Securities Regulation Daily Petition asks justices to mull district court jurisdiction for ALJ challenges
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Wednesday, September 2, 2020

Petition asks justices to mull district court jurisdiction for ALJ challenges

By Mark S. Nelson, J.D.

An SEC respondent in an administrative proceeding argues in a new certiorari petition that the federal appeals courts have effectively "stripped" the district courts of jurisdiction to hear constitutional challenges to SEC administrative law judges.

A certiorari petition filed on behalf of SEC respondent Christopher Gibson asks the Supreme Court to reconsider the question of federal district court jurisdiction to hear constitutional challenges to the SEC’s administrative law judges. According to Gibson, despite the presence of some traditional roadblocks to Supreme Court review, the justices should take his case to clarify federal district court jurisdiction over constitutional challenges to administrative proceedings (Gibson v. SEC, August 31, 2020).

Tenure protections. The SEC had charged Gibson in an administrative proceeding with engaging in front running while acting as an investment adviser. Gibson’s administrative matter has produced multiple initial ALJ decisions, the most recent of which was produced in accord with recent Supreme Court precedent regarding challenges to the constitutional validity of the SEC’s ALJs. In his certiorari petition, Gibson asks the Supreme Court to decide the question of "[w]hether Congress has implicitly stripped federal district courts of jurisdiction to adjudicate separation-of-powers challenges to the authority of SEC ALJs to preside over enforcement proceedings."

Gibson, aided by the New Civil Liberties Alliance, said he should be able to raise the question of SEC ALJs’ removal protections in the district court. "NCLA believes the Eleventh Circuit panel erred in concluding the district court lacked jurisdiction to hear Mr. Gibson’s objections to the unlawful protection from removal by the President that SEC administrative law judges (ALJs) enjoy," said a press release. The SEC ALJ in Gibson’s matter had briefly addressed the question of ALJ tenure in the latest initial decision in the matter.

Gibson argues that even though a traditional circuit split does not exist because the federal appeals courts agree that constitutional challenges to the SEC’s ALJs can proceed via the statutory review scheme enacted by Congress rather than in the district courts, such result ultimately deprives respondents like Gibson from bringing such challenges at an earlier time and increases the costs of defending against the SEC’s charges. "Ordinarily, of course, this Court awaits a circuit conflict before granting review. But as explained below, the circuits’ position squarely conflicts with this Court’s own precedent. The fact that so many circuits have followed one another in committing this error is a reason for granting, not denying, review" (citations omitted). Gibson, who further argued that the question presented is likely to recur, also relies heavily on a Supreme Court decision that upheld the existence of the Public Company Accounting Oversight Board while affirming lower court decisions in that case finding that the district court had jurisdiction to hear the challenge to the PCAOB’s structure and existence.

The Lucia opinion. The Supreme Court in Lucia v. SEC (2018), a decision announced while Gibson’s administrative proceeding was pending at the SEC, held that the SEC’s ALJs are officers of the U.S. subject to the Appointments Clause of the U.S. Constitution. Justice Kagan’s opinion for the court established the parameters of the remedy for SEC respondents who contested the validity of the appointment of the SEC ‘s ALJs: (1) the administrative respondent must timely challenge the constitutional validity of the ALJ and then press the constitutional issue before the Commission, the U.S. appeals court, and the Supreme Court; and (2) such respondent would then be entitled to the remedy of a new hearing before a properly appointed ALJ who is not the same ALJ who previously heard their matter or, alternatively, the Commission itself must hear the matter. Gibson’s administrative proceeding was one of many the SEC’s chief ALJ reassigned to different ALJs following the Lucia decision.

In Lucia, however, Justice Breyer concurred in the judgment but also partially dissented. According to Justice Breyer, the case should have been decided on statutory grounds instead of constitutional grounds because the court deferred consideration of an "embedded" constitutional question whose answer would be necessary to addressing the Appointments Clause issue; that is, what is the constitutional status of the multiple layers of tenure accorded to SEC ALJs who enjoy "for cause" removal from office?

Tough road ahead? The Eleventh Circuit previously rejected Gibson’s assertion that he should be allowed to challenge the SEC’s ALJs’ constitutionality in a federal district court. The Eleventh Circuit had previously rejected similar claims in the case Hill v. SEC (2016), which the court’s per curiam opinion in Gibson’s case said was controlling. Hill relied on the Supreme Court’s Thunder Basin framework, which asks four questions: (1) Is congressional intent to preclude initial review by a district court "fairly discernable" from the statutory scheme? (2) Are claims of the type alleged the type of claim Congress wanted reviewed per the statutory scheme? (3) Can the respondent in an administrative proceeding obtain meaningful judicial review under the statutory scheme? and (4) Does the agency’s expertise bear on the matter and are the claims asserted by the respondent wholly collateral to the statutory review procedure?

As an aside, the Thunder Basin framework generally requires especially strong facts to get an administrative matter heard initially by a district court, although a respondent need not "bet the farm" by preemptively breaking the law to achieve this result. Two cases illustrate the kind of facts needed to get an administrative matter into a federal district court: (1) in Free Enterprise v. PCAOB, persons subject to the PCAOB’s auditing standards did not have to intentionally violate a PCAOB rule in order to get their challenge to the structure and existence of the PCAOB heard; and (2) in McNary, immigrants did not have to present themselves for deportation in order to have their case heard.

Nevertheless, federal appellate courts remain reluctant to allow district courts to review administrative matters when a statute provides for appellate court review following an adverse administrative outcome. The Supreme Court, for example, denied certiorari in Bebo v. SEC, where an SEC respondent had sought to challenge the constitutionality of the SEC’s ALJs. The Bebo petition was denied on March 28, 2016.

According to the Eleventh Circuit, and previously the district court, Gibson can obtain meaningful judicial review if his matter proceeds under the statutory scheme, which allows him to appeal an adverse decision by the Commission to a federal appeals court. The Eleventh Circuit also said the SEC’s expertise may bear on the matter, especially regarding whether Gibson violated federal securities laws and whether the applicable limitations period had lapsed. Moreover, Gibson’s constitutional and statutory claims, said the appeals court, are "inextricably intertwined" with the enforcement proceeding. As a result, the Eleventh Circuit concluded that the Commission should hear the matter initially rather than a federal district court.

Attorneys: Gregory G. Garre (Latham & Watkins LLP) for Christopher M. Gibson.

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