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From Securities Regulation Daily, May 30, 2017

Tilton petition adds to ALJ cases declined by justices

By Mark S. Nelson, J.D.

Lynn Tilton’s challenge to the SEC’s in-house enforcement regime fell short at the Supreme Court, which declined to hear her appeal of whether a U.S. District Court may exercise jurisdiction over a suit claiming the Commission’s administrative law judges violate the Appointments Clause of the U.S. Constitution. Despite a few exceptions at the district court level, the U.S. Courts of Appeal have denied jurisdiction in cases raising issues like those in Tilton’s petition to the Supreme Court. Those seeking to change how the SEC’s administrative law judges are appointed will likely continue to focus on cases that have already gone through the administrative process and which directly raise the Constitutional question (Tilton v. SEC, May 30, 2017).

Specifically, observers will look to the D.C. Circuit’s forthcoming en banc opinion in Lucia v. SEC, argued in late May, for clarification of an earlier panel decision relying on circuit law, and for clues that may strengthen or weaken what had been a burgeoning circuit split. The Lucia panel upheld the SEC’s ALJs primarily by invoking the court’s Landry opinion, which had emphasized ALJ finality as the touchstone for constitutional analysis under the Appointments Clause. (The Landry panel was unanimous in upholding the FDIC’s penalty in that case, but one judge concurred to note two judges’ over-emphasis of finality as that term was explained by the Supreme Court in Freytag). By contrast, a divided Tenth Circuit last year held the SEC’s ALJs are inferior officers and the appointment of the ALJ in that case was constitutionally infirm.

Tilton had pivoted to a new theory in a second complaint that alleged due process and equal protection claims in a renewed effort in the district court to curb the SEC’s in-house proceedings (Tilton’s first suit only is the subject of the Supreme Court’s order). But Tilton has since voluntarily dismissed the new case, which would have faced hurdles under Second and D.C. Circuit precedents suggesting that arguments outside the Appointments Clause context regarding SEC administrative proceedings may not fare much better with respect to the question of district court jurisdiction.

The Second Circuit, for example, issued a summary order in the Chau case two months after Tilton voluntary dismissed her second suit. The Chau panel rejected Equal Protection Clause claims based on the SEC’s decision to pursue an administrative proceeding instead of a court case against Harding Advisory LLC and its principal owner, Wing Chau (Due Process Clause claims asserted earlier in the Chau case were not before the Second Circuit). The decision leaned heavily on the Second Circuit’s divided opinion in Tilton’s first suit (petition for rehearing denied), rejecting district court jurisdiction of Tilton’s Appoints Clause claim.

The Second Circuit in Chau (and in Tilton) also cited the D.C. Circuit’s Jarkesy opinion, issued nearly a year before Tilton filed her second suit, as persuasive authority. Jarkesy involved an SEC administrative proceeding that raised Due Process Clause and Equal Protection Clause/Seventh Amendment right-to-jury claims, but not Appoint Clause claims. The D.C. Circuit walked through applicable Supreme Court precedents and found that Congress intended for Jarkesy’s claims to go through the administrative process before being appealed to a U.S. Court of Appeal.

Tilton’s SEC hearing took place last October and November. Shortly before the hearing, the Commission denied Tilton’s petition for interlocutory review of the ALJ’s order setting the hearing date and regarding the application of the Commission’s amended rules of practice. In the latest activity in Tilton’s matter, the ALJ denied a stay urged by Tilton because of developments in the D.C. and Tenth Circuits on the Appointments Clause issue; the ALJ’s denial also dealt with Tilton’s worry that she may be required to pay disgorgement that pre-dates by five years the Commission’s order instituting proceedings, an issue currently before the Supreme Court (See Kokesh, argued in April 2017). In other instances, the Commission has stayed administrative proceedings where a respondent could appeal a final order to the Tenth Circuit.

The case is No. 16-906.

Attorneys: Lawrence Jay Zweifach (Gibson Dunn & Crutcher LLP) for Lynn Tilton and Patriarch Partners, LLC. Christopher Kendrick Connolly, U.S. Attorney's Office, for the SEC.

Companies: Patriarch Partners, LLC; Harding Advisory LLC

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