Jarkesy v. U.S. Sec. & Exch. Comm'n, Civil Action No. 14–114BAH

• Decision Date: 10 June 2014
• Docket Number: Civil Action No. 14–114BAH
• Citation: 48 F.Supp.3d 32
• Parties: George R. Jarkesy, Jr., et al., Plaintiffs, v. United States Securities and Exchange Commission, Defendant.
• Court: U.S. District Court — District of Columbia

48 F.Supp.3d 32

George R. Jarkesy, Jr., et al., Plaintiffs

v.United States Securities and Exchange Commission, Defendant.

Civil Action No. 14–114BAH

United States District Court, District of Columbia.

Signed June 10, 2014

Karen L. Cook, Karen Cook PLLC, S. Michael McColloch, S. Michael McColloch PLLC, Stephen G. Gleboff, Gleboff Law Group PLLC, Dallas, TX, Mark Butler Bierbower, Hunton & Williams LLP, Washington, DC, for Plaintiffs.

Sarah E. Hancur, U.S. Securities and Exchange Commision, Washington, DC, for Defendant.

MEMORANDUM OPINION

BERYL A. HOWELL, United States District Judge

This matter arises out of an administrative proceeding initiated by the Enforcement Division of the defendant, the U.S. Securities and Exchange Commission (“SEC”), against the plaintiffs, George Jarkesy and his investment fund management group, Patriot28 (formerly known as John Thomas Capital Management, LLC) (collectively, “the plaintiffs”). The gravamen of the plaintiffs' complaint is that they cannot obtain a fair hearing before the SEC in an ongoing administrative process because the SEC's settlement with two of the plaintiffs' co-respondents included myriad findings “against Plaintiffs and a formal legal finding that they are liable for securities fraud.” Compl. ¶ 2, ECF No. 1. Pending before the Court are the plaintiffs' Motions for Preliminary and Permanent Injunctions and Motion to Expedite (“Pls.' TRO Mot.”), ECF No. 3, and their Motion for Leave to Amend Complaint by Filing First Amended Complaint (“Pls.' Mot. Am.”), ECF No. 16. Since no District Court has subject matter jurisdiction over this matter due to the extensive statutory scheme in the securities laws that govern this action, the plaintiffs' motions are denied and this matter is dismissed.

I. BACKGROUND

Plaintiff Jarkesy formed Plaintiff Patriot28 in 2007 “to manage investment funds sold exclusively by a registered placement agent to high-net-worth individuals who knowingly accepted the funds' high-risk investment strategy and acknowledged their ability to bear a loss of their entire investment.” Compl. ¶ 9. During the financial crisis of 2008, the plaintiffs were “battered” and still have not fully recovered. Id. ¶ 10. After the crisis, the SEC's Enforcement Division investigated and ultimately charged the plaintiffs with violating the Securities Act of 1933 (“the Securities Act”), the Securities Exchange Act of 1934 (“the Exchange Act”), and the Investment Adviser's Act of 1940 (“the Adviser's Act”). Id.

The SEC issued an “Order Instituting Administrative and Cease–and–Desist Proceedings,” or OIP, on March 22, 2013 against the plaintiffs and two other respondents, John Thomas Financial, Inc. (“JTF”) and Anastasios “Tommy” Belesis (“Belesis”), who are not parties to this action. See Pls.' TRO Mot. Ex. A at 1, ECF No. 3–1. The OIP alleges that the four respondents engaged in fraudulent conduct and “elevated the interests of Respondents JTF and Belesis over those of the [Investor] Funds by steering millions of dollars in bloated fees to the broker-dealer.” Id. at 2.

Using its power under 15 U.S.C. § 77h–1 and 15 U.S.C. § 78u–3, the SEC chose to bring an administrative action against the plaintiffs and their co-respondents instead of an injunctive action in a District Court, as provided for in 15 U.S.C. § 78u(d)(1). See Pls.' TRO Mot. Ex. A at 17; Def.'s Opp'n Pls.' TRO Mot. (“Def.'s TRO Opp'n”) at 3. As the plaintiffs point out, this statute allows “[t]he SEC ... discretion to bring certain cases in an [Administrative Proceeding], which previously could only be brought in federal court.” Compl. ¶ 25; see also 15 U.S.C. § 78u–3(a) (“If the Commission finds, after notice and opportunity for hearing, that any person is violating [securities laws] ... the Commission may publish its findings and enter an order requiring such person ... to cease and desist from committing or causing such violation....”). Such administrative proceedings are governed by the SEC's “Rules of Practice,” codified at 17 C.F.R. §§ 201.100 et seq. , which provide for, inter alia, procedures for summary disposition, id. § 201.250; interlocutory review by the SEC's Commissioners, id. § 201.400; and, of particular relevance to the instant matter, settlement before an administrative hearing has been conducted, id. § 201.240. The settlement portion of the Rules of Practice provides that “[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, may, at any time, propose in writing an offer of settlement.”Id. § 201.240(a).

