 December 2019
• Docket Number: No. 18-2043,18-2043
• Parties: Craig R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, on behalf of himself and all others similarly situated, Plaintiff, Appellant, v. U.S. SECURITIES AND EXCHANGE COMMISSION, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

945 F.3d 587

Craig R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, on behalf of himself and all others similarly situated, Plaintiff, Appellant,

v.U.S. SECURITIES AND EXCHANGE COMMISSION, Defendant, Appellee.

No. 18-2043

United States Court of Appeals, First Circuit.

December 20, 2019

Alex Lipman, New York, NY, with whom William R. Baldiga, Boston, MA, Justin S. Weddle, Ashley L. Baynham, New York, NY, and Brown Rudnick LLP were on brief, for appellant.

John B. Capehart, Senior Counsel, Securities and Exchange Commission, with whom Robert B. Stebbins, General Counsel, Michael A. Conley, Solicitor, and Daniel Staroselsky, Senior Litigation Counsel, were on brief, for appellee.

Before Torruella, Thompson, and Kayatta, Circuit Judges.

TORRUELLA, Circuit Judge.

Plaintiff-appellant Craig R. Jalbert ("Jalbert"), in his capacity as trustee for the F2 Liquidating Trust, appeals the district court's order granting the Securities and Exchange Commission's ("SEC") motion to dismiss his complaint for lack of subject matter jurisdiction and failure to state a claim. The district court determined that the right to judicial review of the SEC order at issue had been waived as part of a settlement between the SEC and former investment advisory firm F-Squared Investments, Inc. ("F-Squared"). The district court also held that, in any event, Jalbert's claims were only reviewable within the SEC's exclusive statutory review structure, which does not involve the federal district courts. After careful consideration, we affirm on the ground that F-Squared failed to state a claim upon which relief could be granted inasmuch as it waived judicial review by any court.

I. Background

A. Factual Background

F-Squared was an SEC-registered investment adviser firm headquartered in Wellesley, Massachusetts. It served clients in the advisor, institutional, retail, and retirement markets. At some unspecified point, the SEC began investigating F-Squared for violations of federal securities laws.

On December 4, 2014, with the threat of administrative and cease-and-desist proceedings looming, F-Squared executed an Offer of Settlement pursuant to Rule 240(a) of the Rules of Practice of the SEC, 17 C.F.R. § 201.240(a) (the "Offer"). The Offer included the following language: "By submitting this Offer, Respondent hereby acknowledges its waiver of those rights specified in Rules 240(c)(4) and (5) [ 17 C.F.R. § 201.240(c)(4) and (5) ] of the Commission's Rules of Practice." Rule 240(c)(4) provides, as relevant to this appeal, that "[b]y submitting an offer of settlement, the person making the offer waives, subject to acceptance of the offer ... [j]udicial review by any court." 17 C.F.R. § 201.240(c)(4).

The SEC accepted the Offer and settled with F-Squared on December 22, 2014, through the entry of an "Order Instituting Administrative and Cease-and-Desist Proceedings" (the "Order"), to which F-Squared consented. Under the terms of the Order, F-Squared admitted that, between April 2001 and September 2008, advertising materials for one of its investment strategies included statements based on the inaccurate compilation of performance and historical data which improved and inflated the strategy's historical performance. That conduct, F-Squared accepted, violated federal securities laws. F-Squared agreed to cease and desist from committing further securities-laws violations and to undertake certain compliance measures. The Order also required F-Squared to pay $30 million in disgorgement and a $5 million civil money penalty to the United States Treasury. As agreed, F-Squared transferred $35 million directly into the Treasury.

In July 2015, F-Squared filed for bankruptcy. The F2 Liquidating Trust was established during the bankruptcy proceedings to recover on behalf of F-Squared as its successor-in-interest. The bankruptcy court appointed Jalbert as the trustee.

B. Procedural History

On October 26, 2017, Jalbert filed a complaint in the U.S. District Court for the District of Massachusetts against the SEC purporting to represent the F2 Liquidating Trust and "all other individuals and entities similarly situated" who had "money collected from them by the SEC as ‘disgorgement’ without statutory authority or in excess of statutory authority" during the six years prior to the filing of the complaint. Jalbert asserted two claims under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 551 et seq., alleging that: (1) in light of the then-recent Supreme Court opinion in Kokesh v. SEC, ––– U.S. ––––, 137 S. Ct. 1635, 198 L.Ed.2d 86 (2017),¹ the SEC "exceeded its statutory authority by seeking and obtaining disgorgement from F-Squared and the similarly situated members of the Proposed Class as a separate monetary penalty" in both administrative proceedings and federal court actions and (2) the SEC "failed to observe the procedural requirements" of federal securities law by not obtaining an accounting of profits allegedly acquired as a result of wrongdoing before ordering disgorgement. The complaint sought a declaration that the SEC's collection of disgorgement was unlawful pursuant to 5 U.S.C. § 706 ; the setting aside of the $30 million disgorgement paid by F-Squared under the Order; and a refund of that payment, as well as similar refunds for the putative class members.

