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From Securities Regulation Daily, June 26, 2015

SEC fights back over ALJ loss on two fronts

By Mark S. Nelson, J.D.

This week the SEC laid out its plan to fend off the law suit filed by Charles L. Hill, Jr. disputing the legitimacy of the agency’s enforcement regime, especially the appointment of the agency’s administrative law judges. The SEC has asked the district judge who partially granted Hill’s request for a preliminary injunction to stop the SEC’s administrative proceeding against him to stay that order while the agency simultaneously appeals to the federal appeals court for the Eleventh Circuit (Hill v. SEC, June 24, 2015).

The SEC said the district court lacked jurisdiction to hear Hill’s case and that the judge got key points wrong. As an example, the SEC emphasized that its ALJs are not inferior officers, which means Hill’s case is distinguishable from the Supreme Court’s Freytag opinion dealing with the federal tax court’s special trial judges (STJs). In Freytag, the SEC argued, the STJs exercised judicial authority, in contrast to the SEC’s ALJs, whom the agency characterized as aides in carrying out federal executive authority, while the Commission retains plenary power over the agency’s enforcement matters.

The SEC also noted that the district court’s order in Hill’s case runs counter to the D.C. Circuit’s Landry case, in which that court emphasized how the Federal Deposit Insurance Corporation’s ALJs, like those at the SEC, could not issue final orders. According to the SEC, it will incur hardship if the stay is denied because the uncertainty over its ALJ regime could make it difficult for the agency to enforce the federal securities laws. The SEC noted that its administrative proceedings play a key role in deterring future securities violations.

SEC Chief ALJ Brenda P. Murray formally cancelled Hill’s hearing that was to have begun in mid-June after the district ordered the agency to halt Hill’s administrative proceeding. In a second SEC administrative challenge before the same judge in Hill’s case, Timbervest, LLC., which also argued the Article II issue in its appeal before the Commission, seeks a similar court order. The SEC’s ALJ in yet another case that prompted a suit in the Georgia federal court recently declined to stay the administrative proceeding, but said he would comply with any federal court order issued in the case.

The district court’s order in Hill has crept into other ongoing cases alleging the unconstitutionality of the SEC’s administrative process. In one case, Laurie A. Bebo offered the Hill order as supplemental but non-binding authority to the Seventh Circuit panel that heard her case. Bebo had asked the Seventh Circuit to upend the SEC’s jurisdictional victory in a Milwaukee federal court. The Chicago-based appeals court has yet to issue its ruling in Bebo’s case, despite her lawyer’s request for an expedited decision.

The case is No. 15-cv-1801[SEC stay request] and [SEC notice of appeal].

Attorneys: Jean Lin, U.S. Department of Justice Civil Division, Federal Programs Branch, for the SEC.

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