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From Securities Regulation Daily, March 29, 2017

Tenth Circuit’s attack on ALJ regime has no effect on district court jurisdiction

By Amy Leisinger, J.D.

The Kansas federal district court dismissed an action for a temporary restraining order or preliminary injunction to halt to an SEC administrative proceeding for lack of subject matter jurisdiction. According to the court, the Tenth Circuit’s recent decision finding that SEC administrative law judges are unconstitutionally appointed "inferior officers" does not change the fact the district courts lack jurisdiction over agency proceedings under the federal statutory review scheme (Kon v. SEC, March 28, 2017, Robinson, J.).

Bandimere v. SEC. In Bandimere v. SEC, a divided Tenth Circuit panel went against other recent appellate decisions and concluded that the SEC inappropriately determined the Commission’s ALJs were not "inferior officers" under the Constitution. Over the dissent, the panel determined that the SEC, as well as other district and circuit courts, misinterpreted the Supreme Court’s decision in Freytag v. Commissioner of Internal Revenue by concentrating on the lack of finality of an ALJ’s decision instead of the power an ALJ actually possesses. While final decision-making power is relevant to determining whether a public servant exercises "significant authority," it is not dispositive on the issue, the panel explained.

Judicial review. Citing the Supreme Court’s determination in Thunder Basin Coal Co. v. Reich, the court said that a statute providing for agency review will divest the federal courts of jurisdiction if it shows "a fairly discernible intent" to limit jurisdiction and the claims at issue are the type Congress intended to be reviewed within the statutory structure. As to whether it is "fairly discernible" that Congress intended to preclude district court review of an SEC proceeding, the approach to SEC and judicial review is nearly identical to the statutory scheme in Thunder Basin, the court found.

The Thunder Basin Court also said that Congress did not intend claims to be reviewed within the statutory scheme by the agency if a finding of preclusion could foreclose all meaningful judicial review, if the suit was wholly collateral to a statute’s review provisions, and if the claims were outside the agency’s expertise, the court noted. In reviewing these factors, the court agreed with the SEC that the constitutional claims must first be reviewed through the administrative process, followed by appellate court review. Rejecting the contention that harm results from the existence of an unconstitutional proceeding itself, the court found that an appeal constitutes meaningful judicial review notwithstanding the need to complete the administrative process.

Further, the court explained, a claim is not wholly collateral if it is intertwined with the proceeding and is the means by which the aggrieved party seeks to prevail against the agency, as it is in the current case. In addition, the court found that the agency-expertise factor does not support subject matter jurisdiction because the SEC could resolve the matter by coming down in the plaintiffs’ favor on questions the agency routinely considers and "obviate the need to address the constitutional challenge."

No subject matter jurisdiction. Noting the difference in the "procedural posture" of Bandimere and the present case as a collateral action to the SEC proceeding, the court stated that "[j]urisdiction is not existent merely because the underlying claim may have substantive merit." The court concluded that it lacked subject matter jurisdiction to enjoin the proceeding on the basis of the constitutional challenge and dismissed the action.

The case is No. 17-CV-2105-JAR-GLR.

Attorneys: Braden M. Perry (Kennyhertz Perry) for Alexander Kon. Justin M. Sandberg for the SEC.

MainStory: TopStory Enforcement KansasNews

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