Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Chau v. United States Sec

United States District Court, S.D. New York

December 11, 2014


Page 418

For Plaintiffs: Alex Lipman, Sean T. Haran, David A. Feldman, Ashley Baynham, NIXON PEABODY LLP.

For Defendant: Richard M. Humes, Melinda Hardy, Laura Walker, Smith Greig, Sarah Hancur, SECURITIES AND EXCHANGE COMMISSION.

Page 419


Lewis A. Kaplan, United States District Judge.

" The United States' housing market collapse in 2008-2009 and the ensuing global financial crisis are widely considered the worst financial disasters since the Great Depression; their causes have been hotly debated." [1] They have spawned proliferating literature and litigation. Justly or otherwise, they have cast a strong spotlight on some of those involved, including the principal plaintiff in this case, Wing F. Chau. Mr. Chau, through his firm, plaintiff Harding Advisory LLC (" Harding" ),[2] was a prominent manager of collateralized debt obligations (" CDOs" ) -- a " type of structured asset-backed security that evolved to encompass the mortgage and mortgage-backed securities market." [3] Collateral managers typically are responsible for the selection, acquisition, and monitoring of the portfolios of the CDOs.

In October 2013, the Securities and Exchange Commission (the " SEC" or " Commission" )

Page 420

commenced an administrative and cease-and-desist proceeding against Chau and Harding pursuant to various provisions of the Securities Act of 1933 (the " Securities Act" ) and the Investment Advisors Act of 1940 (the " Advisors Act" ).[4] The order instituting that proceeding charges, among other things, that Chau and Harding made material misrepresentations in connection with the sale of securities representing interests in a CDO called Octans I CDO Ltd. (" Octans I" ).[5] They are said to have represented that the assets of the CDO would be selected by Harding. In fact, however, that representation allegedly was false and misleading because Chau and Harding failed to disclose that a hedge fund, the interests of which were not aligned with those of Octans I and its investors, had substantial rights and influence over the selection process.[6]

After some initial skirmishing before the SEC administrative law judge (" ALJ" ),[7] Chau and Harding brought this action to enjoin the Commission from going forward with the administrative proceeding. They contend that the SEC's choice to pursue them administratively, as opposed to suing them in a United States District Court, deprives them of their rights to due process and equal protection of law.[8] They are not alone in attacking the SEC's recent choices of administrative rather than judicial fora.

Plaintiffs' application for a temporary restraining order was denied.[9] The administrative case has been tried to conclusion.[10] The ALJ's decision is expected in January 2015.[11] In the event the Commission prevails before the ALJ, Chau and Harding will have the right to appeal to the Commission and, if unsuccessful there, to seek review in a United States Court of Appeals.[12]

The matter now is before the Court on (1) plaintiffs' motion for a preliminary injunction

Page 421

which, if granted, would bar the Commission from continuing its administrative action, and (2) the SEC's motion to dismiss the complaint for lack of subject matter jurisdiction.


I. The Standard Governing Motions to Dismiss for Lack of Subject Matter Jurisdiction

The Court must address the threshold question of whether it has subject matter jurisdiction before considering the merits.[13] While the Court " must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff," [14] jurisdiction " must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it." [15] It is the burden of the party asserting federal subject matter jurisdiction -- in this case, the plaintiffs -- ultimately to prove by a preponderance of the evidence that such jurisdiction exists.[16]

II. Subject Matter Jurisdiction and Administrative Adjudication

Plaintiffs ask this Court to interrupt an ongoing agency adjudication. The question is whether the Court has the power to do so in these circumstances.

Article III allows Congress " to delay judicial review of administrative action" [17] and " to 'choose the court in which judicial review of agency decisions may occur.'" [18] Whether a statutory provision channeling such review to the courts of appeals divests district courts of subject matter jurisdiction to review an agency action is a matter of congressional intent and depends on whether " such intent is 'fairly discernible in the statutory scheme.'" [19]

" Generally, when Congress creates procedures 'designed to permit agency expertise to be brought to bear on particular problems,' those procedures 'are to be exclusive.'" [20] This implies that Congress' provision of circuit court review of Commission decisions in cases such as this forecloses district court consideration of matters at issue in these administrative proceedings. Nevertheless, the Supreme Court has instructed that a statutory review scheme in limited circumstances does not bar a pre-enforcement challenge to an administrative action.