In October 2013, the plaintiffs' two co-respondents exercised the option provided by § 201.240(a) by making an offer of settlement that contained “a consent to a finding that they ‘aided, abetted and caused the Manager's and Adviser's breaches of their fiduciary duties to the Funds.’ ” Def.'s TRO Opp'n at 7; see Pls.' TRO Mot. Ex. Q (Order Making Findings, Imposing Remedial Sanctions and a Cease–and–Desist Order) (“the Order”) at 2, ECF No. 3–3. Neither plaintiff in the instant matter is referred to by name in the settlement offer, but Plaintiff Jarkesy admits to being the “Manager” and “Adviser” referred to therein. See TRO Hrg. Tr. (“Tr.”) 6:20–22, Jan. 31, 2014. The SEC accepted the offer of settlement in an Order dated December 5, 2013. See Pls.' TRO Mot. Ex. O (“Petition for Interlocutory Review and Stay of Proceedings”) at 1, ECF No. 3–3.

The plaintiffs allege that in accepting the settlement offer and issuing the subsequent Order, the SEC “entered detailed and unqualified findings of fact and conclusions of law against Plaintiffs, including finding that Plaintiffs engaged in fraudulent conduct and violated a specific provision of the Advisers Act.” Compl. ¶ 19 (emphasis in original). The plaintiffs further allege that the Order “contains elaborate findings so sweeping as to establish violations of all of the [SEC's Enforcement] Division's charges and to support each of the remedies sought.” Id. The plaintiffs assert that making such findings in the Order was “totally unnecessary to effect the settlement with [the plaintiffs' co-respondents] Belesis and JTF and, therefore, serve[d] no other purpose than to express the opinions and conclusions of the Commission.” Id. ¶ 20.

Following the entry of the Order and before the commencement of the administrative hearing against the plaintiffs, the plaintiffs filed a Petition for Interlocutory Review and Stay of Proceeding, seeking to disqualify the SEC's Commissioners from hearing any proceedings related to the matter and a dismissal of the administrative proceeding. Pls.' TRO Mot. Ex. O at 1. In their petition, the plaintiffs allege that the Order “establishes that the Commission has conclusively prejudged the case against the [plaintiffs], and engaged in impermissible ex parte communications with the [Enforcement] Division staff in connection with the settlement.” Id. at 1–2. The administrative law judge (“ALJ”) assigned to the matter denied the plaintiffs' motion and the SEC Commissioners subsequently denied the plaintiffs' interlocutory appeal. See Pls.' TRO Mot. Ex. N (“Order Denying Certification for Interlocutory Review”) at 1–2, ECF No. 3–3.

The plaintiffs filed suit in this Court on January 29, 2014, seeking a temporary restraining order to stay the administrative hearing scheduled for February 3, 2014, and a declaratory judgment that, inter alia, the SEC violated the plaintiffs' right to due process and violated the Administrative Procedure Act, 5 U.S.C. § 551 et seq . Compl. ¶¶ 66–72. The Court held a hearing on the plaintiffs' Motion for a Temporary Restraining Order, filed contemporaneously with their Complaint, on January 31, 2014. See generally Tr. Following the TRO hearing, the Court denied the plaintiffs' motion for a Temporary Restraining Order. See Tr. 73:1–4.

Specifically, the Court found that the plaintiffs failed to sustain their burden in seeking injunctive relief because (1) the Court was “not convinced that [it has] jurisdiction over this matter or that this case is ripe for decision[;]” (2) the plaintiffs had failed to show they did not have adequate remedies at law, as provided for by the various securities laws they are accused of violating; (3) the plaintiffs failed to show that they would be irreparably harmed by submitting to an ALJ proceeding; and (4) the balance of equities did not favor the plaintiffs. See Tr. 73:5–74:18. The parties were ordered to submit a proposed briefing schedule to address the pending motion for preliminary injunction. See Minute Order, Jan. 31, 2014.

Rather than continue briefing on the preliminary injunction motion, the parties proposed “that the Court first issue a ruling on subject matter jurisdiction” since, if “the Court finds it does not have subject matter jurisdiction over Plaintiffs' claims, no further briefing by either party would be necessary.” Prop. Br. Sched. at 2, ECF No. 11. The parties were subsequently ordered to show cause why the plaintiffs' motion for a preliminary injunction was not moot, since the administrative proceeding the plaintiffs sought to delay had proceeded as scheduled. See Minute Order to Show Cause, Feb. 18, 2014. In connection with filing their response, the plaintiffs sought leave to amend their complaint to “add more facts supporting their claims against Defendant,” in essence to show that the plaintiffs' request for a preliminary injunction was not moot. See Pls.' Mot. Am. Compl. at 1, ECF No. 16; Prop. First Am. Compl. ¶ 1, ECF No. 16–2 (noting plaintiffs sought to “prevent the SEC from proceeding with ... all other phases of the [Administrative Proceeding], that has violated, and will continue to violate, Plaintiffs' fundamental constitutional rights.”). The Court now addresses the threshold issue of whether it has subject matter jurisdiction over the plaintiffs' claims.

II. LEGAL STANDARD

“ ‘Federal courts are courts of limited jurisdiction,’ possessing ‘only that...