The U.S. Court of Appeals for the Seventh Circuit held yesterday that federal District Courts do not have subject-matter jurisdiction to entertain challenges to ongoing SEC administrative enforcement proceedings where the challenger is already a party to those proceedings. A party to a pending administrative proceeding must defend against that proceeding and then seek review from the SEC Commissioners and, eventually, the federal appellate courts.
The Seventh Circuit’s decision in Bebo v. SEC is the latest ruling in a multi-front series of challenges to the SEC’s authority to bring administrative enforcement proceedings – rather than federal-court actions – especially against nonregulated persons and entities. The Seventh Circuit’s ruling disagrees with several recent decisions holding that the statutory scheme for review of SEC administrative proceedings does not preclude court challenges to the constitutionality of the SEC’s enabling legislation or to the structural authority of the SEC.
The SEC brought an administrative cease-and-desist proceeding against Bebo, the former CEO of a public company, for violations of the federal securities laws. Bebo answered and asserted two constitutional arguments as affirmative defenses: (i) the Dodd-Frank Act’s authorization of administrative enforcement proceedings violates the Fifth Amendment’s equal-protection and due-process clauses because it gives the SEC ”unguided” authority to choose which respondents will and will not receive the procedural protections of federal-court proceedings, and (ii) the SEC’s administrative proceedings are unconstitutional under Article II of the Constitution because the administrative law judges (“ALJs”) who conduct such proceedings are shielded from removal by multiple layers of for-cause protection.
Instead of waiting for the administrative process to end, Bebo sued in federal court, alleging that the SEC lacked constitutional authority to continue the administrative proceedings. The District Court dismissed the case, holding that it lacked subject-matter jurisdiction to entertain the challenge in light of the statutory procedures for review of ALJ rulings.
Under applicable law, a respondent in an SEC administrative proceeding may file a petition for review with the Commission, which can either adopt the ALJ’s initial decision as the final decision of the agency or grant the petition and conduct de novo review. If the Commission’s final decision is adverse, the respondent may seek judicial review under 15 U.S.C. § 78Y(a)(1) either in the U.S. Court of Appeals for the District of Columbia Circuit or in the Circuit Court where the respondent resides or has his or her principal place of business.
Bebo appealed the dismissal, and the Seventh Circuit affirmed.