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Major SEC Enforcement Action Shows the Twists Challenging the use of Administrative Proceedings

By Jeffrey T. Petersen, Esq.  of Shustak Reynolds & Partners, P.C. posted on Monday, July 20, 2015.

James J. Reynolds

James J. Reynolds


We previously reported here on what is currently the only case where an SEC administrative proceeding has been enjoined by a district court on constitutional grounds, Hill v. SEC. That case was heard by Judge Leigh Martin May, who on Wednesday had a similar case brought to her, Ironridge v. SEC. The plaintiffs in Ironridge had an SEC proceeding filed against them alleging they are unregistered broker-dealers. The plaintiffs then filed a complaint and preliminary injunction motion seeking to enjoin the administrative proceedings on the grounds such proceedings are unconstitutional.

The Ironridge plaintiffs are represented by the same law firm in Georgia that represented the plaintiffs in Hill, and the grounds for challenging constitutionality are similar, namely that: (1) the Administrative Law Judge for the proceeding lacks the power to hear the matter, as s/he will always be an inferior officer, and the Constitution requires such officers to be appointed by the President, the SEC or the courts; (2) the ALJ cannot be removed from the post by the President, as required by the Constitution; and (3) the proceeding deprives a defendant of the right to a jury trial.

One would suspect the same arguments to the same judge would result in a similar ruling enjoining the SEC administrative proceeding. The SEC has already appealed that ruling in the Hill case, and apparently there will be several cases up on appeal before too long. With appeals already in process from cases in the district court for New York, it will be intriguing to see how the various appellate-level federal courts determine this issue.

One thing for certain, however, is that the SEC shows no signs of slowing down in its use of administrative proceedings, which do carry with it significant challenges to respondents, namely the significant limitations on discovery and the short timeframe to prepare for hearing in such proceedings.

Jeffrey T. Petersen, Esq. Shustak Reynolds & Partners, P.C.  Shustak Reynolds & Partners, with offices in California and New York, focuses on financial services law and represents broker dealers, investment advisers, registered representatives and high net worth investors. Jeff can be reached in San Diego at 619.696.9500. Dennis A. Stubblefield, a partner with the firm who specializes in representing clients in SEC and FINRA enforcement proceedings, can be reached in Irvine at 949.451.6800.

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