On April 4, 2018, the SEC filed a motion to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6). On August 22, 2018, the district court entered a memorandum and order granting the SEC's motion to dismiss. Jalbert v. SEC, 327 F. Supp. 3d 287 (D. Mass. 2018). The court determined that it lacked subject matter jurisdiction because Congress vested the courts of appeals with exclusive jurisdiction over challenges to SEC orders. Id. at 296–97, 299–300. It also held that Jalbert had failed to state a claim upon which relief could be granted because "F-Squared, as part of the settlement, clearly and unambiguously waived the right to judicial review by any court." Id. at 295. Jalbert then filed this timely appeal of the district court's dismissal.

II. Discussion

We review a district court's dismissal for lack of subject matter jurisdiction and for failure to state a claim de novo, construing the complaint "liberally" and treating "all well-pleaded facts as true." Aurelius Capital Master, Ltd. v. Commonwealth of P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 919 F.3d 638, 644 (1st Cir. 2019) (quoting Town of Barnstable v. O'Connor, 786 F.3d 130, 138 (1st Cir. 2015), and citing Newman v. Lehman Bros. Holdings Inc., 901 F.3d 19, 24 (1st Cir. 2018) ). We accord Jalbert "the benefit of all reasonable inferences." Town of Barnstable, 786 F.3d at 138 (quoting Murphy v. United States, 45 F.3d 520, 522 (1st Cir. 1995) ). Nevertheless, the complaint must allege "a plausible entitlement to relief." Decotiis v. Whittemore, 635 F.3d 22, 29 (1st Cir. 2011) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 559, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).

Jalbert's big-ticket argument is that in light of the Supreme Court's decision in Kokesh -- which holds that disgorgement ordered in civil enforcement proceedings constitutes a "penalty" subject to the five-year statute of limitations set forth in 28 U.S.C. § 2462,² 137 S. Ct. at 1639 -- the SEC's $30 million disgorgement order against F-Squared was unauthorized under the statutes governing SEC disgorgement because it was a penalty and not a remedial, compensatory charge. Jalbert contends that the SEC intended F-Squared's disgorgement as a penalty because, like in Kokesh, it was ordered to punish and deter conduct, and the proceeds were paid directly into the Treasury rather than returned to the injured investors. But as the district court correctly concluded, we do not need to delve into the merits of these arguments because they are not properly before us.

The SEC's Rules of Practice allow "[a]ny person who is notified that a proceeding may or will be instituted against him or her, or any party to a proceeding already instituted [to] propose in writing an offer of settlement." 17 C.F.R. § 201.240(a). The Rules also require an offer of settlement to "recite or incorporate as a part of the offer the provisions of paragraphs (c)(4) and (5) of this section," 17 C.F.R. § 201.240(b), which, as relevant to this appeal, include the waiver, subject to the acceptance of the offer, of "[j]udicial review by any court," § 201.240(c)(4)(v).

F-Squared voluntarily executed such an offer to settle with the SEC. In compliance with 17 C.F.R. § 201.240(b), the Offer included an acknowledgement of F-Squared's "waiver of those rights specified in Rules 240(c)(4) and (5) [ 17 C.F.R. § 201.240(c)(4) and (5) ] of the Commission's Rules of Practice." Thus, as part of the Offer, F-Squared knowingly and voluntarily agreed to waive judicial review of the ensuing order if the SEC accepted it. In due course, the SEC accepted the Offer in its December 22, 2014 Order. See 17 C.F.R. § 201.240(c)(7) ("Final acceptance of any offer of settlement will occur only upon the issuance of findings and an order by the Commission."). Accordingly, the district court properly determined that F-Squared's "clear[ ] and unambiguous[ ]" waiver barred the court's consideration of Jalbert's claims on the merits. Jalbert, 327 F. Supp. 3d at 295. While Jalbert posits several arguments to the contrary on appeal, none are persuasive.

First, Jalbert argues that the SEC's "longstanding practice of obtaining additional, extra-statutory penalties" disguised as "disgorgement" constitutes a structural separation-of-powers violation that cannot be waived. Relying on Kokesh, Jalbert's argument assumes that the SEC exceeded its statutory authority in ordering disgorgement that is, according to Jalbert, punitive and unauthorized, which alone is enough to implicate separation-of-powers principles. But the Kokesh Court explicitly stated that "[n]othing in this opinion should be interpreted...