Page 422

The touchstone is Thunder Basin Coal Co. v. Reich.[21] That case involved a federal statute, colloquially known as the " Mine Act," [22] that allows miners to select employee representatives who, in turn, have certain safety inspection rights. Thunder Basin's miners selected representatives who were members of the United Mine Workers and who were not mine employees. Thunder Basin objected to the selection of non-employee representatives under the Mine Act and informed its regulator, the Mine Safety and Health Administration, that it would not comply with certain related regulatory provisions. When federal authorities told Thunder Basin that it was obliged to comply with those regulations notwithstanding its objections, Thunder Basin sued in federal district court for pre-enforcement injunctive relief. The district court granted the injunction but the Tenth Circuit reversed. It held that " [p]ermitting district court jurisdiction on the basis of claims of constitutional violations or conflict with other statutes would permit preemptive strikes that could seriously hamper effective enforcement of the Act, disrupting the review scheme Congress intended." [23]

The Supreme Court affirmed the Tenth Circuit. It reasoned that to " uphold the District Court's jurisdiction in these circumstances would be inimical to the structure and the purposes of the Mine Act." [24] In doing so, the Court identified three factors pertinent to determining whether a statutory review scheme divests district courts of jurisdiction over pre-enforcement challenges to an administrative action: (i) whether " a finding of preclusion could foreclose all meaningful judicial review," (ii) whether the suit is " wholly collateral to a statute's review provisions," and (iii) whether the claims are " outside the agency's expertise." [25]

In Free Enterprise Fund v. Public Company Accounting Oversight Board,[26] the Supreme Court returned to this framework. Appellants there argued that the structure of the PCAOB, an organ of the SEC created by Sarbanes-Oxley,[27] violated principles of separation of powers. Applying Thunder Basin, the Court determined that a pre-enforcement constitutional challenge to the Board's existence was permissible. First, the Court concluded that the alternative would " foreclose all meaningful judicial review" because the statutory review scheme contemplates appeal of final SEC orders, not a challenge to the Board's constitutionality. [28] Second, the Court determined that petitioners' claim was " wholly collateral" to any SEC adjudication because the only way for appellants to consummate their challenge would be to litigate a particular rule or order when, in actuality, their argument was that the Board's very existence was unconstitutional.[29] Third, the Court stated that the SEC had no special expertise to consider such a challenge, which was a question " of administrative law [that] the courts are at no disadvantage in answering." [30]

Page 423

The parties here agree that the Thunder Basin factors govern whether this Court has subject matter jurisdiction.[31]

III. Circuit Precedent

We begin by canvassing four previous cases in this circuit involving pre-enforcement challenges to administrative adjudications.[32] As will appear, all have looked to Thunder Basin and Free Enterprise Fund for guidance, but have reached differing conclusions based on the factual circumstances of each case. Because plaintiffs and the SEC urge radically different interpretations of these cases, a brief overview is appropriate.

The first case was Altman v. SEC,[33] which involved the SEC's pursuit of administrative charges against an attorney on the grounds that he allegedly offered to have his client provide false testimony to the Commission.[34] The ALJ concluded that Altman had violated his professional obligations under the New York Code of Professional Responsibility and SEC rules and banned him from appearing before the SEC for nine months. When Altman appealed to the full Commission, the SEC increased his punishment to a lifetime ban. Altman sued in the district court, alleging that the SEC had violated his constitutional rights to due process, equal protection, and privacy.[35]

The district court held that it lacked subject matter jurisdiction.[36] It determined, first, that " any constitutional challenge raised in [Altman's] administrative proceedings will be meaningfully addressed in the Court of Appeals should Altman appeal the SEC's sanction against him." [37] Second, the court reasoned that Altman's challenge was not to the existence of the SEC itself (as was the case in Free Enterprise Fund with respect to the existence of the PCAOB), but rather " to the constitutional ability of the SEC to sanction attorneys practicing before it." [38] Third, the court concluded that " the SEC has the authority and expertise to hear constitutional challenges" to its rules.[39]

The Second Circuit affirmed.[40] It concluded that " [t]he district court disposed of each of [Altman's jurisdictional] arguments, holding that [the statutory scheme] does, under this Circuit's precedent, supply the jurisdictional route that Altman must follow to challenge the SEC action in this case." [41]

Shortly after the district court ruled in Altman (but before the Second Circuit's affirmance), ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.