Securities Regulation Daily Appellate court precedent prevents ALJ constitutional challenge in district court
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Wednesday, August 12, 2020

Appellate court precedent prevents ALJ constitutional challenge in district court

By Jay Fishman, J.D.

Two of the three Fifth Circuit judges agreed with the SEC, but the dissenting judge distinguished the SEC rule violator’s ALJ removal challenge from other constitutional challenges.

The United States Court of Appeals for the Fifth Circuit affirmed a Texas district court’s dismissal of the SEC rule-violating appellant’s constitutional challenge pertaining to the removal of an administrative law judge (ALJ), ruling that the district court did not have subject matter jurisdiction over the challenge. The appellate court deferred to circuit court precedent cases which all held that parties constitutionally challenging ALJ enforcement actions must do so in appellate court, not district court, and that the parties must wait until the enforcement proceeding is decided to file the challenge (Cochran v. SEC, August 11, 2020, Owen, P.).

Briefs for and against the challenge. Appellant’s brief. The appellant filed a brief with the appellate court after being subject to an administrative enforcement proceeding in connection with a complaint the SEC filed against her for allegedly violating an Exchange Act auditing standard. She attempted to challenge the ALJ's judgment on constitutional grounds in federal district court in Texas, but that court dismissed her claim on the grounds that it did not have subject matter jurisdiction over the challenge.

She argued in the brief that the district court erred in dismissing the constitutional claim for lack of jurisdiction because district courts can be deprived of original subject-matter jurisdiction over constitutional questions only when Congress intended that result. She noted that the SEC has three avenues for bringing enforcement proceedings under the Exchange Act (in front of a federal district court, the Commission itself, or an ALJ) and contended that the SEC took the one option that violates the Constitution because the statutory scheme does not permit referral of enforcement proceedings to constitutionally unauthorized ALJs.

Her constitutional challenge pertained specifically to the removal and replacement of an ALJ when a party does not believe he or she is being treated fairly. She relied on the Supreme Court decision in Lucia v. SEC, which held that the ALJ who presided over a proceeding was unconstitutionally appointed and that SEC respondents were entitled to new hearings before different, properly appointed ALJs or before the Commission itself. She contended that Lucia prohibited the SEC from subjecting to her to a second unconstitutional enforcement proceeding. Furthermore, the SEC attempted to "ratify" the ALJs’ appointments and reassigned all pending enforcement matters after Lucia but the second proceeding is also unconstitutional. Whereas the first ALJ was unconstitutionally appointed, she proclaimed that the second ALJ presided in violation of the president’s removal power.

The appellant also contended that she cannot obtain meaningful judicial review because she challenged the ALJ’s authority and the ALJ lacks authority, and that appellate review after suffering the injury she seeks to prevent is not meaningful judicial review. Lastly, she stated that the constitutional claims are wholly collateral to the statutory scheme, and the Commission lacks expertise to address them.

SEC’s brief. The Commission’s brief simply stated that the Exchange Act mandates that parties responding to violations alleged by the SEC must present their constitutional challenges for direct review by a court of appeals following a final SEC decision, whether that decision was rendered by the Commission itself, by a federal court, or by an ALJ, and that the SEC is authorized to choose which of those three forums hears the matter.

Appellate court favors the SEC’s brief. The appellate court relied on the SEC’s argument, previous circuit court rulings (particularly the 2019 Bank of Louisiana v. FDIC case), and the district court’s reliance on Exchange Act Section 25, which provides that the exclusive means for asserting constitutional claims before an Article III court is in the court of appeals after a final order issues. The court dismissed the appellant’s reliance on certain cases which allowed a district court to hear constitutional challenges. In those cases, declared the court, the SEC or other agency involved was still investigating the matter, not yet bringing the enforcement proceeding, and Congress prevents constitutional challenges in federal district court only after the agency has brought the enforcement action, not during the investigation. The court emphasized that the appellant was not being deprived of her opportunity to constitutionally challenge the removal of the ALJs. Rather, her challenge would have to be done on judicial review in appellate court, not district court, and that she would have to wait until the ALJ decided her case, which has not happened yet.

Dissenter. While two of the three circuit court judges ruled for the SEC, the remaining judge on the panel dissented. He contended that the Bank of Louisiana case on which the majority relied heavily was not controlling because the appellant’s particular claim regarding the removal of ALJs was really a "structural claim" rather than a constitutional claim requiring judicial review to the appellate court.

The case is No. 19-10396.

Attorneys: Karen L. Cook (Karen Cook, PLLC) for Michelle Cochran. Joshua Marc Salzman, U.S. Department of Justice, for the SEC.

MainStory: TopStory DoddFrankAct Enforcement SECNewsSpeeches LouisianaNews MississippiNews TexasNews

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