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From Securities Regulation Daily, August 3, 2015

SEC battles to proceed administratively against Duka and Ironridge

By Matthew Garza, J.D.

The federal district court in Manhattan today refused to dismiss former S&P executive Barbara Duka’s challenge to the SEC’s administrative proceeding against her, but hinted that her argument that SEC ALJs were proceeding against her in violation of the Appointments Clause could be easily cured were the SEC to preside over an appointment of its ALJs (Duka v. SEC, August 3, 2015, Berman, R.).

In the meantime, SEC target Ironridge Global moved to enjoin the agency’s administrative proceeding against it from moving forward, and the SEC has filed a memo outlining its opposition to Ironridge’s motion, which asserted that its ALJs were “mere agency employees” (Ironridge Global IV, Ltd. v. SEC, July 14, 2015).

Jurisdiction. The Southern District of New York first confirmed its earlier order that it did have subject matter jurisdiction to hear the case, reasoning that the harm Duka seeks to avoid, namely being subjected to an allegedly unconstitutional proceeding, cannot be remedied after it has occurred. The court also said that seeking to halt the ALJ proceeding because it violates the Constitution cannot be considered the same as the “regular” or “routine” business represented by the underlying violations addressed in the proceeding.

Appointments Clause. Duka amended her complaint to include a claim that, in contravention of the Appointments Clause of Article II of the Constitution, SEC ALJs are inferior officers that have not been appointed by SEC Commissioners. The Appointments Clause in Article II provides:

“[T]he Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.”

The court, citing Freytag v. Commissioner (U.S. 1991), concluded that ALJs were in fact inferior officers because they exercise significant authority pursuant to U.S. law. The ALJs in this case (Cameron Elliot and James Grimes) were “arguably” not appointed by SEC Commissioners, wrote the court, although a footnote in the decision said that some SEC ALJs do “appear to have been appointed” by the SEC.

The court said it appears that the SEC may be considering curing this potential Appointments Clause defect by having the Commissioners appoint the ALJs, and it would reserve judgment on Duka’s request for a preliminary injunction for seven days to allow the SEC the opportunity to give notice of its intent to cure any such defect. In the meantime, the SEC was directed not to continue the administrative proceeding.

Ironridge. Ironridge Global, which has been targeted by the SEC for failing to register as a broker-dealer despite aggressively using Securities Act Section 3(a)(10) to obtain and flip penny stocks, is also asking a federal court to halt the SEC’s proceeding against it. The company argued before the District Court for the Northern District of Georgia that the SEC’s proceeding was unconstitutional because it abridged its right to a jury trial and was conducted by an inferior officer that was insulated by tenure protection and not appointed by SEC Commissioners, in violation of Article II.

The SEC filed a 50-page response to the company’s latest motion, arguing that Ironridge was unlikely to prevail on the merits of its argument and could not establish that the Northern District of Georgia was a valid venue for the case. The SEC also argued that the company could not establish that preliminary relief is necessary to prevent irreparable harm. In its filing, the SEC asserted that SEC ALJs are “mere agency employees,” subject to SEC plenary authority and subordinate on matters of law and policy. Their functions do not include issuing final opinions, the SEC argued, and they lack the powers of judges who are officers of the United States.

Attorneys: Akash Desai (Kilpatrick Townsend & Stockton LLP) for Ironridge Global IV, Ltd. and Ironridge Global Partners, LLC. Daniel Zachary Goldman (Petrillo Klein & Boxer LLP) for Barbara Duka. Adam Grogg, U.S. Department of Justice, for the SEC.

Companies: Ironridge Global IV, Ltd.; Ironridge Global Partners, LLC

MainStory: TopStory Enforcement FraudManipulation SECNewsSpeeches GeorgiaNews NewYorkNews

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