Securities Regulation Daily Appeals court gets Appointments Clause question
Wednesday, April 19, 2017

Appeals court gets Appointments Clause question

Thomas Gonnella, a respondent in an SEC administrative case, asked the Second Circuit to hear his petition for review of the Commission’s order imposing $82,500 in penalties plus industry and associational bars related to an alleged stock parking scheme. Gonnella wants the New York-based appeals court, which has a disproportionately heavy load of commercial and securities cases compared to other circuits, to take up his argument that the SEC’s administrative law judge regime violates the Appointments Clause of Article II of the U.S. Constitution in addition to reviewing the liability issues addressed in the Commission’s opinion (Gonnella v. SEC, April 17, 2017).

Looking for circuit split. The Second Circuit, like the Fourth, Seventh, Eleventh and D.C. circuits, has previously been asked to deal with district court jurisdiction in cases where SEC respondents endeavored to short-circuit their in-house cases, but those respondents’ efforts have withered as the few early district court injunctions of SEC proceedings were later overturned by federal appeals courts and several of these cases were rebuffed by the Supreme Court.

Meanwhile, a divided Tenth Circuit ruled against the SEC in a case squarely presenting the Appointments Clause issue via petition for review (at least one district court within the Tenth Circuit has since denied jurisdiction outside of the petition for review context). The D.C. Circuit previously ruled for the SEC based on a disputed circuit precedent, but that decision was recently vacated and will soon be reheard by the full D.C. Circuit in tandem with a case that, in part, makes similar claims about the Consumer Financial Protection Bureau.

Gonnella and the other SEC respondents involved in the D.C. Circuit and Tenth Circuit cases hope for the evolution of a circuit split in administrative cases seeking petitions for review. A clear circuit split in a case that directly presents the Appointments Clause issue could provide a stronger basis than has yet materialized for the Supreme Court rule on the constitutionality of the SEC’s administrative regime, possibly without having to decide other preliminary jurisdictional questions.

Commission order. In August 2016, the Commission upheld penalties imposed by an ALJ against Gonnella for violations of Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule 10b-5, while also upholding aiding and abetting violations by Gonnella related to books and records violations by Gonnella’s employer, Barclays. The SEC had alleged that Gonnella engaged in a "parking" scheme by setting up prearranged sale-and repurchase transactions. Barclays’s internal policy defined the practice as involving no transfer of risk or benefit in order to conceal the true ownership of securities. Barclays’s policy also noted that the practice could be especially worrisome if it occurs near the end of a reporting period.

As a result, the Commission ordered Gonnella to stop engaging in the offending conduct and imposed a second-tier penalty of $75,000 for the antifraud violations and a first-tier penalty of $7,500 for the aiding and abetting charge ($82,500 total penalty). The Commission also imposed wide ranging associational and industry bars, including a penny stock bar, an officer and director bar, and an investment company bar. Then-SEC Chair Mary Jo White and Commissioner Kara Stein supported the result in Gonnella’s in-house case, while Commissioner Michael Piwowar backed only part of the opinion.

Specifically, Commissioner Piwowar partially dissented on due process and other unspecified grounds because, in his view, the Commission exceeded its authority by imposing the investment company bar, which he said the ALJ did not impose and the Enforcement Division had not requested (See footnote 52 in the Commission’s opinion). The Commission has since partially stayed its order with respect to the penalty amount imposed on Gonnella while he pursues a petition for review in the Second Circuit.

But the Second Circuit has already denied Gonnella’s request to remand the matter to the Commission so he can raise the Appointments Clause issue. The appeals court said that remand is for adducing new evidence and not for making arguments.

Parallels to Pierce? Gonnella’s bid to get the Second Circuit to hear the Appointments Clause issue bears at least some resemblance to a case in the D.C. Circuit from a few years ago. The common thread between the two petitions for review is that the respondents in the SEC proceedings raised the Appointments Clause issue during the pendency of their appeals in federal court.

In Pierce v. SEC, Gordon Pierce filed a petition for review of an SEC in-house proceeding that resulted in the Commission upholding penalties against him. The petition for review had a complex procedural history, but the upshot was that Pierce did not raise the constitutional issue until his appeal in the D.C. Circuit had reached the rehearing stage.

After the D.C. Circuit denied Pierce’s request for panel and en banc rehearing, Pierce asked the Supreme Court to take his case. At the time, Pierce was one of the few SEC respondents to raise the Appointments Clause issue without having the district court jurisdictional issue tagging along and potentially operating as a barrier to the court addressing the Appointments Clause.

But the procedural stance of Pierce’s case, having raised the constitutional issue at the rehearing stage, may have helped to dissuade the justices from taking his case. In his petition for certiorari, Pierce first presented the Appointments Clause question, but he also raised a second question: "Whether the Petitioner may assert an Appointments Clause Violation in connection with proceedings that have already been concluded where the issue was first raised in his petition for rehearing and en banc consideration." The Supreme Court denied certiorari in April 2016.

The case is No. 16-3433.

Attorneys: Andrew J. Frisch (The Law Offices of Andrew J. Frisch) for Thomas C. Gonnella.

Companies: Barclays

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