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Tilton v. Securities and Exchange Commission

United States District Court, S.D. New York

June 30, 2015



RONNIE ABRAMS, District Judge.

On March 30, 2015, the Securities and Exchange Commission ("SEC" or "Commission") commenced an administrative cease-and-desist proceeding against Plaintiffs Patriarch Partners, LLC, its founder and CEO Lynn Tilton, and affiliated companies, alleging that they violated the federal securities laws. The SEC has designated an Administrative Law Judge ("ALJ") as the hearing officer in the administrative proceeding against Plaintiffs. Like in a number of other recent cases which sought to challenge the SEC's decision to proceed in an administrative rather than judicial forum, Plaintiffs bring this action to enjoin the administrative proceeding. They contend that the scheme for appointing and removing the SEC's ALJs violates the Appointments Clause of the U.S. Constitution and that the ALJ designated as their hearing officer thus has no lawful authority to preside over their case. Plaintiffs now move this Court to issue a preliminary injunction barring the SEC from continuing its administrative proceeding against them, pending resolution of the instant matter.

The first question this Court must address in deciding whether to halt the ongomg administrative action against Plaintiffs is whether it has the power-or jurisdiction-to do so. Ultimately, I conclude, it does not. Congress has created a remedial scheme applicable to claims such as Plaintiffs', pursuant to which the exclusive avenue of review of an ALJ's decisions is through the administrative process, with subsequent judicial review by a federal court of appeals. Plaintiffs are therefore obliged to further litigate their claims in the Commission's administrative forum and seek review, if they so choose, in a circuit court of appeals. Because this Court lacks subject matter jurisdiction to decide the merits of Plaintiffs' constitutional claims, their motion is denied and the Complaint must be dismissed.


With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress expanded the SEC's authority to impose civil penalties in administrative proceedings where such penalties could previously only be sought against non-regulated persons or entities in federal district court. See Pub. L. No. 111-203, § 929P(a), 124 Stat. 1376, 1862-64 (2010); see also Duka v. US. SEC, No. 15-CV-0357 (RMB), 2015 WL 1943245, at *2 (S.D.N.Y. Apr. 15, 2015); Bebo v. SEC, No. 15-C-3, 2015 WL 905349, at *1 (E.D. Wis. Mar. 3, 2015) (with Dodd-Frank, "Congress made the SEC's authority in administrative penalty proceedings 'coextensive' with its authority to seek penalties in federal court" (quoting H. Rep. No. 111-687, at 78 (2010)). This is one of several recent cases attacking the SEC's decision to bring an ever increasing number of enforcement actions within its own administrative scheme, rather than in federal court.

I. SEC Administrative Proceedings Generally

SEC administrative proceedings "shall be presided over by the Commission or, if the Commission so orders, by a hearing officer." 17 C.F.R. § 201.110. "Hearing officers" are defined to include administrative law judges. 17 C.F.R. § 201.101(a)(5).

Unless the Commission directs otherwise, an AU "shall prepare an initial decision in any proceeding" over which he or she presides. 17 C.F.R. § 201.360(a)(l). The Commission may on its own initiative or on a party's petition review the initial decision. 17 C.F.R. § 201.411 (b), (c). If no petition for review is filed and the Commission does not review on its own initiative, the Commission "will issue an order that the decision has become final...." 17 C.F.R. § 201.360(d)(2).

Congress has established a scheme for judicial review of Commission actions, providing that a "person aggrieved by a final order of the Commission... may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit.... On the filing of the petition, the court has jurisdiction, which becomes exclusive on the filing of the record, to affirm or modify and enforce or to set aside the order in whole or in part." 15 U.S.C. § 78y(a). [1]

II. SEC Proceedings Against Plaintiffs

Plaintiffs allege that the SEC began investigating them "at least as early as" December 2009. Compl. ¶ 5. On March 30, 2015, the SEC issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings ("OIP"), which commenced administrative proceedings against Plaintiffs pursuant to the Investment Advisors Act and the Investment Company Act. Id. at ¶ 5; Gunther Decl. Ex. 1. By Order of the Chief Administrative Law Judge, the administrative proceeding is to be presided over by Administrative Law Judge Carol Fox Foelak. In the Matter ofLynn Tilton et al., Administrative Proceedings Rulings Release No. 2494 (SEC April 6, 2015), available at

III. The Instant Action

In this action, Plaintiffs seek to avoid "being compelled to submit to an unconstitutional proceeding...." Campi. ¶ 6. Plaintiffs' argument is rooted in the Appointments Clause of Article II of the Constitution. Article II provides, in relevant part, that "Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments." U.S. Const., art. IT, § 2, cl. 2. Plaintiffs contend first that since ALJs are not appointed by the SEC Commissioners themselves, i.e., the head of a department, the ALJ appointments scheme is unconstitutional. Pls.' Br. at 13-14. Second, Plaintiffs argue that under the Supreme Court's decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (20 I 0), an "inferior officer" cannot, under Article II, be insulated from Presidential removal by more than one layer of tenure protection. Pls.' Br. at 13. Since the ALJs cannot be removed except for "good cause, " 5 U.S.C. § 7521(a), and the SEC Commissioners themselves cannot be removed "except for inefficiency, neglect of duty, or malfeasance in office, " Free Enter., 56 I U.S. at 487 (citation omitted), Plaintiffs maintain that the two layers of tenure protection created by the ALJ removal scheme is unconstitutional. Pls.' Br. at 2.

The SEC disagrees. As an initial matter, the SEC argues that this Court lacks subject matter jurisdiction over Plaintiffs' claims, since Plaintiffs must raise their claims through the administrative remedial scheme established by Congress and seek judicial review, if any, before a court of appeals. Opp. at 6-11. The SEC further contends that its ALJs are not "inferior officers" under the Constitution but mere "employees, " the hiring and firing of whom is not governed by Article II. Id. at 11-22. Finally, the SEC argues that Plaintiffs have not shown irreparable harm sufficient to warrant a preliminary injunction, nor that the balance of equities or the public interest favor granting a preliminary injunction. Id. at 22-25.


The threshold issue in this case-and, ultimately, the dispositive one for purposes of the present motion-is whether subject matter jurisdiction exists for this Court to consider Plaintiffs' claims. Plaintiffs, as the party asserting federal subject matter jurisdiction, bear the burden of proving by a preponderance of the evidence that it exists. Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000).

Federal courts are courts of limited jurisdiction. Perpetual Sec., Inc. v. Tang, 290 F.3d 132, 136 (2d Cir. 2002). "Within constitutional bounds, Congress decides what cases the federal courts have jurisdiction to consider." Bowles v. Russell, 551 U.S. 205, 212 (2007). As noted above, the federal securities laws provide that a person aggrieved by an order of the Commission "may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit...." 15 U.S.C. § 78y(a)(l); see also 15 U.S.C. §§ 77i(a), 80a-42(a), 80b-13(a). The jurisdictional question here is whether this "statutory scheme of administrative and judicial review ...

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