Securities Regulation Daily Supreme Court declines petition asking to clarify what is a timely Appointments Clause challenge
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Monday, May 13, 2019

Supreme Court declines petition asking to clarify what is a timely Appointments Clause challenge

By Rodney F. Tonkovic, J.D.

A petition for certiorari argued that the Ninth Circuit's “magic words” approach to Appointments Clause challenges was too rigid, but the Supreme Court declined to hear the case.

Certiorari has been denied for a petition asking the Supreme Court to clarify how to mount an Appointments Clause challenge. The petition asked the court to clarify Lucia's requirement that an Appointments Clause challenge be made in timely manner. The circuits have no uniform approach, the petition argued, leading to a situation where the challenge would have been entertained in some circuits, but not others (Kabani & Company, Inc. v. SEC, May 13, 2019).

Challenge to PCAOB proceeding. In 2014, a PCAOB hearing officer found that Kabani and Company, an accounting firm, violated the Board's rules by altering documents and attempting to deceive inspectors during an investigation. In May 2014, Kabani moved to recuse the PCAOB, claiming recusal was required as a matter of constitutional law due to concerns about the hearing officer. The PCAOB refused and affirmed the hearing officer's findings and the imposition of sanctions. On appeal to the SEC, Kabani argued that the hearing officer was improperly biased and that there were constitutional deficiencies in the administrative framework. The Commission eventually sustained the PCAOB's actions.

The Ninth Circuit then denied Kabani's petition for review, finding that the petitioners forfeited the Appointments Clause claim by failing to raise it in their briefs or before the agency. The court cited Lucia v. SEC, which had been issued after briefing was complete: “[O]ne who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case is entitled to relief.” A motion for reconsideration was denied without explanation.

Cert. petition. Kabani's petition for certiorari asked the Court to clarify the contours of a “timely challenge” under Lucia. The Court was asked whether petitioners who timely challenge the constitutional validity of the appointment of an administrative adjudicating officer are ineligible for relief unless they specifically cite “the Appointments Clause” as the basis for their constitutional objections. While acknowledging that it did not, prior to Lucia, specifically name “the Appointments Clause,” Kabani maintained that the constitutional validity of the administrative framework of the proceeding was challenged at all stages. The petitioners noted that the Sixth Circuit has held that a petitioner need not “mention the Appointments Clause issue in front of the administrative law judge,” as long as it identifies the issue at a later point, but that, in the Tenth Circuit, a petitioner must mention the issue in administrative filings. Other courts beside the Ninth Circuit would have entertained Kabani's challenge, the petition notes.

Briefs. The Commission's respondent brief argued that Kabani failed to make a timely challenge. Whether a challenge is timely turns on the ordinary and well-settled principles of waiver and forfeiture, the brief said, and presenting the Appointments Clause claim in a Rule 28(j) letter was simply too late. The Commission observed further that during the early stages of the case, Kabani only challenged the hearing officer's experience - not that the officer's appointment itself was invalid. The Commission also maintained that Kabani's claim would be deemed forfeited, no matter in which circuit it was brought.

The petitioner's reply brief accused the Commission of “buy[ing] into the Ninth Circuit's improper specific-verbiage requirement,” underscoring the need for the Court's intervention. Again acknowledging that the precise phrase, “Appointments Clause,” was not used until before the Ninth Circuit, Kabani argued again that it repeatedly challenged the constitutionality of the administrative framework and the appointment of the officer. The brief also pointed to a “wide swath” of different approaches to the timeliness issue and said that the Court needed to step in and clarify the requirement.

The petition is No. 18-1117.

Attorneys: George W. Hicks, Jr., (Kirkland & Ellis LLP) for Kabani & Company, Inc.; Noel J. Francisco, Solicitor General, Department of Justice, for the SEC.

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