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From Securities Regulation Daily, September 23, 2016

Government tells justices Tilton case not ready for prime time

By Mark S. Nelson, J.D.

Acting U.S. Solicitor General Ian Heath Gershengorn told the Supreme Court that Lynn Tilton should be denied a stay of her administrative proceeding while she decides if she will ask the justices to take her case now that the Second Circuit has held that the district court lacked jurisdiction to hear Tilton’s challenge to the constitutionality of the SEC’s administrative law judges. Justice Ruth Bader Ginsburg had asked for the government’s views on Tilton’s request for a stay pending the filing of a petition for certiorari and the Supreme Court’s decision to either grant or deny that petition (Tilton v. SEC, September 21, 2016).

Tilton’s case not extraordinary. The government launched a broad-side attack on Tilton’s stay request, citing the Supreme Court’s role as final arbiter (and not as a court of first view), while also leaning heavily on a high court prudential rule warning against the court becoming involved too early in all but "extraordinary cases." That latter principle derives from several in chambers opinions, including the seven-year-old opinion in Conkright v. Frommert by Justice Ginsburg denying a renewed stay application by a corporate pension plan administrator who argued that recoupment of funds paid would be difficult if the court later ruled for the plan administrator. The renewed Conkright request had asserted the Court’s invitation for the Solicitor General’s views as a changed circumstance justifying a stay.

According to the government, Tilton cannot meet the Conkright standard on either the jurisdiction issue, or the Article II appointments clause issue, which the Second Circuit did not address in Tilton’s case. For one, the government said the federal securities laws provide a statutory scheme through which Congress intended administrative cases like Tilton’s to progress. Moreover, the Seventh, Eleventh and D.C. Circuits have decided the jurisdictional issue the same way as did the Second Circuit in its ruling against Tilton (the Fourth Circuit will hear a similar case in October).

Also on the jurisdictional front, the government sought to distinguish Tilton’s case from the plaintiffs’ unique circumstances in the Supreme Court’s Free Enterprise case. Here, the government said there was no need for Tilton to "bet the farm," and she was already subject to an administrative proceeding before the SEC. Nor would Tilton’s worries about facing a potentially devastating administrative result justify granting a stay because the Supreme Court has previously explained that participating in legal proceedings is part of living in a country with a government. Tilton’s claims about the Second Circuit’s too narrow focus on only one Thunder Basin factor (meaningful judicial review) was likewise misplaced.

Article II question premature. Tilton had argued there was broad disagreement among lower federal courts on whether the SEC’s ALJs were appointed in compliance with the appointments clause of Article II of the U.S. Constitution. But the government countered that the courts in Tilton’s case had not addressed this question and that her claims of a circuit split were premature (Supreme Court Rule 10 notes the circuit split as one argument for granting certiorari and, in practice, it is one of the most common routes to the high court). The government said whatever split currently exists is between the D.C. Circuit’s Raymond J. Lucia Companies decision (upholding the SEC’s ALJs) and several district court cases that have now been vacated on appeal. But the government noted several pure Article II cases pending in the Ninth and Tenth Circuits that could still produce a circuit split.

Tilton launches new battle. As Tilton seeks to get the Supreme Court’s attention in the case already decided against her, she has opened a new front in the district court within the Second Circuit. In a lawsuit filed just weeks ago, Tilton seeks a declaratory judgment and injunction on Fifth Amendment due process and equal protection grounds based on her claim that the SEC’s rules of practice are unfair to respondents in administrative proceedings (The SEC recently adopted somewhat more relaxed rules for in-house cases that take effect next week, with special applicability dates for matters pending as of July 13, 2016).

The Second Circuit ruled against Tilton in June. Since then, she sought and was denied panel and en banc rehearing by the appeals court. Tilton’s case, and the separate but similar case of Barbara Duka, also were briefly embroiled in a controversy over when the SEC could restart Tilton’s and Duka’s in-house proceedings. The SEC’s ALJ restarted Tilton’s case in July, the Commission then denied Tilton’s petition for interlocutory appeal, and the matter has proceeded on various pre-hearing motions ahead of an October 24 hearing date, the most recent motion concerning Brady-related production issues.

The case is No. 16a242.

Attorneys: Ian Heath Gershengorn, Acting U.S. Solicitor General, for the SEC.

Companies: Patriarch Partners, LLC

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