Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, January 24, 2017

Tilton takes challenge to ALJ regime to the top

By Rodney F. Tonkovic, J.D.

Self-described "Turnaround Queen" Lynn Tilton has brought her challenge of the constitutionality of the SEC’s administrative apparatus to the Supreme Court. Tilton, who has been battling the SEC for nearly two years, asks the court to consider whether federal courts have jurisdiction to hear Appointments Clause challenges to SEC administrative law judges. The petition also asks whether SEC ALJs are "inferior officers under the Appointments Clause (Tilton v. SEC, January 18, 2017).

Lower court proceedings. The SEC instituted administrative proceedings in March 2015 against Tilton and several of her Patriarch Partners investment firms alleging fraud under the Investment Advisers Act. Two days later, Tilton brought suit in the Southern District of New York seeking to enjoin the administrative proceedings, asserting that the appointment of the SEC’s administrative law judge violated the U.S. Constitution’s Appropriations Clause. The district court dismissed Tilton’s lawsuit, finding that the court lacked subject matter jurisdiction. Tilton appealed.

In June 2016, the Second Circuit affirmed. Applying Thunder Basin, the Second Circuit concluded that Congress intended Appointments Clause claims such as Tilton's to be reviewed within the SEC's exclusive statutory structure. Meaningful judicial review was available, a majority of the court, and Tilton must first await an adverse final Commission order before petitioning for review on constitutional grounds.

Undeterred by this setback, Tilton petitioned for a rehearing, asserting that the panel failed to properly evaluate the factors required for district court constitutional review and made a decision in direct conflict with applicable precedent. The petition was denied without comment in August 2016. In September 2016, Tilton renewed her attack, filing suit in the district court sitting in Manhattan and arguing that the SEC's ALJ regime violated her constitutional rights on equal protection and due process grounds. This suit was abandoned one month later. The administrative proceeding commenced on October 24, 2016, and the parties are awaiting the ALJ's decision.

Procedural unfairness. The petition notes that the SEC has prosecuted an increasing number of cases before its own ALJs since the enactment of the Dodd-Frank Act. The Commission wins the vast majority of these cases, and the petition attributes this success to pro-prosecution procedural features of the administrative proceedings. This procedural unfairness is compounded by the fact that SEC ALJs, who have "substantial authority," are chosen by SEC staff, instead of by procedures prescribed by the Appointments Clause, and are thus not politically accountable.

The petition argues that the Second Circuit's decision conflicts with the Supreme Court's holding in Free Enterprise Fund that the securities laws do not preclude district court jurisdiction over an Appointments Clause challenge. In Free Enterprise Fund, the Court concluded, in contrast to the Second Circuit's holding, that requiring plaintiffs to defend themselves before the very administrative apparatus that they are challenging is not a meaningful avenue of relief. Post-enforcement review cannot be "meaningful," the petition explains, because it would not remedy the impairment of a petitioner's constitutional rights or compensate their economic losses. The Second Circuit also misapplied the remaining Thunder Basin factors because the challenge to the existence of the ALJ regime has no bearing on the merits of the SEC's allegations against Tilton and did not require any special expertise.

The petition admits that the Second Circuit's decision is in accord with decisions by the D.C.SeventhFourth, and Eleventh Circuits addressing similar challenges to the ALJ regime. But, the petition asserts, the proliferation of courts making the same error shows the need for Supreme Court review. Each appellate court to address the issue, the petition continues, has consistently misapplied Thunder Basin and departed from Free Enterprise Fund.

The petition also asks for an answer to the question of whether SEC ALJs are inferior officers under the Appointments Clause. This question was not reached by the Second Circuit, the petition says, but ought to be decided sooner rather than later. The Commission's position that its ALJs are mere employees is clearly wrong, the petition maintains, and at odds with the Court's holding in Freytag v. Commissioner of Internal Revenue (1991) that special tax judges wielding similar "significant authority" were inferior officers. Here, the petition takes note of the recent Tenth Circuit decision in Bandimere v. SEC, which, unlike other courts addressing the issue, held that SEC ALJs are inferior officers who must be appointed in conformity with the Appointments Clause.

The petition is No. 16-906.

Attorneys: J. Stephen Walker (Law Offices of J. Stephen Walker, P.C.) for Margaret Richek Goldberg. Mary J. Hackett (McGuireWoods LLP) for Bank of America, N.A.

Companies: Bank of America, NA

MainStory: TopStory AccountingAuditing DoddFrankAct Enforcement FraudManipulation PrivateEquityNews SupremeCtNews

Back to Top

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.