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Second Circuit Allows Joint Petition For Rehearing Of Appeals Challenging Constitutionality Of SEC Proceedings Before Administrative Law Judges
07/04/2016On June 27, 2016, the United States Court of Appeals for the Second Circuit granted a motion to allow former ratings agency and private equity executives to jointly file a petition for rehearing of their appeals challenging the constitutional validity of SEC proceedings before administrative law judges. Barbara Duka v. U.S. Securities and Exchange Commission, No. 15-2732, slip op. at *1 (2nd Cir. June 27, 2016); Tilton v. Securities and Exchange Commission, No. 15-2103. In a two-sentence ruling, the Second Circuit granted the motion to permit the petitioners, Barbara Duka and Lynn Tilton, to proceed jointly in their attempts to overturn the Second Circuit’s holding that underlying SEC proceedings must conclude before the constitutionality of those proceedings may be challenged in federal court. Duka and Tilton had filed separate lawsuits seeking to halt administrative proceedings brought against them by the SEC, claiming that SEC administrative law judges’ appointments and insulation from removal are unconstitutional.
The SEC commenced administrative proceedings against Duka and Tilton in January and March of 2015, respectively. The SEC alleged that Duka, a former managing director at Standard & Poor’s Ratings Services, had made false and misleading statements to investors regarding her group’s rating methodologies. Duka brought an action against the SEC in the Southern District of New York on January 21, 2015, arguing that the SEC’s use of administrative law judges violated the Appointments Clause of the Constitution because the ALJs at issue were not properly appointed, and that ALJs are also unconstitutionally insulated from the power of the president to remove executive officers from office. On August 12, 2015, Judge Richard Berman granted a preliminary injunction barring further SEC proceedings against Duka, after finding that the appointment of the ALJs likely violated the Appointments Clause.
Tilton, the founder and CEO of private investment firm Patriarch Partners, was alleged to have hidden poor investment performances in a bid to accrue excessive management fees. Tilton brought a suit against the SEC in the Southern District of New York on April 1, 2015, also alleging that the SEC’s administrative tribunals were unconstitutional. On June 30, 2015, Judge Ronnie Abrams held that the district court did not have jurisdiction to halt the SEC administrative proceedings, ruling that Tilton must instead argue the case before the SEC’s in-house court and then appeal to a federal appeals court if she loses.
The Second Circuit affirmed Judge Abrams’ ruling on June 1, 2016, holding that Tilton must first exhaust her arguments and appeals within the SEC’s administrative scheme before raising her constitutional challenge in federal court. The Court vacated its prior stay on further SEC proceedings in that case. In light of its ruling in Tilton, the Second Circuit also summarily vacated the injunction inDuka and remanded the case for further proceedings.
On June 23, 2016, Duka and Tilton filed a motion seeking leave to jointly file a petition for rehearing. Duka and Tilton argued that their cases “are controlled by the same issues” and that judicial economy would be served through the filing of a joint petition. The Second Circuit granted the motion on June 27 in a two-sentence ruling that stated merely that the motion was granted. This procedural step does not shed light on Duka and Tilton’s likelihood of success in their effort to convince the Second Circuit to reconsider its prior ruling—but the Second Circuit’s decision in these cases will be closely watched.
