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Seventh Circuit Rejects Court Challenge to Pending SEC Administrative Enforcement Proceeding

By Proskauer Rose LLP | August 27th, 2015

By Jonathan E Richman, Ralph C Ferrara, Ann M Ashton and Tanya J Dmitronow

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.

Factual Background

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.

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U.S. Sentencing Commission Proposes Amendments to Widely Criticized Economic Crime Sentencing Guidelines

By Proskauer Rose LLP | January 28th, 2015

By Mark Harris, James Unger and Phillip Caraballo-Garrison

In recent years, a growing chorus of federal judges and defense attorneys have protested that the Federal Sentencing Guidelines for economic crimes regularly recommend inconsistent and unjust sentences. Critics claim that § 2B1.1 of the Guidelines suffers from a lack of clarity, that it treats defendants who have secondary roles in large schemes with undue harshness, and that it produces suggested prison terms that are disproportionately severe for first-time offenders who are not likely to reoffend. There is no dearth of examples to fuel those fires, as seemingly inconsistent outcomes abound. Last year, Judge Jed S. Rakoff of the Southern District of New York stated that “[the] arithmetic behind the sentencing calculations is all hocus-pocus —it’s nonsensical.”

Last week, the U.S. Sentencing Commission responded with proposed amendments to § 2B1.1 that are designed to remediate some of those shortcomings. The Sentencing Commission has also solicited input from interested parties on a broad range of associated issues. The relevant provisions up for amendment are:

A. 2B1.1 cmt. 3(A)(ii): Intended Loss Defined

As it stands, “Intended loss” is defined in application note 3(A)(2) as: “the pecuniary harm that was intended to result from the offense,” including “intended pecuniary harm that would have been impossible or unlikely to occur (e.g., as in a government sting operation, or an insurance fraud in which the claim exceeded the insured value).” This definition has resulted in disagreement among several Circuit Courts over whether determining “intended loss” should be a subjective inquiry focused on the defendant’s intent or an objective inquiry focused on what harm could reasonably have been anticipated.

The Sentencing Commission’s proposed amendment would clarify that determining “intended loss” is a subjective inquiry to be measured by the harm “that the defendant purposely sought to inflict,” instead of the objectively predictable consequences. The Sentencing Commission also proposed an optional revision that would account for harm caused by a defendant’s co-conspirators.

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