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Recent Appellate Action SEC Use of In-House Courts Shows the Courts Recognize the Major Importance of the Issue

By Dennis Stubblefied, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, September 18, 2015.

Two federal appellate courts, the Seventh and Second Circuits, respectively, have recently weighed in on the issue of the SEC’s use of in-house administrative judges in civil enforcement proceedings against individuals. Many of the respondents in such cases have challenged the constitutionality of the forum, essentially arguing that the SEC cannot use the ultra-expedited internal proceeding with its hand-picked administrative judges to impose potentially severe civil penalties on individuals.

The recent Seventh Circuit opinion in Bebo v. SEC served as an important victory for the SEC on this issue, as the Court there found that the federal courts lacked jurisdiction to determine Bebo’s challenge to the administrative proceeding at this time. Instead, Bebo will have to wait until any appeal of the SEC administrative court decision to present her challenge to that forum to an appellate court.

In its decision, the Seventh Circuit followed the reasoning of the majority of federal courts that have ruled on the issue, stating that it was apparent from the statutory framework that Congress intended judicial review to occur within the regular SEC administrative process of administrative decision followed by appellate review, if desired, rather than proceeding outside that process immediately to a federal court. The decision is of major importance because it will serve as the first marker – in the SEC’s favor – of appellate decision in this hotly contested arena.

Over in the Second Circuit, the appellate court there just yesterday issued an exceptionally unique ruling, ordering a halt to an SEC administrative proceeding against New York financier Lynn Tilton. The matter had been set to go to trial on October 13th. The lower federal court had previously rejected Tilton’s efforts to bar the administrative case from going forward, and her appeal on the matter was heard by the Second Circuit this past Wednesday. Although the rare order to halt the case does not necessarily suggest that the Second Circuit is inclined to rule contrary to the Seventh Circuit’s recent decision (and/or otherwise favorably to the Commission), it does illustrate that the Second Circuit’s concerns about the implications of the SEC’s use of the administrative forum are substantial enough to take a pre-emptive approach to use of that forum in this case.

New law is being made in this arena---including SEC Enforcement across the board, particularly in Insider Trading cases---every week, it seems, and the fallout will dictate how individuals must respond to SEC civil enforcement actions going forward.

Dennis A. Stubblefield, Esq.  and Jeffrey T. Petersen, Esq. Shustak, Reynolds & Partners, P.C., with offices in California and New York, represent clients across a broad spectrum of SEC investigations and enforcement actions. Dennis can be reached in Irvine at 949.451.6800 and Jeff can be reached in San Diego at 619.696.9500.

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