Real Estate Developer and Investment Firm Make Another Bid to Challenge the Constitutionality of SEC’s Use of Administrative Courts

Posted on August 5, 2016, by Jennifer B. Dempsey in Administrative Proceedings. Comments Off on Real Estate Developer and Investment Firm Make Another Bid to Challenge the Constitutionality of SEC’s Use of Administrative Courts

A real estate developer and an investment firm have asked the Eleventh Circuit Court of Appeals to reconsider a June 2016 panel ruling that reversed a district court’s decision that permitted both litigants to sue the Securities and Exchange Commission on constitutional grounds. The United States District Court for the Northern District of Georgia permitted Gray Financial Group and Charles L. Hill to proceed with a lawsuit against the SEC that challenged the use of administrative enforcement proceedings, and it enjoined the SEC’s pending enforcement action. Gray Financial and Hill, like several other litigants around the country, urged the federal court to declare that the SEC’s use of administrative courts and administrative law judges violates Article II of the Constitution. The district court concluded that it had jurisdiction to consider that question, even before the underlying enforcement proceeding had concluded.

The Eleventh Circuit subsequently vacated the district court’s decision because it concluded that the SEC’s enforcement action against Grey Financial and Hill must proceed first and therefore the district court lacked subject matter jurisdiction. The Eleventh Circuit concluded that the Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010)—a case in which the Court permitted a constitutional challenge that related to the creation of the Public Company Account Oversight Board—did not support the conclusion that Grey Financial and Hill could make a similar challenge to the use of administrative proceedings.

In the petition for rehearing filed this week, Gray Financial and Hill take issue with the Eleventh Circuit’s application of the factors from the Free Enterprise decision. Under Free Enterprise, the Supreme Court instructed that courts are to consider the availability of meaningful judicial review, whether the claims are outside the agency’s expertise, and whether the claims are wholly collateral to the statute’s review provisions in evaluating if pre-enforcement judicial review is available. The Eleventh Circuit concluded that availability of judicial review was “the most critical thread.” Grey Financial and Hill contend that the appellate court misconstrued Free Enterprise by giving undue weight to the first factor at the expense of the other two. The dissenting judge in the Second Circuit’s decision in Tilton v. SEC, No. 15-2103, 2016 WL 3084795 (2d Cir. June 1, 2016), took a similar view. Whether the Eleventh Circuits agrees to take on further review of the issue will have a significant impact on the viability of similar challenges, three of which have already been shut down by the DC, Second, and Seventh Circuits over the past year.

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