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From Securities Regulation Daily, September 17, 2015

SEC blocked from pursuing former S&P director Duka

By Kevin Kulling, J.D.

The federal district court in Manhattan rejected the SEC’s request to stay a preliminary injunction that halted administrative proceedings against former S&P managing director Barbara Duka. The court’s refusal to delay imposition of the injunction is based on its determination that Duka is likely to prevail in her challenge to the constitutionality of the SEC’s administrative proceedings against her (Duka v. SEC, September 16, 2015).

Procedural History. The SEC instituted administrative proceedings in January 2015 against Duka, the former head of S&P’s Commercial Mortgage Backed Securities Ratings Group, for alleged false and misleading statements made by S&P concerning its post-financial crisis methodology for rating commercial mortgage-backed securities.

Duka requested a preliminary injunction to halt the SEC proceedings, arguing that the ALJs who hear such matters were “inferior officers” under the Constitution, and as such, were required to be appointed by the President, a department head, or a court of law. Because the SEC ALJs involved in the administrative proceeding against Duka were not appointed by the president, a court, or the SEC, their appointments were not appropriate and were thus in violation of the Constitution’s Appointment Clause, according to Duka.

On August 12, 2015, the district court entered the preliminary injunction against the SEC, ordering the agency to halt its administrative proceedings against Duka. In addition to determining that forcing Duka to proceed would cause her irreparable harm, the court agreed with Duka’s analysis that the SEC administrative law judges (ALJs) were likely not appropriately appointed.

On August 26, 2015, the SEC filed a Notice of Appeal and sought a stay of the preliminary injunction issued by the district court. In its request for the stay, the SEC questioned the district court’s jurisdiction to consider the matter and challenged Duka’s assertion that SEC ALJs were inferior officers.  

The SEC argued that a stay was proper because the agency had already expended significant resources preparing for the administrative enforcement hearing and the injunction issued by the district court caused irreparable harm by interfering with the SEC’s ability to enforce the securities laws and deter future violations. In addition, the agency and the public had a strong interest in the prompt adjudication of the SEC’s allegations.

SEC’s stay request denied. On September 16, 2015, the Court heard oral arguments and shortly thereafter, issued its decision to deny the SEC’s application to stay the preliminary injunction. 

First, the court asserted jurisdiction over the matter, holding that a finding of no subject matter jurisdiction could foreclose all meaningful judicial review of Duka’s claim; the claim for injunctive and declaratory relief was wholly collateral to any commission orders or rules from which review might be sought in the Court of Appeals, and the constitutional claim posed in this case was outside the SEC’s expertise.

Next, the Court reviewed whether the SEC met the criteria for a stay, focusing on whether they made a strong showing of likely success on the merits; whether they would be irreparably injured absent a stay; whether issuance of the stay would substantially injure the parties interested in the proceedings; and where the public interest lies.

The court concluded that the SEC was unable to demonstrate likely success on the merits because, in the court’s view, SEC ALJs in fact are inferior officers because they exercise significant authority pursuant to the laws of the United States, their positions were established by law, their duties, salary, and means of appointment for that office were specified by statute, and, in the course of carrying out their important functions, including adjudications, ALJs took testimony, conducted trials, ruled on the admissibility of evidence, and had the power to enforce compliance with discovery orders.

Because the SEC ALJS appeared to be inferior officers who were not appropriately appointed pursuant to Article II, their appointment was likely unconstitutional in violation of the Appointments Clause.

The court also concluded that a stay was not proper because the SEC did not demonstrate irreparable harm. Although the agency contended that the court’s preliminary injunction interfered with its ability to enforce the securities laws and to deter future violations, the argument was not compelling for the court, which said that the SEC had at its disposal several options to prosecute securities claims, including bringing the claims in district court. Alternatively, the SEC could have the SEC Commissioners issue an appointment or preside over the matter themselves, the court said.   

Accordingly, the court was persuaded by its belief that Duka had a likelihood of success on appeal and the prospect of her suffering irreparable harm if she would be forced to defend an unconstitutional proceeding.

The SEC remains enjoined from further pursuing administrative proceedings against Duka and its application to stay all proceedings pending appeal will be considered separately by the court.  

Attorneys: Daniel Zachary Goldman (Petrillo Klein & Boxer LLP) for Barbara Duka. Adam Grogg, U.S. Department of Justice, for the SEC.

MainStory: TopStory Enforcement FraudManipulation NewYorkNews

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