By Bill Flook
The U.S. Chamber of Commerce, Cato Institute, and Competitive Enterprise Institute together asked the Supreme Court to take up a case that could place additional checks on the SEC’s use of in-house enforcement proceedings. In a joint October 5, 2020, amicus brief, the groups accused the commission of “seeking to barricade the courthouse doors in this case.”
The petition in Gibson v. SEC represents the latest effort to chip away at the SEC’s authority to bring charges of securities fraud and other violations before its administrative law judges (ALJs) instead of in federal court, coming two years after the Supreme Court upended the commission’s administrative proceedings in Lucia v. SEC.
The free market groups, in their brief, argued that the case “presents a recurring, exceptionally important issue of citizen access to federal court when personal liberty is threatened by ongoing executive branch action that violates essential separation-of-powers principles.”
“It also highlights the intolerable predicament faced by aggrieved citizens when structural constitutional violations are allowed to persist until any meaningful remedy evaporates,” the groups wrote.
Christopher Gibson is a former investment adviser who was first charged by the SEC in 2016 for so-called “front running” related to selling his own shares of Tanzanian Royalty Exploration Corp. before selling those owned by a fund he was advising, among other allegations.
An SEC administrative law judge in early 2017 ruled against Gibson. But the SEC vacated that decision following the Lucia ruling and assigned the case to a new in-house judge. That second ALJ issued an initial decision in March 2020, handing him an at least three-year ban from the securities industry and ordered him to pay about $184,000 in penalties and disgorgement. The full commission has agreed to review that decision but has yet to do so.
While the administrative proceedings against Gibson were slowly moving forward, Gibson in March 2019 sued the SEC in U.S. District court for the Northern District of Georgia, claiming the commission’s proceedings were unconstitutional, among other arguments. The District Court tossed out the case over lack of jurisdiction, and the Eleventh Circuit later affirmed that order.
In late August, the New Civil Liberties Alliance petitioned the Supreme Court to review the Eleventh Circuit ruling. The nonprofit group, which said it filed the petition pro bono, bills itself as protecting “constitutional freedoms from violations by the administrative state.”
A core question in Gibson v. SEC is whether Gibson can seek review in federal court before the SEC’s administrative proceedings have fully run their course. The petition also argues that the SEC’s ALJs are unconstitutionally insulated from removal because of their tenure protections.
The approach taken by the courts in cases like Gibson’s “requires private citizens and businesses to endure the entire, multiyear gauntlet of the SEC’s administrative enforcement process before they are afforded an opportunity to convince a court that the process itself is unconstitutional,” the Chamber, Cato, and Competitive Enterprise Institute wrote in their brief.
“This approach delays vital private challenges to structural constitutional defects in the agency’s process until years after injury is suffered, leaving challengers with no timely or meaningful remedy,” the groups wrote.
If granted, the petition threatens to further constrain the SEC’s in-house enforcement powers following the Lucia ruling in June 2018.
“The agency seeking to barricade the courthouse doors in this case—the SEC—is no stranger to this Court,” the groups wrote in the amicus filing, citing Lucia and other unfavorable Supreme Court rulings involving the SEC in recent years.
Justice Elena Kagan delivered the majority opinion in Lucia, which rebuked the SEC over its process for hiring ALJs. The High Court found that ALJs are “officers of the United States” subject to the Appointments Clause of the U.S. Constitution and therefore must be appointed by the President, judiciary or agency heads. The SEC’s five ALJs were all hired by the chief administrative law judge.
Kagan concluded that, like tax court judges, the SEC’s ALJs exercise significant discretion carrying out functions such as taking testimony, conducting trials, ruling on the admissibility of evidence, and overseeing the discovery process.
In response to the Lucia ruling, the SEC said it would rehear a long list of enforcement actions pending in its administrative process.
This article originally appeared in the October 15, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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